Personal Finance Advice

I’ve been harping about inflation for the past week now, but after remembering how it was back in the 80’s, I don’t think I can say enough about it.  To paraphrase former Boston Celtics coach Rick Pitino, Alan Greenspan ain’t walking through that door folks.  While often criticized in his later years, the former Federal Reserve chairman built up a solid reputation as an inflation fighter.

Now don’t get me wrong some inflation can be a good thing.  At about 2-3% a year it can help stir growth and can be quite healthy for an economy.  Now statistics over the past year has shown it inflation to be moderate but that can be misleading.  The government has been constantly changing the ways they report inflation over the years.

Why would they hide the true numbers of inflation?  Because it is in their best interest, inflation has winners and losers, those that are able to save are hurt by inflation while those that are in debt are helped by it.  With the national debt at over $9 Trillion and rising, the government by using smoke and mirrors is hiding from us the real rate of inflation.  While that debt is losing value over time, lower interest rates also makes it cheaper to finance that debt.

Who stands to lose the most?  Retirees that have built up a lifetime of savings should be running scared.  They will need to do the most in making sure that the value of their nest eggs are protected.  Investments that would normally be considered high risk like commodities, precious metals and other inflation friendly investments may offer a beacon of hope if the troubled times do come.  

Recessions are inevitable, they are part of the cyclical nature of the economy.  Sometimes you just have to take your lumps and move on.  However the current Federal Reserve Board, has so far given the appearance that it would rather stave off a recession than fight inflation.  This should have alarm bells ringing for most of us.  Once it starts, inflation can get out of control fast, some South American countries still haven’t fully recovered from their bouts of hyper inflation.

While the government artificially sets short term interest rates, it is the market that determines long term interest rates.  A careful watch should be kept in the upcoming weeks on the movement of long term Treasury Bonds.