In this uncertain time many investors are flocking to fixed income investments. We believe this can become a mistake in the long run. If inflation takes hold then the principle value of the fixed income instrument will decline and the income portion will have reduced spending power. This is a double whammy. Many investors plan on relying on fixed income securities for their retirement. We at believe that income investing is the way of the future. However, when subscribers find our web site they expect to find all types of fixed income investment strategies. But they are soon disappointed.

Economics 101 tells you that inflation is the friend of debtors and the enemy of creditors. Since most voters are debtors; guess what they vote for.

Why else do we think inflation is coming back? There is an excellent article titled Deficits do Matter written by Hans Sennholz of the Ludwig Von Mises Institute. He presents the following arguments:

Both deficits, the federal and the state, constitute a heavy burden on the capital market, which keeps no idle savings amounting to hundreds of billions of dollars. They force the Federal Reserve System to come to the rescue; it can print any amount of money and create any volume of credit. The Fed is the financier of last resort, the ultimate source of funds that enables the federal government to finance any conceivable expenditure and cover any possible deficit. Without the Fed, fiscal deficits of such magnitude would soon depress the American economy and cause serious political repercussions. Its ability to create dollars that enjoy worldwide acceptability enables it to distribute the burden of U.S. Government deficits to countless millions of dollar holders all over the globe. They pay for the deficits through depreciation of the dollars in their pockets. Japanese and Chinese, Arabs and Hindus, French and Germans, and all others with dollar savings join Americans in bearing the burden of federal deficits.

This ability to place the economic cost of government spending on millions of trusting victims rests on the extraordinary position of the U.S. dollar as the world’s primary reserve currency. The dollar acquired this distinction by international agreement reached at Bretton Woods in New Hampshire in 1944 which committed the United States to provide an anchor for world prices by pegging the dollar at $35 per ounce of gold and envisioned a world economy linked by fixed dollar exchange rates. When the United States suffered chronic gold losses and finally faced inability to make payments in gold, President Nixon severed the dollar’s gold link in August 1971, devalued the dollar against major foreign currencies in December 1971, and finally floated it in March 1973. The world has been on a floating dollar standard ever since. It is a fiat standard, unbacked and irredeemable, which can be inflated and depreciated at will. Managed by the Federal Reserve System, it is a useful standard in the financial service of the U.S. Government.

Other countries are narrowly limited in their ability to inflate and create credit; if they indulge in expansion rates greater than those of their neighbors and trade partners, they soon face payment difficulties as imports increase and exports decline. They then have to reduce the expansion rates and fall in line with their neighbors and partners. The Federal Reserve System as the manager of the world dollar standard has no such narrow limits. It can inflate and create credit as long as its expansion does not exceed the worldwide demand for its currency. It may generate trade deficits year after year and aggravate its maladjustments as long as foreign banks and investors hoard the dollars or invest them in American obligations. It is bound to cause worldwide financial upheavals, however, when it depreciates the dollar at excessive rates and thereby inflicts painful losses on those foreign investors.

The privilege of the USA having the world reserve currency is that you can pay off your debts with inflated fiat money and spread the burden to people that do not vote for you. This is why the US Government will not be able to resist the temptation to print money. Quite frankly, this is why we feel the French and Germans are determined to turn the Euro into a world reserve currency. This way they can spread the pain of decades of their economic mismanagement around the globe. This we believe is the underlying cause of the dispute over IRAQ.

In conclusion we recommend that investors begin to consider the impact of inflation on their investments and income. We can also assure you that relying on Governments will be a disappointment. In Canada, many income supplements are indexed for inflation but only for the inflation amount that exceeds 3%. Therefore, you are guaranteed to lose 3% per year. Furthermore, we feel inflation figures presented by governments are misleading and in most cases higher than reported.

Stick with us and you will not be disappointed.

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