What is in store for us this year during this treacherous time?
“It’s different this time”…is what everyone says at the top of a bubble and surprise surprise it never is, the markets reset and the debt cycle begins again.
However, that dreaded phrase may actually have some truth to it this time from what I’m hearing from many different experts. What’s confusing is that during such uncertain geo-political, social and financial times many analysts all have conflicting views!
Some inflationists are convinced that inflation will progress into hyperinflation (what happened in Venezuela and Zimbabwe); whereas, deflationists will then state a just as a believable argument saying that deflation will ensue (prices go down). But how can they be so sure? Who does one believe? How is a lay person like myself supposed to work this stuff out?
In this blog post I will make a shambolic attempt at trying to regurgitate what others have said in a way that makes some sort of sense. I’m actually writing this out of selfish reasons because it will help me work out in my own mind what is going on.
However, let’s start with the most obvious problem we have at the moment – inflation (see my previous blog post on the Stealth Tax).
When you put your money into your savings account and feel chuffed that you’re being a diligent citizen, you’re actually losing money……what?!
The bank are giving you an interest rate of 0.1% (at best!) in return for depositing your money with them for ‘safe keeping’. What actually happens next is they give you pennies for your deposit and they then lend YOUR money out to others in the form of a loan at 2-3%. They make a profit from your money and this is called Fractional reserve banking. Don’t believe me? Look it up.
Not only that but if you’re getting a return of 0.1% from the money you save in your piggy bank and inflation is at “supposedly” 5% (it’s actually more like 15%) then your money over the year is going down by -4.9%, which a lot of people don’t realise. This is why investors are being pushed further and further down the risk curve – i.e. investing in more and more risky assets – just to try and keep up with inflation!
A similar time to this was during the World War and run away inflation in the 1970-80s. The reason why it is different this time is because central banks around the world have printed so much money that the debt to GDP ratio is the highest it has ever been. What this effectively means is that the amount the Government owes its central bank cannot be paid back if interest rates rise too much.
However, in order to get inflation under control and calm down the market, interest rates have historically been risen to discourage people and businesses from borrowing so much money, dampening down the economy. Therefore, if inflation is getting out of control and the only way to curb this is to raise interest rates, which no Government can afford to do, what happens next? THIS is why it is such uncertain times.
The only reason why inflation finally curtailed back in the 1980s was because the debt : GDP ratio was lower and the world could tolerate interest rates being put up to 20% temporarily by Paul Volker (FED Chairman from 1979 -1987), however painful that was for people during this time, so eventually the rising rate of goods did reduce back down to normal levels.
This current period of time might be different because a) the debt : GDP ratio is a lot higher, b) no politician has the backbone to commit political suicide for the greater good and raise interest rates to +7% and c) even if interest rates were increased beyond ~2.5% – it would cripple the world’s economy as every Government would become bankrupt.
Scary thoughts and sometimes ignorance is bliss but I thought it better to share my mental burden with you; troubles shared, troubles halved!
On that cheery note, I shall leave it there.
Watch a quick video on how economies experience “booms and busts“.
Exercising only contributes to 5% of weight control, whereas, diet contributes a much higher percentage; therefore, eating well is a far more potent tool if you want to lose/gain weight!
This blog is for educational purposes only and should not be construed as financial advice. It is purely opinion-based.