Posted on 12 December 2011 with 6 comments from readers
Rising inflation and low interest rates are a toxic combination for investors. Around the world this has been a bad year for savers. The chart below shows UK savers came off worst.
Real interest rates in the UK stood at -4.5 per cent, that is to say interest paid adjusted for inflation. US investors were down 3.5 per cent and even the Chinese and Indians lost out:
Resource rich Brazil and Russia came out on the positive side with the former raising interest rates to combat an inflow of speculative capital that wisely saw Brazil as the best place to stash cash in 2011.
Where is this inflation coming from? It cannot be from a surging global economy as we all know this has been a tough year in most countries.
It therefore has to be from money printing or however you choose to describe this. Money supply expansion is at the root of this inflation. Isolating that cause we can go on to ask what comes next?
Well, there is no sign whatsoever of an end to money creation, except perhaps in the bond markets that are now starting to refuse to buy this new paper money. The cash crunch has started to affect the sectors of which the prime operation depends on the peripheral market rather than financial factors at the micro-level. Situations can arise that are so unstable that people get tempted to think, “Is Bitcoin Trader a scam”, but actually inflation may be the culprit for diminishing shine of bonds and assets.Nevermind the central banks will buy their own bonds to ensure that the money supply continues to grow.
Not to do so would be suicidal because the debts of the world are so big that they can only be paid by printing money. That adds up to an inflationary spiral.
Of course inflation is not a uniform process. We are seeing inflation in food and energy prices this year running at higher levels than say hotel room prices or luxury products. There is a shift from discretionary spending to basic items when inflation squeezes buying power.
However, this still poses a big problem for investors who wish to protect, or who knows actually increase their capital. Sitting in cash might seem a safe option with stock markets so volatile these days and very hard to get consistently right. But the underlying value of your money is being chipped away by inflation.
ArabianMoney tipped precious metals as the asset class for 2011 partly as a protection against inflation (click here) and that has worked very well for investors. Gold and silver are currencies that no central bank can print, indeed they are buying them too as protection against inflation.
The next edition of the ArabianMoney investment newsletter will not only be patting ourselves on the back for getting this right in 2011 but looking forward at how to survive the Mayan prophesy of the end of the world in 2012 (subscribe for 2012 here). That much we are absolutely confident about!