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Old 10-26-2008, 08:31 AM   #1
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Best Thing to Do

I have been thinking about one way the future might look as it pretains to inflation.

Lets assume that a nation has massive debt, their economy has slowed signficantly and they are passing massive fiscal packages and lowering interest rates to near zero in an effort to jump start their economy. Also the new administration in on an FDR like spending approach which it funded by paying higher rates to get the money necessary to finance the projects.

Fast forward 3-5+ yrs and they actually have ended up over stimulating the economy.

Inflation arrives in a significant way.

What happens to the value of the dollar? (My guess Lower)

Where do you put your money? What type of hard assets do you hold? What is the best thing to do with debt? Be leveraged prior at lower rates or have it all retired? Bottom line how do you prepare for this scenario?

What got me thinking about this is I recently read an article about that eventually governments will have to inflate thier currency to get out of their debt situations. This could be ugly. I don't remember much about the late 70 or early 80s and the impact on inflation.

tomcat98
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Old 10-26-2008, 08:55 AM   #2
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I wonder about the same thing. I can even imagine a devaluation of the dollar.
Currently I'm thinking:

Gold when it reverses it's downtrend. Although, I can't see loading up on a significant portion of my net worth because it's too risky. I don't think I could take $20 to $50 dollar moves per day.

Stocks when they reverse their downtrend. As inflation climbs, stocks prices should inflate as well. I would have to do a lot of research to choose which stocks though.

Land / real estate. Again when the downtrend reverses. Although, I'm already over invested in this with my primary residence.

Foreign currency. The Swiss franc used to be a safe haven, but even they are now inflating their currency.

IPS - Inflation Protected Securities. Again I'm already very overweighted this class with IBonds.
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Old 10-26-2008, 10:02 AM   #3
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Quote:
Originally Posted by Tomcat98 View Post
What happens to the value of the dollar? (My guess Lower)
It depends upon where other currency rates are in relation to the dollar's.

Right now the dollar is strong because of:
Preceived safety
Selling of foreign investements and converting them to $
+++ $ interest rate lowest - other currencies will lower their rates - so those foreign currencies will fall.
US first into recession; first out - most likely to raise interest rates first.

In your scenario if, the other countries have raised interest rates first to fight inflation; then the $ will get weaker. If the $ does it first it will get stronger.

If the US government prints a lot of money to meet its debts it will get weaker.

The european Fed's primary goal is price stability - most likely to raise rates in spite of the negative effect on the economy.

The US's Fed goals are not as focused.
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Old 10-26-2008, 10:48 AM   #4
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Quote:
I don't remember much about the late 70 or early 80s and the impact on inflation.
I'll defer to the Pros here...I recall the very high inflation & CD interest rates of the 70's but I don't recall stock prices inflating a great deal.

Did they?
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Old 10-26-2008, 11:09 AM   #5
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Originally Posted by Tomcat98 View Post
Fast forward 3-5+ yrs and they actually have ended up over stimulating the economy.
Inflation arrives in a significant way.
While the Fed raises interest rates as we go, keeping businesses & the economy riding the razor's edge.

Quote:
Originally Posted by Tomcat98 View Post
What happens to the value of the dollar? (My guess Lower)
The last couple months have actually been pretty good to the dollar-- it's just added the coup de grace to international & emerging-market funds. I'm trying to decide if I mind watching the dollar decline again.

Quote:
Originally Posted by Tomcat98 View Post
Where do you put your money? What type of hard assets do you hold? What is the best thing to do with debt? Be leveraged prior at lower rates or have it all retired? Bottom line how do you prepare for this scenario?
Isn't this where we're all supposed to gather 'round the FIRE, hold hands, and sing Kumbaya the virtues of diversification?

I'll take low-interest loans anytime I can get them, although we might have to wait another 40 years. As for hard assets, just about all commodities & natural resources seem to be one more hedge against the dollar.

I'd rather hedge with international dividend-paying stocks, dividend-paying stocks of domestic companies with international markets, and REITS/rental real estate.
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