Deflation? Hyperinflation? What Do I Do?

I absolutely love tuning into talk radio stations. It’s hucksterism at its most entertaining – the selling of fear is palpable and the line between content and commerical is so blurry I can’t tell if the host is on an economic rant or trying to sell me on a gold broker.

Regardless of whether you think such talk show hosts are the scourge of the earth or a vital source of speaking truth to power (I’m not in either camp, actually), there is one truth that you can take away from all of it: no one knows for sure what’s going to happen next in terms of the economy.

One can make a reasoned, rational case that we’re on the verge of a golden age because of emerging technological advances and the opening of new markets. One can make a reasoned, rational case that we’re on the verge of economic collapse that will come in the form of a deflationary spiral (lower prices lead to lower production which leads to fewer jobs which leads to lower prices…). One can make a reasoned, rational case that we’re on the verge of economic collapse that will come in the form of hyperinflation (prices escalating, the dollar dropping compared to other world currencies, etc.).

We just don’t know.

If you believe a boom time is coming, it probably makes sense to invest in stocks, particularly in technology and in emerging markets. Invest in things that will grow like crazy when things start to take off.

If you believe deflation is coming, it probably makes sense to start hoarding cash, because every dollar will increase in value. Buy CDs and keep your money in the highest-yield savings accounts you can find.

If you believe hyperinflation is coming, it probably makes sense to buy real physical assets like real estate and, yes, even precious metals. Buy things that will retain at least some significant inherent value regardless of what happens to the dollar and to the national economy.

The problem is, of course, that these avenues don’t really overlap. If you’re investing all of your money in cash, you’re missing out on other areas, for example.

Given the complete uncertainty of the future, what should a person do?

Diversify.

Do not put all your eggs in one basket, even if you believe disaster is just around the corner. This is true whether you’re investing for personal gain, investing for retirement, or simply deciding how to put together your personal budget for next month.

You can diversify your investing by having a little bit of this and a little bit of that. At retirement, you’re probably more concerned about protecting yourself against collapse than riding a possible financial rocket, so your concern would be more towards investing conservatively in cash and bonds and some real estate.

You can even diversify when you budget. How? You diversify whenever you toss some money towards an emergency fund. That way, whenever that disaster around the corner peeks out, you have the tools you need to handle it. You also diversify whenever you buy in bulk, because you’re effectively investing some of your money into long-term household resources at a bargain price.

The more diversification you have in your financial life, the more likely you are to be able to simply roll through anything that life can hand you – and the more likely you are to be able to take advantage of any great opportunities that come your way.

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