The longer the financial crisis goes on, the more signs evolve that the world drifts towards a time of high inflation. The governments of all important countries have spent trillions of Dollars in order to bailout the banks and to stimulate the economy. The Fed and other central banks have decreased the interest towards zero. There is still no end of the crisis in sight. The stock markets plunge again and again after a short time of a bear market rally. US households have lost meanwhile about 13 trillion Dollars. The unemployment rate has climbed to 8.1 percent in the States. The population is worried about the future and people start saving. The saving rate has increased from zero to three percent in the States since 2006. This affects consumption in a value of around 500 billion Dollars. Other industrialised countries are faced with similar problems. 36 million employees have lost their job in the big 7 industrialised countries.
The endless seaming crisis and the risk of deflation have caused the Fed and other central banks to exercise the so called quantitative easing. They have begun to buy government bonds and corporate bonds. The Fed intends to buy government bonds for about 300 billion Dollars. The Fed and the central banks of England, Australia and Switzerland have launched their programs of quantitative easing. This is just another word for printing money. The European Central Bank still restrains of it, but it seems a question of time until they join.
The policy of big central banks as the Fed and the British one will have an impact to the inflation risk. The inflation risk is much higher since the start of the quantitative easing policy. The world markets will get flooded with freshly printed money.
The answer to the question is crucial: Who belongs to the winners and losers of inflation. It decides about the financial success of the different interest groups.
The winners of inflation
The winners of inflation are the debtors. Inflation devalues the debts. This relieves the countries from the burden of the public debts that the gigantic stimulus programs have caused. Inflation also relieves all private debtors, because it devalues their liabilities: debtors of mortgages as well as of credit cards. It helps furthermore the pension funds, because the liabilities of most of the pension funds exceed the assets. It is therefore recommendable to renew and fix the mortgages now.
Inflation stimulates consumption and investments. It is better to buy and invest today than to postpone it, because everything gets more expensive tomorrow. This is the economic theory. If the politics of quantitative easing succeeds, it could revitalize the economy after the financial crisis. The decade of stagnation in Japan during the nineties of the 20th century, however, has shown that quantitative easing can fail and turn out in a long time of stagnation.
If the investors are on the winning side of inflation, it also means that investments in stocks achieve lucrative performances. The performance of stocks is usually higher than the inflation rate and thus results in a positive yield.
The losers of inflation
The lenders and savers are the big losers of money. Inflation devalues cash and the yield on bonds. It curtails the income of people who rely on fixed income or an income from a pension.
The traditional protection against inflation is to keep a high share of cash in gold. Gold is the best currency during time of high inflation. Inflation linked bonds or funds offer an alternative to common fixed income investments. People who can afford to risk a long term investment can buy high quality stocks or equity funds. Stocks of car makers and banks should be left out. Inflation usually boost the prices of commodity, thus a good commodity fund can be drawn in consideration.
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Liliane Waldner
Bio Box:
Liliane Waldner is a business economist. She has attended the board of several public entities companies and pension funds, some of them dealing with the financial markets. Her website is:
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