One of the articles that was submitted for the latest Carnival of Twenty-Something Finances took a rather pessimistic view of the economic future, particularly when it came to the current political climate. As I mentioned in that carnival, I don’t particularly agree with everything that My Wealth Builder thinks will occur, but I still think it’s important to be aware of such predictions and prepare for the worst. So, I’m going to review his predictions in more detail, looking at how likely I believe they are to occur, what to do to prevent suffering too much if they come to pass, and how to make sure you don’t lose your shirt if he just happens to be wrong. Let’s begin:
Prediction #1: High Inflation
How Likely is It: Given that we’ve been suffering (if that’s the right term) from deflation for most of the year, we’re definitely due for higher inflation when the people begin spending and banks begin lending again. How much inflation, and whether it qualifies as high, will depend on how well the government adjusts once the economy starts to heat up. I’m guessing we’re in for at least a few years of higher than normal inflation before everything finally settles out.
What if It Happens: There are several good ways to invest in order to fight inflation, some of which I’ve covered already on this blog. The short list includes stocks, Treasury Inflation Protected Securities (TIPS), and I-bonds, the last two being special types of government bonds. You could also invest in commodities and real estate, although they will not be as explicitly an inflation defense.
What if It Doesn’t Happen: If we aren’t hit by high inflation, you can do much the same thing: a diverse portfolio, with plenty of stocks and/or inflation protected bonds, is always a good idea.
Prediction #2: Higher Health Care Cost, Lower Quality
How Likely is It: To be completely honest, I don’t know. The health care reforms in this country are still being debated in the broadest possible terms, with no agreement on what the health care system will look like after the dust settles. I’m trying to be optimistic about the final bill that results, but I will admit that even the best designed bill may fall apart in practice. But, isn’t that always the way?
What if It Happens: Again, without knowing what the future of health care will look like, it’s hard to give solid advice. I doubt that private health insurance plans will disappear overnight, so even if your employer decides to drop your coverage, you can probably still find a health insurance plan that offers significantly more features than a government plan (assuming that a single-payer or other government controlled plan actually is in the final package). In that case, you may find yourself choosing between an inexpensive but less desirable government plan or an expensive, better private plan; which one you choose will depend on your resources and priorities.
What if It Doesn’t Happen: It’s possible that health care reform can make the health insurance environment simpler, easier to understand, and cheaper. (Don’t laugh, it’s possible.) In that case, you may find yourself with cheaper, better coverage than you have now, and you won’t need my help.
Prediction #3: Taxes Will Be Higher for Everyone
How Likely is It: This is the one on which I’m most torn. On one hand, we here in the US have a large and steadily increasing national debt, which will need to paid off (or at least scaled back) at some point in the future. To do that will require cutting spending (which is easier said than done, as everyone wants to reduce spending until a program that gives them money is on the chopping block), raise taxes, or mostly likely, doing both. On the other hand, no less than Jack Hough of SmartMoney argues in the December 2009 edition that compared to other developed nations, our national debt is affordable and under control. So, until I start reading news that say, Japan has declared bankruptcy, I’m going to say that the government is going to hold off on raising taxes (at least for all but the top percentage of earners or so) for quite a while (probably not until Obama’s second term or so).
What if It Happens: If I’m wrong and taxes do go up in the near future (or I’m right and you just happen to be in the top tax brackets), there are a number of ways to hedge your taxes. Adjusting when you make charitable contributions, how much you contribute to your retirement accounts (as well as whether you choose a pre-tax or post-tax style account) and what type of investments to choose will all affect your tax bill. Taking the time to carefully look over your tax return as well as consulting with an accountant or other professional will be even more worthwhile if you find yourself facing higher tax rates.
What if It Doesn’t Happen: Well, even if tax rates don’t rise, you’ll still have to pay some taxes. (They’re as inevitable as death, after all.) So much the same suggestions still apply; study the tax laws, for the nation, the state, and your city, if applicable, and do what you can to manage your tax burden.
Prediction #4: Recession Recovery Will Be Slow
How Likely is It: Well, if you ask economists, the Great Recession has already concluded and we’re in the recovery stage already. Of course, from a jobs perspective, things are significantly bleaker. With unemployment hovering around 10% (and even that figure does not include things like underemployed people and others who have given up on searching), there’ s a high number of people who still have a lot of recovering to do. Personally, while there are parts of the economy that are making an improvement, I think that there’s a way to go (and not too much that the government can do, in spite of their best efforts).
What if It Happens: Not too much you can do as an individual to speed up the recovery, sad to say. Just keep your income coming in (as much as you are able to control that), pay down debt (and don’t add any more if you don’t require it), and build up an emergency fund in case the slow recovery leads to your own financial troubles. (And if (God forbid) you do happen to lose your job, check out my list of ways to bounce back from unemployment; it’s full of good advice.)
What if It Doesn’t Happen: If things recover much quicker than feared, it’ll be very good. However, there’s not much different to suggest in that case; keeping your finances in good shape is just as important even if things go well. The only difference is that hopefully you won’t be as worried about losing your jobs if the last traces of the recession are gone by this time next year.
That’s all there is to it; as I said in my title, I think you should hope for the best, but prepare for the worst.
Related Websites
Leave a comment