All the major economies around the world seem to be driving towards and trying to ramp up inflation in a very meaningful way. Used to be inflation was a dirty word, it kills purchasing power through the loss in value of the currency and goods it can buy over time. Let’s just go over that for a moment. Let’s say you leave money in a non-interest bearing bank account (most accounts seem to be or near zero these days) and inflation does stay near zero then not a big worry as you can rest assured that that new fridge, car or washing machine should be the same price next year as it is today. US$10,000 this year and US$10,000 next year we can carry on about our daily lives without the worry that we are losing purchasing power. Though if all of a sudden inflation starts running at 3% a year and you still get nothing in your account then your purchase would be US$10,300 next year for the same item. That presented in a different way also implies that your US$10,000 is worth close to US$9,700 next year and lower and lower each year thereafter. This is pure wealth destruction via inflation.
It doesn’t sit well with most people that they’re not able to keep up with inflation at the minimum because their store of wealth is deteriorating. In the 1980s in the Reagan era in the US we saw inflation running up around the 15% per annum mark (your US$10,000 is US$8,500 next year!..) and so unless you were in assets or investments that could keep up with such rampant inflation than your wealth dropped significantly throughout that era of high inflation.
Many pension funds both sovereign and private as well as insurance companies have had no choice but to buy long dated bonds with ever smaller yields over the past 20 years and now we are at an inflection point. Could get messy as these long-dated bonds or debt that they have taken on will be worth a lot less when new issuance of such bonds yield a higher rate over the years to come. Just imagine what would happen if we went back to 15% inflation a year with 15% long bond yields, the present value of their current portfolios would plummet like a hot potato and could cause severe unacceptable losses to such institutions and their clients and their ability to fund pensions and other obligations they have taken on.
Well let’s get back to basics here as its clear that all major governments are trying to kick start growth again by ramping up inflation hoping that wages, real estate, stock markets and other assets will rise in value and “inflate” their way out of stagnant growth that seems to prevail in these economies over the past few years. Clearly at the time of writing December 13th 2016 the world seems to feel better with President elect Trump about to take the helm of the US superpower and the world already anticipating a big pickup in inflation. So far looks good but just remember it could get a little out of hand. Already people are rushing into assets that will inflate to get “ahead” of the inflation. Basically, take your money out of the mattress and stick it somewhere where you will outpace or at least try and keep up with the inflation so that you don’t see your wealth evaporate.
So, I say again to all these governments trying to stoke inflation. Be careful what you wish for, you just may get it.
Richard Cayne originally from Montreal, Canada has lived in Asia for over 21 years and has helped thousands of High Net Worth Individuals and Corporates with International Investments and asset structuring. He spent a majority of these years in Tokyo Japan and currently spends most of his time in South East Asia with his base in Bangkok Thailand. He can be reached at +66(0)2611-2561