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The Biggest Risk You're Not Thinking About

We could face inflation of enormous magnitude, and TIPS won't save you.
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What is the biggest economic risk you face today? Short-term traders see this question in its most simplistic form: How much will your nominal account value be on tomorrow's or next week's statement, compared with where it is today?

But your longer-term fiscal health and perhaps even you financial survival will depend on another, more basic factor. We could be facing inflation that's higher than anything we have seen in the country's history.

President Nixon took the U.S. off the gold standard on August 15, 1971. Not coincidently, the buying power of the U.S. dollar has declined dramatically since that period. According to officially released Consumer Price Index numbers, on Feb. 17 of this year, it would have taken $5,596.42 to purchase what $1,000 did on Jan. 1, 1971. You needed to earn 459.64% cumulatively over those 41.08 years simply to maintain your equivalent buying power.

Keep in mind that the Bureau of Labor Statistics has twice altered the way it calculates CPI (in 1980 and 1990) to lessen the reported rate of inflation it was officially releasing to the public. Food and energy became segregated from "core" numbers.

Owner-equivalent rent became 26% of our inflation index as housing prices hit the skids, but as rental prices have risen, the BLS is seriously considering dropping this single largest component from the index. CPI is a rigged game that always favors the underreporting of true inflation.

That's why Treasury inflation-protected securities, or TIPS, will not protect you against what are likely to be enormous actual increases in cost of living.

While our government has been devaluing the dollar, the promised but unfunded future liabilities of both Social Security and Medicare have skyrocketed. The net present values of the unfunded liabilities dwarf the headline $16 trillion national debt figure you hear about.

Total Federal Obligations, 2002-2011

SGS, U.S. Treasury, BEA

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Avoid lending money at fixed rates for any period longer than six to 12 months. I have all my personal cash in demand accounts -- not in CDs, not in bonds and certainly not in the most toxic class of all: mortgage-backed securities and the REITs that hold them.

The one asset that will get you through the most likely scenario is your ability to earn a living by providing a needed product or service. Make yourself as valuable as possible to society, and you will always be able to live a reasonably good life.

Investors of retirement age should fare best in the tumultuous times ahead by owning stocks of high-quality companies that provide basic, necessary goods and services. World history has shown that shares of these type firms will survive, prosper and hold their buying power better than anything else.

Be prepared for great volatility along the way. Remain unlevered so you're not forced or intimidated into selling when the world is panicking. Turning ownership of solid, profitable firms into fiat-based currencies backed only by the "full faith and credit of the U.S." will prove to be the riskiest choice you could make.