Here's what's going to happen:
The fed will contiue to aggressively cut interest rates. the thinking is, as long as housing prices are falling, then inflation is not a concern. once housing does bottom out and shows signs of stabilizing (maybe within 2 to 3 years) then the fed will fight a fight it knows how to fight...the inflationary fight.
The Fed will clamp down on credit availability in an effort to snuff out inflation. This will require a major tick up in the interest rates.
An increase in inflation from primarily food and fuel, and the corresponding increase in interest rates will solve the problem of excess liquidity (too many dollars floating around) as well provided those holding dollars with a greater return on their dollar holdings (China).
In this scenario, inflation is the fed's friend, and it will do nice work of bringing the the higher costs of house ownership down.
It should play out relatively painlessly for most. However, here are potential pitfalls:
- large holders of dollars stand to lose through the loss of purchasing power (prices are going up but collecting less on your cash position). Have some cash to be flexible. Cash is essentially stored energy which you have to put to use. If you are counting on cash as a source of income you may want to consider a part time job.
- Hold some commodities to offset the loss of purchasing power of your dollars. commodities have had quite a run, and i would be hesitant to buy more at these levels, that is unless you have none...then buy slowly
- Be mindful of your job-casualties of the impending recession through job loss will be in a precarious possition. if this is the case, another reason to hold some cash.
- holders of credit card debt (CCD) will get hurt when interest rates start cranking up. If possible, pay down CCD and/or lock into a fixed rate if at all possible.
- stay flexible nobody knows for sure how this thing will play out. Although a smooth recovery is likely, it is not a sure thing and there are to be sure some bumps in the road to recovery.
- For stocks, stick with companies with little or now debt, good dividends, industries which will be supported by consumers and/or governement spending.
