Earlier this week, President Bush proposed a budget of about 3.1 trillion dollars to Congress. Of course, this could get bigger and it doesn’t even include all costs like the wars. There are approximately 300 million people living in the United States. That means that the federal budget costs each person over 10, 000 dollars per year. This includes everyone, so a family of four would have a share of about 40, 000 dollars. This is just for the federal government, not state and local. There are variations as to how much each person pays, but just the fact that the average cost of the federal government is 10,000 dollars a year is staggering.
With future obligations (also known as unfunded liabilities) estimated around 53 trillion dollars and up and a national debt over 9 trillion dollars, the government is headed towards bankruptcy. They could cut spending, but how likely is that any time soon? Anyway, it would be too little too late for the trouble we are in. The government could raise taxes, but this would just hurt us more. And also consider the fact that increased taxes may not necessarily end up increasing the total amount of money going to government. This is one thing that some Republicans get right. The Laffer Curve shows us that at some point, increased taxes will actually decrease the amount collected by government.
The only real options for the government is to severely cut back on Social Security and Medicare benefits or printing money. The likelihood is that both will happen. Of course, as the government prints/creates money, it causes the value of the dollar to decrease and prices rise.
You should consider this scenario when investing. The only way for the government to get out of this mess is to severely cut benefits and/or inflate the money supply. It would be wise to protect your assets from inflation. Although real estate looks bad right now after the real estate bubble, it is still probably a good long-term “investment” as long as you can afford what you buy. I put investment in quotes because it is really more of a consumer good, but it would be better to have a portion of money in real estate than it would be to have it in bonds or cash if there is a high inflation environment.
I don’t recommend stocks as much to protect against inflation, although they can keep up over the very long term. But if you look at the horrible 1970’s with high inflation, stocks went down. I would recommend precious metals and other hard assets as an inflation hedge. There are now many options to buy these like stocks. An exchange traded fund (ETF) that mimics gold is GLD and an ETF that mimics silver is SLV.
Now that it is looking like the next president will be McCain, Clinton, or Obama, it would be wise to prepare. They are offering the status quo or worse. The problem is that the status quo is driving us off a cliff.