Inflation and Your Investments

Here is a rule of thumb as to what can happen to future interest rates. This is due to the probability of runaway inflation because of huge government deficits.

In a 2003 report by a Federal Reserve economist, there was a calculation of the effects of government debt and its impact on long-term interest rates. This was done before the current financial meltdown and the resuscitation efforts of the Administration.

The report concluded: "A percentage point increase in the projected deficit-to-GDP ratio raises the 10-year bond rate expected to prevail five years into the future by 20 to 40 basis points. Similarly, a percentage point increase in the projected debt-to-GDP ratio raises future interest rates by about 4 to 5 basis points."

In other words, the reflection of inflation in the form of higher interest costs.

As I recently noted, inflation induced by heavy deficits does not arise rapidly during a recession, but it jump-starts once recovery gets going. Then it quickly gets out of hand.

And then all the theory economists use to remedy the matter gets stymied by politicians who know the medicine will cause an economic pratfall. Any economist remedies are over-ruled by political considerations of forthcoming elections.

Be certain your investment policies then are inflation-proof. Keep tuned.