Should You Invest Short Term
Firstly, if the U.S embraces a policy to “bail out” firms and heavily subsidize the economy it could very well spin us into a major hyperinflation. Why? If the Fed utilizes its ability to increase the money supply, it would cause an overflow of currency into the economy and push the value of the dollar down and interest rates up at an alarming and uncontrollable pace. Furthermore, by heavily subsidizing the economy, there is no guarantee that the money given will be spent. During times like these most of the individuals and businesses will hoard the money that is given to stimulate the economy. Furthermore, by bailing out firms and heavily subsidizing the economy, it would aid badly managed companies and industries an opportunity to continue to flourish.
Secondly, let us look at the resent mortgage industry bailouts. Are we really any better off? We still have high unemployment, huge foreclosures, looming inflation (over 3%), high oil prices, and evidence of a possible hyperinflation approaching. Currently we are in a stagflation – a combination of inflation, slow economic growth and high unemployment. The above is all because of the Fed’s use of its Monetary policy “Only” to bail out the banking industry, subsidize the economy (which was a little too little and a little too late), and attempts at keeping the interest rate to low for too long. We need more bipartisanship in our political arena to assist the Fed to get us out of this economic mess that we currently find ourselves in.
Lastly, if I have cash available to invest I would keep it as liquid as possible. Why? Because, if I know interest rates will rise, I do not want to commit my money to any long term investment. For example, if I lock up my money in a 3 year CD earning 1.5%, then in 8 months the interest rates increase to 3.5% for another investment, I take out the money from the 3 year CD and must absorb a hefty early withdrawal penalty. Did I make any money? No! In fact I lost money. In conclusion, I would be better off keeping my money in an interest baring checking account or a saving account until a better investment opportunity comes along.
Hubbard, R.G. (2008). Money, the Financial System, and the Economy (6th ed.). Boston: Pearson Addison Wesley. ISBN: 9780321426703