More Economic Pain To Come
Fortune is finally on the "reality" bandwagon with an article about the latest economic bubble.
Yes, folks, government has been borrowing outrageous amounts of money, and the bond market has happily sunk money into these bonds. But like the dot-com bubble, the housing bubble, and the commodities bubble, this one, too, won't last. And, as the article belatedly points out, the only two possible outcomes are massive interest-rate increases or hyperinflation.
The personal-finance upshot of this is pretty simple: Make major purchases that require borrowing now.
In the event that we once again see double-digit mortgage rates like we had in the early '80s, you'll want to be locked into a nice, fixed-rate, 30-year mortgage as your neighbors try to figure how they can afford to buy property in a world where a bank loan looks more like a credit card offer.
In the event we end up in a hyperinflation, the amount you owe compared to the amount you should be earning in the inflationary environment will make the relative amount of that debt smaller and smaller. As one friend put it, "I could pay off my mortgage for the price of a six pack."
Now, all this is said with two caveats: 1) It's possible -- through the use of financial finesse the likes of which government has never previously demonstrated -- to do a "controlled burn" on the economy, spreading out the correction for many years, in which case you'll end up no worse off for having the nice, fixed-rate mortgage. 2) My house is on the market, so I may be a bit biased in encouraging you to buy real estate. :)
For those who are not contemplating major, debt-inducing purchases, my advice is this: don't keep a lot of cash. Two months' living expenses to get you through should you lose your job is the most that you want in a regular bank account right now.
Inflation-protected treasuries should hold their relative value (which, right now, is the same as cash) regardless of which scenario plays out. If we end up in the high-interest-rate scenario, however, these investments will underperform compared to the high-interest-rate bonds that will be issued later on, but you won't actually lose any money (assuming you believe the government's calculations of how much inflation there is).
In a hyperinflation, the stock market may end up being your best bet. I'm hesitant to recommend jumping into the market right now, as it seems to have settled into a seesaw pattern, and I'm predicting it's near its short-term peak at the moment. However, dollar cost averaging remains wise, especially if you can set up an account to do so automatically out of your paycheck every month. (I can recommend you to a very good financial advisor if you'd like.) As prices go up throughout the economy, prices of stocks should rise along with them. If you've chosen your stocks well (or your mutual fund chooses stocks for you well), as long as the companies stay afloat in the deadly economic waters, your net worth should keep pace with inflation. This is, of course, the riskier move, as the stock market will probably continue to be bearish for many years if the high-interest-rate scenario plays out (which makes picking stocks and mutual funds carefully all the more important).
Either way, watch for more economic pain to come. Those "green shoots in the economy" the media keeps talking about aren't signs of a recovery, they're signs that the fire has moved on to another part of the forest.
Yes, folks, government has been borrowing outrageous amounts of money, and the bond market has happily sunk money into these bonds. But like the dot-com bubble, the housing bubble, and the commodities bubble, this one, too, won't last. And, as the article belatedly points out, the only two possible outcomes are massive interest-rate increases or hyperinflation.
The personal-finance upshot of this is pretty simple: Make major purchases that require borrowing now.
In the event that we once again see double-digit mortgage rates like we had in the early '80s, you'll want to be locked into a nice, fixed-rate, 30-year mortgage as your neighbors try to figure how they can afford to buy property in a world where a bank loan looks more like a credit card offer.
In the event we end up in a hyperinflation, the amount you owe compared to the amount you should be earning in the inflationary environment will make the relative amount of that debt smaller and smaller. As one friend put it, "I could pay off my mortgage for the price of a six pack."
Now, all this is said with two caveats: 1) It's possible -- through the use of financial finesse the likes of which government has never previously demonstrated -- to do a "controlled burn" on the economy, spreading out the correction for many years, in which case you'll end up no worse off for having the nice, fixed-rate mortgage. 2) My house is on the market, so I may be a bit biased in encouraging you to buy real estate. :)
For those who are not contemplating major, debt-inducing purchases, my advice is this: don't keep a lot of cash. Two months' living expenses to get you through should you lose your job is the most that you want in a regular bank account right now.
Inflation-protected treasuries should hold their relative value (which, right now, is the same as cash) regardless of which scenario plays out. If we end up in the high-interest-rate scenario, however, these investments will underperform compared to the high-interest-rate bonds that will be issued later on, but you won't actually lose any money (assuming you believe the government's calculations of how much inflation there is).
In a hyperinflation, the stock market may end up being your best bet. I'm hesitant to recommend jumping into the market right now, as it seems to have settled into a seesaw pattern, and I'm predicting it's near its short-term peak at the moment. However, dollar cost averaging remains wise, especially if you can set up an account to do so automatically out of your paycheck every month. (I can recommend you to a very good financial advisor if you'd like.) As prices go up throughout the economy, prices of stocks should rise along with them. If you've chosen your stocks well (or your mutual fund chooses stocks for you well), as long as the companies stay afloat in the deadly economic waters, your net worth should keep pace with inflation. This is, of course, the riskier move, as the stock market will probably continue to be bearish for many years if the high-interest-rate scenario plays out (which makes picking stocks and mutual funds carefully all the more important).
Either way, watch for more economic pain to come. Those "green shoots in the economy" the media keeps talking about aren't signs of a recovery, they're signs that the fire has moved on to another part of the forest.