What you should know about the FED's inflation policy
The US Federal Reserve (central bank of the Unites States of America) has adjusted its mandate on inflation during 2020 to „moderately above 2% p.a.” from „below 2% p.a.”
Despite ultra-low interest rates and quantitative easing, the FED has missed their inflation target to such an extent that they have been compelled to adjust their objectives and strategy.
In economics, inflation refers to a general and sustained increase in the price of goods and services, synonymous with a reduction in the purchasing power of money.
What could this mean for us all?
The new approach is alarming because it allows the inflation rate to be over-shoot without the FED taking early countermeasures. This approach greatly increases the risk of rampant inflation. The early intervention system has been simply turned off. The last 10 years clearly show that inflation moves more like a clumsy giant tanker that’s difficult to manoeuver. A great example is Japan: where for more than three decades the authorities have tried to encourage inflation rise without success.
Rampant inflation once initiated could last for many years before the central banks get it under control.
Who would high inflation be helping?
Due to the financial crisis that accompanied the Covid-19 pandemic the world’s mountain of public and private debt has risen to an extreme value. According to various sources, global government debt will have reached 250 trillion USD by the end of 2020. Debt is a core problem because repayment is unlikely or impossible. High inflation is one solution to this global debt problem because monetary devaluation eats up national debt without the need to increase taxes or reduce government spending. The beneficiaries of persistently high inflation would therefore clearly be governments and central banks. The FED and ECB indicate that their inflation targets are constantly being missed, but has there been corresponding inflation in asset valuations (asset inflation)?
Property prices have also seen enormous increases over the last few years.
Returns
Year | S&P 500 | Nasdaq 100 |
2009 | 23,45% | 53,54% |
2010 | 12.78% | 19,22% |
2011 | 0% | 2,70% |
2012 | 13,41% | 16,82% |
2013 | 29,6% | 34,99% |
2014 | 11,39% | 17,94% |
2015 | -0,73% | 8,43% |
2016 | 9,54% | 5,89% |
2017 | 19,42% | 31,52% |
2018 | -6,24% | -1,04% |
2019 | 28,88% | 37,96% |
2020 (CORONA) | 16,26% | 47,58% |
Average | 13,15% | 22,96% |
Who would be affected by inflation?
The losers in a climate of sustained high inflation in all sectors are clearly those with fixed pensions, savings and current account money. Anyone who relies on these things will be steadily robbed of their savings until he or she takes action.
This can be illustrated by the following example ->
Savings: €100,000, inflation rate 5% p.a.
1st year: 95.000EUR purchasing power
2nd year: 90.250EUR purchasing power
3rd year: 85.737EUR purchasing power
4th year: 81.450EUR purchasing power
5th year: 77.378EUR purchasing power
6th year: 73.509EUR purchasing power
7th year: 69.833EUR purchasing power
8th year: 66.342EUR purchasing power
9th year: 63.024EUR purchasing power
10th year: 59.873EUR purchasing power
After 10 years 100.000€ will have a purchasing power of just under 60.000€ due to an inflation rate of 5% p.a. In this way 40% of purchasing power is destroyed.
What can you do to protect your assets?
Both flexibility and diversification are important elements in wealth planning and investing in trend markets with a long-term perspective can reward you with extraordinary returns. Physical assets are also an important component. “As much as necessary but as little as possible” applies to current accounts and savings. At current interest rates, you are guaranteed to lose purchasing power and this is likely to remain the case for years to come. A rising inflation rate would further increase the rate of loss of purchasing power. If you are interested in a more detailed portfolio analysis and would like to receive tips and tricks for your personal asset management, contact us now. Our experts will be happy to accompany you as long-term partners in your personal asset protection.
