Preparing for economic fire and ice

By Linda Stern

WASHINGTON (Reuters) - Some say American economic strength will end in inflation, others say in recession. Even Federal Reserve policy setters don't agree.

While Fed Chairman Ben Bernanke has been publicly and loudly focusing on the risks of recession, Dallas Federal Reserve President Richard Fisher has suggested that inflation is such a horrible alternative, it's worth enduring a recession to tamp down.

They are the folks who are trying to steer the country through those two extremes, and perhaps their own ambivalence is part of the reason why most people can't figure out whether to worry about the fire (inflation) or the ice (recession). Certainly there is ample statistical reason to worry about either, or both.

You can worry about recession because: Gross Domestic Product growth in the fourth quarter was glacial, the stock market is predicting it, more people are filing for unemployment benefits, companies are reporting weak sales and earnings, and even Warren Buffett says we are already in one.

You can worry about inflation because personal consumption expenditures were up significantly in January, oil costs more than $100 a barrel and other commodities are hitting record high prices. The dollar is at a record low against the euro, and federal deficits, private borrowing and the Fed's constant lowering of interest rates could cheapen money going forward.

Or you could worry about both of them at the same time -- a 1970s style stagflation that cuts jobs and pay while raising the cost of everything. Not a pretty place to be. And not, necessarily, where we will end up, especially with Bernanke and Fisher and many other policymakers determined to avoid that scenario.

Nonetheless, that worst-case scenario might be the best one to prepare for. If it keeps you somewhat ready for recession and for inflation, you will be solid regardless of what happens over the next year or two or three. Here are some moves that can protect you through fire, ice or both.

-- Organize your debts. This is the most important step to take. Make sure your monthly payments are at a manageable level and will stay that way. Depending on your circumstances, that might mean taking any of these actions: refinancing a high-rate mortgage, plowing all of your available money into paying down credit cards, or transferring balances from a high-rate card to a low-rate card.

Line up a home-equity line of credit while times are good, but don't use it; keep it for emergencies. The less debt you have, the more ability you will have to manage a pay-cutting recession and budget-busting inflation. If you are making your payments on time and have a decent rate on your mortgage, don't be in a rush to pay it off early. If inflation hits, you can pay it off over time with cheaper money.

-- Keep putting money into your 401k, IRA and other investment portfolios. The worse things get, the more having money helps.

-- Keep investing and stay diversified. With the stock market into its third month of sell off, there are some good companies selling at decent prices. If a full-blown recession hits, things could get worse before they get better. But some year, you will be happy to have bought solid blue chip stocks at today's prices. Keeping some foreign stocks and energy/commodity companies in the mix will help you weather worsening markets.

-- Shop smarter. Food prices are increasing, so be educated about the best places to shop and the most economical and nutritional foods to buy. Stock up when items are on sale. One entertaining blog that offers some eat-cheap-and-healthy tips.

Take the time to comparison shop what you are spending for insurance, entertainment (including cable TV add-ons) and communications services. Often, there's another deal out there that is better.

-- Borrow smarter. Only borrow money for items that appreciate in value. That includes a home and an education that will reward you your whole life. Even if you can afford the new car loan/computer loan/vacation loan now, it wouldn't hurt to wait a while before locking in more obligations. Stash your intended monthly payments in a savings account and reconsider the loan in four, six or 12 months. At a minimum, you will have more money available for a down payment.

-- Reduce your energy dependence. That may mean going for the smaller car, using public transportation or walking more often. Figure out your gas mileage and the cost of gasoline locally, and do the math so that you know how much a typical trip costs you. Turn down the thermostat and wear a sweater.

-- Finally, don't worry so much. Many economists are predicting a brighter end for 2008, so the gloom and doom may not last long.

(Linda Stern is a freelance writer. Any opinions in the column are solely those of Ms. Stern. You can e-mail her at lindastern@aol.com.)