How can a Personal Investor Adapt to a Contractionary Monetary Policy

investingJust as a personal investor should take the time to adjust their personal financial position to better meet the demands of an expansionary policy, changes need to be made to reflect a Contractionary government policy. Specifically, because of the way in which such an environment will generally command higher interest rates, lower growth in private business, and possibly even an appreciation in currency values, an investor should focus on building up the integrity of their own financial position so that they can weather the ensuing costs of living.

The most obvious aspect of a Contractionary environment that an investor needs to deal with is the increasing costs of managing debt. Because of the way in which the government has taken it upon themselves to require banks to fortify their financial statements, while private business growth declines in the face of the reduced accessibility of capital, consumers will start to see that paying down their expensive debt is the strongest guaranteed investment that they can possibly make in the economy.

From there, building up a savings portfolio that pays a high fixed income will likely become a strong move. Depending on the business cycle itself, the investor can choose to invest in either long or short term investments so as to maximize their yield. That being said, because of the way in which private demand will be contracting, it is important to remember that these investments should only be made into securities that provide a great deal of safety, just in case the company or government providing the investment is not able to continue supporting their obligation over the long term. From there, it is a matter of building up the wealth to put into the principle of these investments.

Because of the way in which the supply of money in the economy is tightening up, the value of the domestic currency will likely be increasing. Combined with a slow reduction in employment levels, another strong move for an investor to make is to obtain and hold a solid employment schedule. By working consistently in a way that allows some flexibility to add to a savings portfolio on a regular basis, an investor is building up the integrity of their financial position.

By building up this wealth, they are both ensuring that they are in a position to weather out any financial difficulties that may arise unexpectedly in the future (which would have otherwise been serviced by debt in an expansionary environment), or to prepare for the next expansionary cycle, during which they will be able to invest a great deal of funds into the new growth that occurs.

Remember, the key to weathering through a Contractionary cycle is to build up wealth through steady employment (of any kind), and to make sure that debts are paid off. From there, savings are a priority, in that they are worth more to us than ever before.

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