Inflation and Falling Dollar and Recession... Oh My!

It would seem from reading the business pages of any newspaper that we are currently facing an economic triple-threat. Most journalists sound a lot like Dorothy from the Wizard of Oz, "Lions and tigers and bears! Oh, my!" My situation now is to try and separate the sensationalism from the level headed analysis, then more importantly decide what to do about it.

I worry about the ability of the Federal Reserve, Treasury Department, and our Federal Government to think long term (as I have). The Fed has shown through their recent actions that they may be willing to cut interest rates in response to turbulence in the equity market and the President (and several other interventionist officials) have proposed bailing out home owners that took out foolish mortgages. It seems that these people are all for capitalism up until it comes time for people to pay the price for their risky behavior.

Very few people realize that inflation is the largest risk factor most investors face. The time horizon for accumulating retirement assets is approximately 40 years. In that time a tame inflation reading of 2% annually will decrease your spending power by 220%. Inflation over the last century has been on the order of 3.25% annually (source). Over 40 years that rate would cut your next egg by 359%. Here is the real kicker, the current inflation rate is listed at 4.3% from November 2006 to November 2007 (CPI data source) and many feel this is grossly understated because it omits food and energy (two areas that have had the most run-up recently). If this rate continues, a dollar today will be worth less than $0.20 when I retire. Based on these numbers I worry that today's leaders are sacrificing the long term value of my investments and the security of my retirement for the sake of a bail out for Citibank and John Doe adjustable-rate-mortgage-holder.

Last week my portfolio took over a 3% nose dive. Taken at face value, it seems like all of the doom-sayers could be right. However, the conclusion I have come to (disclaimer: I am not giving financial advice. Seek the advice of a professional) is that the markets and economy will work out just fine. That is, IF our leaders are willing to make the choices that safeguard our long term economic system. This can only happen if we stop the bail outs and rate cuts that can undermine the system. I will keep buying stocks and investing. I am not going to change a thing just because there is turbulence and volatility. I hold a diversified portfolio of assets which will smooth out the sharp dips. In the long run, stocks produce great returns for investors. I sure hope I'm right...

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