In the “good old days” it was enough to put your money in a savings account and let it grow with compound interest. Today, there is no savings vehicle that comes close to bringing you enough money to overcome inflation, a weakening dollar, and taxes.
Beginning with inflation, since Jimmy Carter was president, each succeeding president has played around with the rules for determining inflation. If we were using the same method for determining inflation as was used during the Carter administration, I would be getting at least 70% more Social Security than I am. That means our government is essentially stealing 70% of my SS income as well as the income of anyone whose benefits are indexed to inflation.
Also, using the former inflation criteria, inflation today would be between 11% and 12%. The current government thinks that it isn’t necessary to count food and energy in their inflation calculations. When housing was blowing up to bubble proportions, the price of houses was also not counted. Instead, they counted the lower rental figures. (See www.Shadowstats.com for accurate inflation numbers.)
Now let’s add in the weakening dollar, which has taken a big dive in just the past two weeks (late February, early March). Ben Bernanke, the Fed Head, has decided that it is better to prop up the stock market and the banks with prime interest rate reductions than to protect the dollar and stop inflation. Of course it is precisely these same interest rate reductions, perpetrated by Bernanke’s dreaded predecessor, Alan Greenspan, which was most instrumental in bringing about the current housing debacle and all of the related ripples. While this policy is good for the stock market (theoretically) and banks, it is bad for everyone else.
Since the introduction of the Federal Reserve in 1913, the dollar has lost over 95% of its value. It has lost a great deal of that value in just the past couple of years. One way that the dollar is depreciated, aside from lowering interest rates, is to run the printing presses day and night. Put more money into the system and the money already in the system is worth less.
Most people think that higher prices are the definition of inflation. Actually, it is an increase in the money supply that causes inflation. Higher prices are the consequence. So pumping money into the economy causes inflation and a weaker dollar, a double whammy on the working class.
Finally, any income you make from a savings account, CD, Money Market account, or other savings vehicle, is going to taxed, just like any other income. When you combine all three of these dings to your investment income, it is evident that it is absolutely necessary to try to find an investment that will bring you 10% at the very minimum and hopefully 15% or more.
As soon as you start talking about 15% or more, you are moving into risky territory. The sad fact of today’s economy is that you either risk or you lose. This is a tragedy for those who are retired or are about to retire and thought they had enough money to live on in their golden years. Between inflation, dollar weakness, and taxes, they are losing money without doing anything.
So you need to invest or lose money. It’s as simple as that. The only question is, are there relatively low-risk investments that will still bring in the returns that I need to keep my head economically above water? The answer is a qualified, “No.” High risk and high returns are joined at the hip. The best you can do is minimize your risk with smart investing.
Right now, the whole stock market is sliding downhill like an avalanche. Are there safe plays within this economic meltdown? My own bias is that there are. One way to make money on a falling market is to bet against it by shorting individual stocks or whole indexes. I will not cover that aspect in this short piece.
The other way to gain significantly in an economic meltdown is to go with those investments which traditionally provide a safe haven for wealth during severe downturns. One of those safe havens is precious metals, gold, silver, and platinum. All three of these have been making new highs over the past couple of weeks, silver going past $20 an ounce and gold threatening $1,000 an ounce.
According to those who are in the know about gold, $1,000/ounce is still a bargain. I have read that the old gold high of $850 (in 1980) would be equivalent to $1,200 today, so we’re not there yet. Another gold bug, who used the inflation methodology from the Carter years, says that a gold would have to go over $6,000/ounce to match the $850 high.
The other area of low risk and high potential is commodities, including base metals and any foodstuff. Anyone who shops for the family knows that food prices are going through the roof (which is why they’re not counted in inflation). Finally, energy is a safe bet for good profits because we will still need energy regardless of a recession or depression.
So short the market (and especially financial institutions) and/or go for commodities, precious metals, base metals, food, and energy.