Inflation Will Return Strongly - So Invest Accordingly

Inflation has always taken a significant bite out of the dollar's purchasing power over any 25 year period. You must make provision to combat it with equity-based investments in your retirement portfolio. Don't be tricked by temporarily near-zero inflation. Our government debts and promised benefit obligations will force strong inflation down the line. So get prepared.

Simply put, inflation means too many dollars chasing to few goods and services. The government supplies these excess 'dollars' by essentially printing money to pay for what it has borrowed and what it has promised in benefits when there's little or no chance that the government can get us taxpayers to pay it back through taxing our productivity or what we own. They develop all these 'unpayable' obligations by promising too much to everyone.

Since there's no such thing as a 'free lunch' but the government is in charge of the money, they do it. So the money you hold becomes less valuable - meaning less purchasing power; the government debases it by its debt-creating policies. It pays out benefits and obligations in 'cheaper' dollars. Of course, debasing the dollar is effectively a hidden tax on those who hold 'dollars' - like cash, savings accounts, bonds, or any dollar-denominated debt instrument.

The recession makes people afraid to buy, invest, or demand services since they might lose their job and will need their money later. This lowered demand causes a temporary reduction in the 'demand' value of certain products - like real estate - and the reduction of business in general. To offset this natural reduction in demand, government eases credit and bails out banks to try to keep business and commerce from contracting too much - and hopefully increase business.

This continues until the public gains confidence that 'the economy' won't contract more and they won't lose their jobs. Then, the average Joe will start buying again. The economy will heat up and things will seem OK. But there's more...

The accumulated Federal Deficits is now about $16 trillion as of the end of 2012. And the unfunded Social Security and Medicare liabilities are over $63 trillion (2012). This is the amount promised in government benefits into the future after payroll taxes and premiums expected to be collected for them are subtracted out. Ideally this money should be 'in the bank' to generate interest and to keep us solvent - but there's nothing 'in the bank'!

The government just pays out benefits with what it brings in through the associated taxes and the creation of more debt. All these obligations are just too much for taxpayers to pay. Paying it all off is virtually impossible.

The impact of these debts can be lessoned by a little more taxation, reducing Social Security and Medicare benefits and, of course, inflating the currency.

To protect yourself, don't stick only with interest-bearing assets which are denominated in 'dollars'; they will lose their value. To the extent you can, invest in inflation-resistant assets. Buy real estate where you can afford its carrying costs. Buy a little gold in one form or another. Hold equities in your portfolio besides your interest income assets. And hold only a fixed-interest mortgage. As inflation kicks up, interest rates will increase and make those variable rate mortgages increasingly a burden to pay off.

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