While I’m not a straight-up free market person, I do agree that the current bailout business is going to affect out economy — and the sort of buying power you have. Patel’s analysis is informative and interesting. And he offers a way for you to hedge (at your own risk, of course).

What’s the most popular word on the national news in the US and many other parts of the world these days?

Answer: bailout.

Yes, bailouts are quite the frenzy these days. Yet in spite of the hype, there is still much uncertainty regarding what exactly a bailout is, and what it means for individuals in terms of their own personal finance. So here’s a no-nonsense breakdown.

To put it simply, bailouts are an attempt to prop up troubled industries. The argument for bailouts is that allowing failure will be too detrimental; it will result in systemic economic problems. The argument against bailouts is that allowing collapse causes prices to fall and stagnant industries to be expelled from the market.

Personally, I’m staunchly in the anti-bailout camp, as are most free market proponents who come from the Austrian school of economics, which tends to view government intervention as the problem rather than the cure. But regardless of whether you are in favor or opposed to the bailout,
everyone should understand the economic implications of the bailout, so that they can plan their finances accordingly. And the simple analysis of bailouts is that they will likely lead to currency devaluation — meaning the US dollars you have will be worth less, so that you will need more of
them to buy the same goods and services.

Why do bailouts result in currency devaluation?

Here’s the breakdown:

1. Bailouts mean the respective government is going to spend more money. Like you or I, government can only spend money it acquires through its revenue generation capabilities (i.e. taxation). If it wants to spend more, it needs to go into debt — the same as if you or I want to spend more than we earn.
2. The US government is currently at record levels of debt, with debt currently over 11 trillion — and still rising.
3. The problem is that as the global economy weakens, there are fewer and fewer debt buyers will to give the US a loan. China, one of the largest buyers of US bonds thus far, recently announced a large stimulus package of its own to help boost its own economy. The more it spends on its own economy, the less money it will have available to buy US debt.
4. So what happens if the US government cannot find a debt buyer? It will have to pay its debt obligation simply by printing more money.

So, how can you protect yourself against this risk? Two simple answers: foreign currencies and precious metals (gold and silver).

Over the past eight years, the US government has maintained a very lax monetary policy — meaning it has been significantly expanding the money supply. This has resulted in devaluation of the US dollar, while foreign currencies and precious metals have risen relatively. And while problems in the global economy and a tightening of credit markets have allowed the US dollar to strengthen for much of 2008, the risk of further US currency devaluation remains likely so long as government spending continues to rise while the tax base diminishes due to a sluggish economy.

So keep this in mind as you plan your finances over the next few years. Remember: it’s not how much money you have, but rather how much your money can buy.

Post from: EveryJoe

What You Need to Know About Bailouts to Plan and Grow Your Finances

Image credit/source: scriptingnews on Flickr

Post from: EveryJoe

New Dollar Bill!

Lately, I’ve been getting questions about how the $700 billion bailout is likely to affect the U.S. dollar. In the near term, the bailout has been helpful, since the dollar has been rallying on the assumption that the economy is likely to recover as a result of this measure. But the Forex Blog is not so sanguine, and warns about taking things right now at face value:

The consensus- unchanged from when the plan was first unveiled- is strongly negative, especially as far as the Dollar is concerned. When combined with the government’s other initiatives, the bailout will add nearly $1 Trillion to America’s national debt. Additionally, the Federal Reserve Bank would have to print money to bridge a shortfall in the government’s borrowings, thereby stoking the fires of inflation. Ironically, the Dollar’s best chance to avoid a continued decline is if the bailout plan fails in its stated aim, and the American economy implodes, pulling the global economy down with it.

I found this a very interesting analysis. But it seems in line with everything else about this bailout and with efforts at “economic stimulus.” Everything done so far seems to have little value beyond the surface, and does little to promote long-term stability and prosperity.

What do you think the effects of the $700 billion bailout will be?

image credit: sxc.hu

Post from: EveryJoe

Will the $700 Billion Bailout Help the U.S. Dollar?

Most people think the word inflation means rising prices. But the precise definition of inflation is an increasing supply of money which results in the appearance of rising prices. In real terms, prices have not gone up. It is only that the value of the currency has depreciated so that it takes more and more of it to buy something. 

Natural News uses the example of gold prices. Gold prices have remained stable, the writer argues, but the US dollar has depreciated to a point that it costs nearly $900 to buy one ounce of gold now as opposed to $35 in 1913.

Many lay the problem of inflation squarely on the monetary policy of getting away from the gold standard. And there are very valid points to this argument. After all, the US dollar is no longer backed by any tangible asset. Instead, it is backed by the fact that the Treasury can always print more money.

What do you think of where our US dollar is headed?

Post from: EveryJoe

A Different Way to Look at Inflation

But it is a good time to start a plan to invest in gold? There’s the question. The gold bulls will tell you it’s always a good time to invest in a safe haven rooted in something represents something you can actually touch (paper currency, of course, merely being the representation of an idea of value, rather than something cold and hard and tangible).

On top of which, some analysts are starting to predict that we could get $1,000 an ounce gold by the end of this year or early next year. So if you invest now, and gold does go up that far, you’re still in great shape. And if you have a long term investment window, even if it falls, something like gold is unlikely to fall too far.

That said, it is important to remember that gold prices can be rather volatile. If oil prices sudden take a dive (it could happen), or if the dollar recovers, gold prices could drop. If you’re using gold as a short term investment, that could mean a loss, especially if the drop brings gold back to the mid-$600 level it was at not that long ago.

Over the long haul, I like gold. It generally appreciates, and if you have the risk tolerance, you can ride out the price volatility.

Disclaimer: I am not an investment professional. You make any investment at your own risk, and there is always the risk of loss. Consult an investment professional and/or do your own research before making any investing decision.

Post from: EveryJoe

Is Now the Time to Invest in Gold?