Outlook on Inflation

The Federal retain has publicly commented that it will do what is indispensable to starve off deflation. What this means is supplementary quantitative easing or printing money will be used in an attempt to stimulate the economy. Whilst it is safe to say the operation taken to date has prevented a major retreat it hasn't produced the recovery hoped for. This just goes to show how deep and wide the Global Financial accident cut into the Us economy.

Assuming the Federal retain does continue with phase two of printing money it is logical to expect Us Dollar will continue its southward journey against other currencies. It will also mean interest rates will remain at their report low levels into the foreseeable future. This is due to the increasing provide of Us Dollars in the market.

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It appears the Us will retain their whole 1 status as the global economic powerhouse by letting inflation run much higher than what we have seen over the past decade. By doing this the size of their debt will decrease as a ration of the economies net worth. Let me expound with an example. If you have an asset worth 0 and have borrowed to purchase that asset you have a loan to value ratio (Lvr) of 80%. If over the policy of the next 12 months there is 10% inflation your asset is now worth 0. However your debt will be the same (if serviced with interest only) or slightly decrease (if serviced through principle and interest repayments). The new Lvr is 73% (80/110). Keep inflation running at 10% over the 5 years and all of a sudden your Lvr is back in a much healthier state.

So who loses? Those holding the debt because the value of cash decreases. The countries who have purchased Us bonds are set to lose. Even inflation connected bonds will not be an productive hedge against inflation because the main drivers of inflation (food and energy) are omitted from the valid inflation calculation. The current inflation figures published show inflation in the low particular digits However the real inflation is reported by some economists as being in the lower duplicate digits. Quite a difference!

Outlook on Inflation

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