President Ronald Reagan famously said about inflation: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”
Inflation is not all bad, because of inflation, we have less exposure to a depression or so said John Maynard Keyes. Many agree with his thoughts, but many do not. Inflation can steel away purchasing power from those who can no longer work, those who are locked into a fixed income, those whose lifestyle can be threatened.
The opposite of inflation is deflation. With deflation comes lower real estate values, loss of pension values and an overall drag on the world’s economy.
Too much inflation or too much deflation can cause chaos and worldwide disturbances. Think of inflation over a period of time as long-term thievery. This is merely a theft of future purchasing power.
Along with instability of values, comes government tinkering. Trying to manipulate the money supply physically, leads to an opposite result.
During the Obama Administration, the Federal Reserves pumped billions of dollars created from thin air to help the government respond to the banking collapse of 2008. The Federal Reserve controls the actual supply of money. It is fundamental supply and demand, if there is too much money and inflation is a concern, the Central Bank makes its member banks increase the amount of cash reserves kept on hand. This effectively dries up the amount of money available to the economy. The opposite is also true; the Federal Reserve can just loosen the amount of reserves required and more money flows into the economy.
The original concept of control over the money supply originated many years ago with the idea being created by Mr. Keyes. Helping the Central Bank create booms and lower deflation by controlling the money supply.
What has made the concept work is not the fact that there would be more money in circulation, it is the fact that the Central Bank also kept interest rates by controlling the “discount” interest rate, the interest paid from bank to bank to the Central Bank.
Of course, history tells a different story, under the Nixon Administration, the cheap money concept could not stop almost runaway inflation. President Nixon, who was always known as a “Keynesian” follower believed that more money bred more money and more money created a more robust economy. Of course, now we see that that as an actual plan was a flawed idea. It took almost 15 years for his errors to be corrected, and in fact, it wasn’t until the Clinton Administration added more and more control that the idea of runaway inflation was finally under control.
In many ways, Clinton was correct, administer taxes, balance the budget and pay down the national debt. Often, easier said than done.
If you are retired, close to retirement or planning for retirement, there is a simple and effective method to plan for unknown inflationary issues.
Think of your retirement money as a big pot. When retirement time comes, in that pot, use part of your money for income, fixed for 5 years. The balance of your “pot” buy a Fixed Indexed Annuity with an income rider. Many companies will guarantee a return of 6% (more or less) if you use the funds for income. In 5 years, have a look at your budget, the economy and how much money remains in your pot. Determine your situation and either take part or all the pot and use it as guaranteed income, income that will pay for the rest of your life.
If you are still concerned about inflation in 5 years, use only a part of the remaining pot and repurchase income for five years, sending the rest ahead.
You can accomplish all of this without market risk, basing your future inflationary concerns with solid guarantees.
This is a concept; your actual situation will entirely depend on you, your goals, your age, the amount of money you have available and your health.
Always consult a licensed and authorized professional for help in determining how best to accomplish your goals.