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Sexy inflation.. and umm not so sexy Greece

by on May 13, 2010

From the sandy beaches of Mykonos in Greece – time finally seems as though it’s on your side. The idyllic beaches, fantastic cocktails and all night clubs just make the rest of the world simply disappear. Heaven is an island in the Mediterreanean.

Suddenly these images are replaced with ones of riots and street warfare in Athens – an unfortunate casualty of the credit crisis as the media portrays it. I don’t deny that the credit crisis had a major part to play in Greece’s woes but I think it also has to do with the fact that no matter how much the rest of Europe loves frolicking on Greek beaches with Greek women – bailing Greece out is a completely different issue. Thankfully with the latest $750 Billion bailout plan, the Euro Zone has decided to take a forceful stance against the train nicknamed “sovereign default” heading straight for them. About time, or that train was about to turn into a ship ready to annihilate the European economy. And annihilate is a nice word to use here.

My point here is that when the Euro Zone decided on adopting a single currency across multiple nations – they gave up monetary policy, which today could have been a plausible solution for Greece’s current problems. The idea here is simple – depreciate yourself out of debt, but in this case as there is a common currency – the Greek Central Bank cannot use interest rates as a tool in its arsenal against problem such as these. Hence, the need for a massive bailout.

But what about the US? US gross debt is at a staggering 87.3% of GDP where 56.6% is held by the public, and 44.4% is intra-governmental (think China!) – that’s about $700,000 per person in the US and about $2.1 Million per household in the US. These numbers don’t even hold any meaning for me  – how does this even start to affect me?

This is where it all gets hazy as no one has clear cut answers for someone like me who is thinking about starting to build a financial plan – the focus is on all the big guys. I definitely know of at least one thing that’s impending on the horizon is inflation – with interest rates this low for these many years, the fed will most probably be too slow in hitting the accelerator on interest rates when inflation starts to take off. This might not be a bad thing especially if it allows the Fed to depreciate it’s way out of some of its debt and for me, it’s basically a great way to have an artificially bloated stock portfolio. Yes, inflation is suddenly starting to look pretty darn sexy.

So, here’s the plan – as a starting point for my financial plan, I’m thinking about going for mutual funds or ETFs with a blend of equity and fixed income – nothing too impressive. However, I definitely want to either buy in on a fund where they know exactly when to start swapping out of fixed income into equity when interest rates start going up – any ideas where I could find something like this? Or even better – what are my other options?

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