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Hedging Your Bets

By Editor Jane • on August 29, 2009

The biggest question in everyone’s mind is, what comes next and how do I not only survive, but thrive? We, as a population, have begun to figure out that the change we voted for is seriously upon us. Change brings instability, and instability brings opportunity for significant gain and loss. We are in unstable times – we have stopped being a nation of laws and started to regress down the path of being a nation of personality. There are a handful of things we know. The nation is spending money it doesn’t have and wants to spend more, recent political actions have brought the stability of contracts into question, and the government is trying to control nearly every facet of life with Cap and Trade coupled with universal health care. Now what?

There are a few probable scenarios. The first, and most likely one is that the economy heads into a major depression. With the current policies on the table, industry and citizens will be saddled with more regulations and more taxes. More taxes and regulation equals less productivity. Less productivity leads to depression. Depression can lead to deflation if production grossly outpaces consumption as companies struggle to stay alive. Current government policies are creating a lot of uncertainty, which people react to by clamping down on spending, both as private citizens and corporations. As the government attempts to create liquidity by injecting more and more money into the system, inflation is a very real threat. The question that goes with the depression is which ‘flation we will see. At some point, the market has to become saturated for any product, our debt is no different. When we can no longer sell our debt, the currency will lose value. Inflation seems to be the most likely from our current perspective, as we will most likely saturate the debt market before we overproduce, but it is far from certain. The best hedge is a multi-layered approach.

The core problem is understanding what is currently happening and correctly predicting the future. Right now, the best bet is to invest in politically connected companies and enjoy the profits. That is a clear path for a few years. The big issue on the horizon is inflation or deflation? We know it will be rough, the question is how to prepare for it. Inflation suggests a small bank account with heavy investments in stocks and hard goods. Deflation suggests the opposite. With the level of uncertainty, the most fundamental hedges are the ones with the greatest certainty of success. The investment advice our grandparents gave us holds true: stay out of debt, have a steady job, and put some away in banks, some away in stocks, and some away in hard cash/precious metals. It is a way of life coupled with a three layered hedge that protects against the market crashing, banks failing, and everything failing.

There are deeper scenarios being played out that deal with the fundamental stability of the nation. Everyone reading this article realizes that spending more than you make is the road to insolvency and then failure. Personal, corporate, and public finance all share that same core issue. A relevant model if you don’t believe the public part is California. When a government is spending itself into bankruptcy while simultaneously planning to spend more and tax its people further, the outlook for that government is bleak. Californians have choices, and they have voted with their feet by leaving. Americans are not trapped with one, or even two political models. Americans can chose between fifty different ways of doing government business, fifty-one if you count D.C. If the people decide to change what is happening, they have more ability to change the government than any other country in the world. Americans vote with their feet, wallets, ballots, and lives regularly. This nation has weathered worse problems. The government may go bankrupt, as we are seeing in California. Thus far, the state has not devolved into anarchy, which is encouraging. This will be an agent for change, and with that change comes opportunity. California can fall apart, or it can rise anew. The best way ahead is for the taxpayers, not the politicians, to take charge and rebuild the state’s political landscape. Then California can undo its oppressive regime of taxation and obsessive spending habits, attracting back taxpayers, corporate and individual, who had voted with their feet previously. On the other hand, it can try to spend more, tax more, and continue to lose its income base to other states. California has been in a death spiral of taxation and rampant spending for years, and must change or die.

We have a lot of change. It is clear that we need to change the cycle of overspending and taxing productivity to death. It is also clear that we are going to suffer the effects of this cycle shortly. The only part that is unclear is exactly how it will play out. How we will come out of this change is partially in our control. By wisely hedging our bets, we can maximize the odds of not just surviving, but thriving in these times. Not all change is bad, change brings risk, and risk contains the opportunity for reward if you can seize it.

The Realist is an Air Force Academy graduate, holding a master’s degree in Unconventional Warfare from the American Military University, and a co-founder of The PULSE Review.