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Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Thursday, September 10, 2009

The Next Problem We Will Face

An article in the Wall Street Journal earlier this summer (Get Ready for Inflation and Higher Interest Rates”, June 10th, 2009) warns that once we get through the current economic crisis, we can expect high inflation and high interest rates.

The article was written by Arthur B. Laffer, chairman of Laffer Associates and co-author of “The End of Prosperity: How Higher Taxes Will Doom the Economy – If We Let It Happen” (Threshold, 2008).

Mr. Laffer wrote: “With the crisis, the ill-conceived government reactions, and the ensuing downturn, the unfunded liabilities of federal programs –such as Social Security, civil-service and military pensions, the Pension Benefit Guarantee Corporation, Medicare and Medicaid – are over the $100 trillion mark. With U. S. GDP (gross domestic product) and federal tax receipts at about $14 trillion and $2.4 trillion, respectively, such a debt all but guarantees higher interest rates, massive tax increases and partial default on government promises.”

If cap and trade and healthcare reform legislation are also passed and call for even more government spending and taxes, it can only make matters worse. Higher interest rates and high inflation could likely trigger another recession, shortly after we’ve recovered from the current crisis.

So what can you do to prepare? Make sure your portfolio is broadly diversified and contains more than just fixed income assets. You’ll need equities for the long haul to keep up with inflation. You might include some treasury inflation-protected securities (TIPS) and possibly even a small amount of commodities via a well-diversified no load mutual fund. We would recommend dollar-cost averaging if you invest in commodities.

One way to help combat inflation is to reduce spending and increase savings. The less you spend, the less inflation will impact you and the more you’ll be able to add to your portfolio.

Consider learning a new trade to improve your marketability. You might also consider developing a hobby into a side business to help boost your income.

Finally, make sure you minimize investment expenses and optimize your portfolio’s tax efficiency.

In short, if you prepare now, you can mitigate the affects of the possibility of high inflation and higher interest rates down the road.

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