Wednesday, June 3, 2009

Inflation Protection – Part 1 – The Need

Inflation is coming. It might be next year or the following year but it is coming. The Federal Reserve is creating money out of thin air to the tune of billions of dollars each day. The money the Fed creates will eventually reach the general economy and cause prices to rise.

Government spending has risen dramatically while revenues have fallen 34% year over year. The Obama administration predicts a recovery starting in early 2010. However, they also set the “worst case” scenario for the bank “stress test” at 8.9% unemployment in a recovery starting in late 2009. The Federal Reserve is now forecasting 9.4% unemployment by the end of 2009 and continuing to rise to around 10.5% before declining.

The administration promises to reduce spending in 2010 and to raise taxes everywhere on everything.

They want to create a carbon use tax also known as “cap and trade” that will increase the cost of doing everything that uses energy – virtually every human activity. Some estimates peg the carbon tax cost at an average of $3,000 per family. Make no mistake families will pay this cost through increased prices of goods and services.

They want to create a “value added tax” (VAT) on all economic activity. VAT taxes are commonly used in Europe. They are sort of like sales taxes that are applied at every level of production and consumption – unlike American sales taxes that are applied only at the retail level. A 10% VAT would increase the cost of everything a family purchases by about 10%. So a family that spends $30,000 a year would experience about $3,000 in increased prices of goods and services as a direct result of the VAT. It would also increase the administrative costs of running a business by requiring all companies to collect these taxes.

The recently announced increased CAFÉ standards for automobiles are estimated to add $1,300 to the price of an average new car.

Plus, the administration says it will allow the Bush tax cuts expire in 2011. That will effectively increase income taxes on the average family by about $1,500 per year.

Why am I talking about tax increases in a piece on inflation? Because increasing taxes will, I say again, will slow economic growth; perhaps enough to delay the recovery for years. A delayed recovery means that new taxes will fail to produce the predicted revenue. This will result in continuing deficits that must be financed through borrowing and the creation of ever more money.

Inflation is coming – get ready.

So, how does one “get ready” for inflation? By moving money into assets that will increase in nominal value as the currency inflates - more to come.

Links to the Inflation Protection Special Report
Part 1 - The Need
Part 2 - Gold
Part 3 - Oil
Part 4 -TIPS
Part 5 - Consumer Staples
Part 6 - Commodities
Part 7 - Summary

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