The Associated Pest

You voted and we deliver! The Associated Pest’s Poll results are in, and our readers believe that a Weakening US Dollar is the greatest threat to the US right now. It received 51% of all votes, handily beating out “The Mortgage Crisis” (18%), “Rising Fuel Costs” (15%), “Terrorism” (11%), and shockingly “Iran and/or North Korea” (a meager 5%).

Don’t Forget to Vote in our newest poll, “Where Should the US Military Presence Be?”. As always, the Pest will deliver an article based on reader results. It’s the only place where your vote directly inspires an article!

The weakening Dollar is the highest priority to our readers. Let’s first explore its cause and effects.

Inflation is the key to a weakening dollar. Inflation occurs from an excess of money being created by a government and spent by its citizens and businesses without an equal amount of trade and goods being created.

From a macroeconomic standpoint, in our modern economy, when interest rates are low, people will buy more goods and services. This increased spending will create a need for more money. When there is a trade deficit, such as the one we have in China, lower interest rates will therefore create inflation. Dollars will flow into China and their goods will flow into the US.

As the Fed raises interest, this causes a pullback in spending from consumers and consequently a pullback in inflation. It’s a simple concept really. If you are buying on credit would you rather have to pay 5% interest or 15% interest? Obviously if you were given a 15% interest rate, your spending would decrease. So when the interest rate is lowered by the Fed people will buy more, but the dollar will weaken.

The effect of a weak dollar is simply that it does not have the purchasing power of a stronger dollar. This is both good and bad. Really bad if you want to take that dream vacation to Europe and find that a cup of coffee is going to cost you $5. But it’s good if you are an American business that exports your goods to places like Europe, because the Europeans can buy more of your goods for less of their money.

China has built its massively growing economy exactly on this principle. They have been operating with over a 6% rate of inflation for years. The US and other countries are actively buying up their goods and feeding the Chinese our precious green backs, Euros, etc. This in turn grows the need for more Chinese Yuan put into circulation and drives up their inflation.

So as you can see, inflation is both good and bad for an economy depending on your perspective. In general however, a government likes to limit inflation for a variety of reasons, but that is another article for another time. Let’s suffice it to say those imports we covet are going to cost us as consumers more. That includes our food, gasoline, electronics, clothes, etc. When we can’t afford to pay for those things anymore, we are in trouble.

So what can you, the investor and simple consumer do to limit your risk to inflation?

There are simple steps you can take right now to limit yourself to the risks of this growing problem.

1) If you are adverse to riskier investments and just want to shield your savings from inflation, go to your local bank and buy up some I-Bonds. I-bonds are “inflation resistant” (hence the “I”) bonds that the US government backs. These bonds are sold for face value unlike most other government bonds, and earn a small percentage yield plus a percentage equal to the inflation rate. It is probably the safest way to shield yourself from inflation, because they are guaranteed by the US Government.

2) A bit riskier, but still historically solid is buying commodities such as gold. Gold prices have, for obvious reasons, increased with inflation and decreased with deflation. An ounce of gold has the same “actual” buying power it did back in ancient times…. meaning you could buy the same amount of goods and services, for say an ounce of gold, as you could buy today. Commodities are a great way to protect against the weakening dollar. They are simple supply and demand, so do some research to find the best fit for you. It could be gold, silver, platinum, coffee, soy beans, corn, etc. You can buy and sell on the COMEX (Commodities Exchange) with futures contracts. You could also buy physical commodities like gold or silver bullion. Although I wouldn’t recommend filling your your mattress with bushels of corn, they’ll probably rot!

3) A third option would be to invest in stocks or bonds issued from other nations around the world. Find a solid emerging market, such as Brazil right now, and put some of your dollars into a few companies you feel are going to reap some good profits by buying stock in those companies. Make sure to do your homework though! Just as any investment, this involves risk. Don’t just blindly throw your money into a company without checking out their financials and studying their business.

4) A fourth option, that is inherently riskier, is trading dollars for other currencies. This can be done on the Forex, but is incredibly risky if you don’t know what you are doing. However, a good alternative for hedging inflation on the dollar is buying an ETF that is “bearish” on the dollar. (Bearish indicating that you are betting on the dollar’s increased weakness). An ETF is an “Electronically Traded Fund” where a fund manager (someone who knows what they’re doing) can buy and sell multiple currencies, stocks, and bonds much like a mutual fund, but with very little management expenses incurred by you (That’s a good thing!). Shares of ETFs like PowerShares DB US Dollar Index Bearish (symbol UDN on the AMEX) are doing very well right now. Their rising graph corresponds nicely with that of the shrinking dollar index. Your risk here is that when the dollar begins to rise this fund will inevitably decline. As long as you’re bearish on the dollar you can use a fund like this to hedge risk.

5) Do like Giselle and get payed in Euros. Just kidding, I don’t think your boss will help you on that one!

PLEASE HELP MAKE THIS ARTICLE BETTER. SHARE YOUR TIPS AND TRICKS WITH OTHER INVESTORS. WE WOULD LOVE TO HEAR YOUR COMMENTS AND SUGGESTIONS BELOW.

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