Photo courtesy of Paul Nicholson

It’s fairly evident that the U.S. Monetary policy of printing money will bring on inflation. The question is when? Inflation is a lagging indicator so it could take awhile to appear. When it does this will cause a rise in interest rates which will put pressure on the economy and other financial assets.

What is inflation? Inflation is described as when the total money in an economy increases too rapidly, so that the quality of the money (the currency value) often decreases. Economists generally think that this money supply increase causes the price of  goods/services to increase over time.

Wouldn’t it be nice if we could just print all the money that we wanted without any consequences? Even if inflation were somehow avoided we will certainly have a number of bubbles to deal with. We can see what has happened to the stock and bond market. The stock market is up 156% in 4+ years yet the economy has shown little in the way of growth. The bond market, likewise, has been extremely strong with the hi-yield corporate bond market up almost 100% in a little over 4 years (ending in June of this year).

Balloons – Photo Courtesy of Franz Dejon

There will be consequences to these policies and they will be felt world wide. The economies of the world are now linked and you have central banks around the world printing money. The days of investing in other markets when the U. S. economy is hurting are over.

The money being pumped into the system is keeping us from being in a very deep recession if not worse. The stock market, real estate, bond market and consumer credit markets would all sink without the monetary support.

The U.S. has never printed this much money this fast and it tells you that The Fed is very worried. They tell us not to worry yet they have no plans to pull the money out of the system. They will just wait until the bonds mature to take our money out. Will inflation wait 10 years?

You figure that the Fed is borrowing about a trillion a year, how would the economy fare without that stimulus? When the money stops flowing then you can look for troubles since the Fed has had a hand in creating some significant bubbles.

What can you do to protect your investments?

Actively managing your investments will be the key to survival in what is likely to be a very rough down move in the markets.

You will need to know:

How to create Trend lines for individual stocks and mutual funds.

You will need to know how to determine price objectives.

And you’ll need to know how to place sell stop orders on your investments.

Stay in touch to keep learning!

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