The government has created record in spending that include $108 trillion in unfunded liabilities for social security, Medicare plus new universal healthcare benefits. This has put the country on risk. With the rates of interest close to zero, the Federal Reserve are not able to take one conventional action – reducing short-term rates – to re-establish the weakened economy.

In this difficult economic collapse or double-dip recession, politicians – with the reluctant help of the Fed – could decide to spend still more massively to try to jump-start the financial system. The consequence could be stagflation: slow growth along with higher inflation.

Inflation is the curse to the debt holders. But it is a blessing to the debtors – and Uncle Sam is the chief of them – as they can pay the fixed obligations with increasingly worthless currency.

Are you scared of rising inflation? And would like to make sure better profits over inflation from your investments at least risk? In that case Treasury Inflation Protected Securities (TIPS) may be the best investment option for everyone.

Treasury Inflation Protected Securities (TIPS) are also known as Treasury Inflation Index Securities and Real Return Bonds (RRB). TIPS are ‘safest of the safe’. There is minimum downside risk on investing. TIPS are long-term fixed income investments protected against fluctuations in the rate of inflation.

But why make use of TIPS as your hedge against inflation, rather than a traditional hedge, such as precious metals? You can utilize both as your hedge against inflation. However always remember, precious metals like gold and silver are less than ideal hedges.

Gold and silver have performed extremely well over the last 10 years. Gold has more than quadrupled. Silver has done even better. But 20 years before that were a total disasters.

But no matter if inflation is low or high, TIPS will protect you from the risk on your investment. How?

Here are the advantages of buying Inflation-Protected Treasuries:

Regular Interest Payments: Just like a regular Treasury bond, TIPS pay interest regularly once in six months. However unlike traditional bonds, your principal grows yearly by the amount of inflation, as calculated by the consumer price index (CPI). That is when inflation rate is up; value of TIPS is also increased automatically. In other words, inflation protection is available on both capital and investment. The interest paid once in every six months as well escalate by the amount of inflation.

Tax Advantages: The interest you receive from TIPS investments are freed from state and local income taxes (but not federal).

TIPS are also less unstable when compared to the traditional bonds. The yield on these TIPS funds is presently about 2.5% (plus whatever inflation is going ahead).

Another influential reason to consider adding TIPS to your portfolio is the great portfolio diversification advantages they bring. This reduces the total risk and / or instability of your portfolio over time. TIPS bond yields are little or negative correlation with the performance of many other traditional investments such as shares and regular bonds.

Rising inflation probability are helpful for TIPS profits, however in the short period are negative for the returns of stocks and bonds and vice versa.

TIPS can be purchased in 3 ways:

1. Directly: You can buy TIPS directly from the U.S. Treasury or via a bank, broker, or dealer. You can learn more about buying TIPS directly at http://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips_buy.htm

2. Through the Vanguard Inflation-Protected Securities Fund (VIPSX).

3. Through its ETF equivalent – the iShares Barclays TIPS Bond Fund (NYSE: TIP)

Buying TIPS through mutual funds offer more flexibility.

There are several advantages of buying TIPS

1. TIPS are very safe for long-term investments. 2. TIPS are superb ways to diversity your portfolio that reduces whole portfolio risk. 3. TIPS are government guaranteed. 4. TIPS are less unstable than traditional bonds. 5. TIPS are advantageous when inflation rates are expected to move up plus when financial system slows down. 6. Investment on TIPS involves less active investment management thus help both beginners and skilled traders.

Some traders make a complaint that TIPS hasn’t done anything interesting in recent times. This is not correct. We’ve been in the influence of disinflationary forces, not inflationary ones. That will not change next week or next month.

But as the deficit keeps growing that makes people sad, pressure will increase on the government to do “something”. That “something” can be a decision to inflate our way out of this mess, rather than risk the kind of deflationary spiral that Japan has suffered over the past 2 decades.

Understand that: The Fed has by now taken interest rates almost to zero. Congress has already tried a huge fiscal stimulus The Federal Reserve has already created trillions out of thin air to mop up worthless securities.

There are chances of increase in inflation if the economy stumbles once more that forces to the government to take further action, it could be even further reckless.

A few libertarians and laissez-faire capitalists will refuse to buy TIPS. But other inflation hedges sometimes never work. Hence there is no small risk taking an alternative approach.

In total, TIPS is the only investment that guarantees a gain that exceeds inflation in the years in the future. And it is in fact an key element of your portfolio.

Hedging against inflation can be risky sometimes. Download FREE Weekly Wealth Letter to learn strategies about Hedging against Inflation to reduce risk on your investment. Weekly Wealth Letter is loaded with powerful resources for wealth building. Download your free copy now: http://www.weeklywealthletter.com/wwl/index.jsp?ref=uaw&arid=1

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