In part 1, we took a look at the causes of the current tug-of-war between forces that will fight over lower and higher interest rates in the coming days of our American economy.

To recap, here's our problem: Americans spend much, much more than they probably should and rely heavily on debt to fund their purchases. A huge amount of this debt is funded by foreign investors who enjoy the relative stability of American markets. As a result, we have an enormous account deficit -- nearly $800 billion per year.

With this massive account deficit comes a weakening dollar. With a weakening dollar, foreign investors will begin to demand higher interest rates to make their investment in the American economy worth their while. Sounds easy enough! But we have that pesky problem of our current real estate and credit disruptions that could place our economy in a tailspin and, hence, require lower interest rates to bail us out. Who is going to win this battle?

In this Fool's mind, it certainly isn't the American consumer. We won't stop our spend-happy ways any time soon, and foreigners will happily look elsewhere to put their money. Here's why.

Superpower America?
Don't kid yourself. U.S consumers will go out kicking and screaming before they agree to slash consumption of foreign goods by $800 billion per year; not to mention doing so might self-destruct the economy in the first place. We can rule that option out: Americans won't retreat from their debt-laden spending habits. But can we count on foreign investors to keep the party rolling? Don't count on that, either.

For decades, there haven't been many attractive foreign currencies for foreign investors to place their massive stockpiles in -- the U.S dollar still remains a default choice. But times are certainly changing. With the massive increase in globalization in the past decade, the United States has surrendered part of its economic moat to once economically non-threatening countries like China and India. The longer this trend continues, the less the dollar will serve as the currency of choice for global investors.

The more and more the dollar continues to plunge -- and with little in sight to show an end to its slide -- other currencies such as the Japanese yen, the Chinese yuan, and the euro are becoming increasingly attractive in lieu of the greenback. With interest rates being slashed in an attempt to prop up the sickness in the housing market, the dollar's dive should stay firmly on track for a while to come.

Cue Taps?
It's a scary scenario: a U.S. economy staring a recession square in the face, credit markets all but frozen in place, real estate across the country sitting on a foreclosure time bomb, and a need for higher interest rates just to keep the foreign investors interested could spell trouble for this nation on a level we've never seen before. What's a Fool to do?

Before you begin constructing a fallout shelter in your backyard, you should know there are a few things you can do to prepare yourself for economic headwinds down the road. Some of the most basic investment principles you should already be following will become increasingly important should interest rates begin to rise in the future.

Avoid businesses that can't open their doors without debt
We've already seen some serious damage done to companies that even dabbled in credit markets in the past few years. Banking giants such as Citigroup (NYSE:C) and Washington Mutual (NYSE:WM) have been clobbered from real-estate-related writedowns, and even companies that have nothing to do with real estate, but rely on debt, such as US Airways (NYSE:LCC) and Blackstone (NYSE:BX), are certainly feeling the pinch from a roiled debt market. Think it's bad now? You certainly don't want to be on the bad end of these companies if rates start going up.

Instead, pay special attention to companies such as Microsoft (NASDAQ:MSFT), Texas Instruments (NYSE:TXN), or K-Swiss (NASDAQ:KSWS) -- all companies that don't count on any long-term debt to fund their operations. In turbulent times, not having to be at the whim of debt to finance their day-to-day business gives these companies a serious leg up.

Give yourself a cushion
With interest rates in a precarious position and the economic future of the U.S in shaky hands, it's increasingly important that you don't fall into any interest rate holes. The solution to this problem sounds as easy as it comes, but seems to elude many:

  • Stay out of debt.
  • Save your money.

Both of these tasks require little more than some basic knowledge and a healthy dose of perseverance. The Motley Fool provides a highly recommended 60-second guide to getting out of debt, as well as some money-saving tips even the most frugal of us should catch up on.

I will survive
Betting against the United States economy long term hasn't ever panned out well for anyone, and it certainly may continue that way for some time. While the sky won't be falling to the ground anytime soon, as an investor, it's important to be cognizant of the big-scale issues our nation is facing and how they can have an effect on your money. Develop a sound game plan, stay disciplined, and be prepared for whatever gets thrown at you down the road. In these crazy days, it's the surest path to financial success.

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