Interest Rates and Inflation
Chris and Axel both have repeatedly said that the future is not going to be like the past. I have given a lot of thought to this statement and one of the conclusions I have come to where the future is not going to be like the past is that we are going to have high inflation in the United States, it has started and it is going to get worse. This inflation is being driven by demand for commodities by the growing economies. Lets examine at what is different this time from the past.
The Us after WWII accounted for about half of the world economy. Today it accounts for about a fifth of the world economy. The last super inflation was in the 80s when iboth inflation and Short term Interest Rates of Treasury Bills were in the high teens. This inflation was driven by domestic demand. Now America has reached peak growth and consumers have peked out on their credits; banks are not willing to lend easily. However since 80% of the world demand is outside of the US and the rest of the world is growing at high rates 7% to 9% for China and India, Commodity Procies are sky rocketing and are going to keep going up. Therefore the US is going to face inflation in Food, Fuel and Commodity prices since the US does not set prices anymore, the rest of the world does. Therefore unlike the past the US will be faced with a weakening dollar ( due to QE programs, high deficits and Debt at over 90% of GDP with no significant programs to reducing the deficit. The US is also facing a stagnant economy and high inflation (imported from overseas). Normally the Fed would raise interest rates to fight inflation but this inflation is not being caused by local demand chasing limited supply and tighteneing of Monetary Policy is not going to reduce imported inflation. THIS IS DIFFERENT FROM THE PAST.
So what are investors going to be faced with? Low interest treasury rates and high inflation; The Fed will keep buying Bonds at the low interest rates thus increasing the size of Assets on their Balance Sheet; they have to do this for another reason; high interest rates on national debt would further drive up the deficit. So the poor individual investors will be faced with Deposit Inteterst rates at near zero and inflation at 10%+ The Corporations are flushed with cash as they are not investing in additional capacity so they will not need to borrow.
Result, people will have to take high risks to earn higher returns on their capital or lose purchasing power of their net worth. Since most economies with stable legal systems are not growing and the ones causing inflation are do not have a stable investment environment; people will be taking risks not proportional to the rewards. Conclusion; only way to keep up with inflation is to invest in assets that are inflating in value; Energy, Commodities and Real Assets in growth environments and in Foreign Currencies of economies .
What Martenson and Merk have been saying will hapen in the future, is hapening; WE ARE NOW IN THE FUTURE. But don’t count on investing debt instruments in US$, paying high Interest rates, to keep up with inflation. infact count on the dollar continuing to slide as other countries increase rates to fight inflation and also work on reducing deficits and pay off their debt.
Inflation is a sustained increase in the average price of all goods and services produced in an economy. Money loses purchasing power during inflationary periods since each unit of currency buys progressively fewer goods.
At the other extreme, an economy with no inflation has essentially stagnated. The right level of economic growth, and thus inflation, is somewhere in the middle. The inflation rate in United States was last reported at 2.3 percent in April of 2012. From 1914 until 2010, the average inflation rate in United States was 3.38 percent
“Money loses purchasing power during inflationary periods ………..”
Since interest payments of bonds also lose purchasing power, buyers of new bond issues are compelled to seek higher rates, pushing the interest rates issuers have to pay. And no one will buy your existing bond paying 4% if new issues are paying 4.5% unless you drop the price
so the yield matches those of the new issues.
Price inflation is not an indication of progress whatsoever. What matters is output. If output increases, this means lower prices of goods, which is not burdensome to businesses if their purchasing power goes up as well. Ask the computer industry.
Besides, the accurate definition of inflation is that of monetary inflation, which manifests in part in prices. Zero inflation means a greater proclivity to save, more capital, more efficiency and more output. At least the Austrian economists say.