INFLATION IS CAUSING YOUR WEALTH TO MELT
Inflation is causing your wealth to melt. Before the recent financial and sovereign debt crisis, the world was largely okay for investors. If you played it safe and didn’t want to take any risks, you could, for example, put your money in fixed-income securities such as federal savings bonds and federal bonds. Investors who bet on these securities receive regular interest payments and their money back at the end of the term. Interest rates were mostly above inflation, which measures the average increase in the cost of living. So investors received compensation for rising food prices, energy costs and rents. And the interest rate that went beyond inflation ensured steady growth in wealth. With federal securities, investors could maintain the purchasing power of their wealth and increase it at the same time. Those rosy times are long gone. Since the outbreak of the crisis, interest rates have plummeted. They have now reached historic lows. With federal securities, investors have long ceased to be green. These are the people who want the highest level of security today have to pay for it – with a gradual loss of wealth. Because many federal securities only deliver negative returns. In the case of bonds that still yield low returns, after deducting inflation and withholding tax, a real loss is also recorded annually.
The situation is similar for bank deposits such as overnight money and fixed-term deposits , savings bonds and savings books . In addition, banks and savings banks are no longer unreservedly viewed as a haven of stability, as they used to be. Financial institutions and, with them, entire states can get into dangerous difficulties.
CAUTIOUS INVESTORS NEED TO RETHINK
Bad times for investors who have so far mainly focused on fixed-income investments and avoided risky papers such as stocks. Such an investment strategy, which was considered cautious until a few years ago, now harbors the risk of a steady loss of purchasing power.
Today more than ever, careful investment is a question of expectations: Someone who is convinced that paper money will soon be worthless is, from a personal point of view, behaving cautiously when investing the assets in gold, real estate, stocks and inflation-protected bonds. From the perspective of another cautious investor who believes in the continued existence of the international financial system, this strategy is tantamount to a visit to the casino. Because gold and stocks in particular, but also real estate, are risky investments.
Most cautious investors are likely to have at least one thing in common: for them, preserving their savings comes first. They want to avoid painful losses. But how to achieve this goal today- opinions differ. Extreme strategies, in which you put all your money into a single investment, perhaps for fear of a financial market catastrophe, are by no means the yellow of the egg. On the contrary: the risk of being completely wrong is considerable. One of the golden rules for cautious investors is never to put everything on one card. It is safer to spread your wealth across different investments, which include stocks. Because without the return opportunities that they offer, it is hardly possible to preserve your assets. It seems strange: But it is a consequence of the crisis that today, of all people, cautious investors can hardly do without shares.
EXTREME RISKS ARE NO LONGER DISCUSSED
If you divide your money into different investments, the chances are that some of them will always do well, regardless of what happens in the financial markets. A possible support for bond prices means limiting the losses that investors can make with bonds in the worst case. At the same time, the debtor states are guaranteed acceptable financing costs in this way. The dreaded downward spiral of rising interest rates and growing burdens on national budgets, which could ultimately lead to bankruptcy, appears to be broken.
THIS IS HOW THE “EXPROPRIATION OF SAVERS” WORKS
Some investors fear that the states could reach into their bag of tricks and try to purposely increase inflation in order to pay off debt through higher inflation. In theory it is possible. In practice, however, it is not that easy to implement.
You can’t just make debt go away (if you can’t or won’t repay it). But you can put it into perspective without having to pay a cent from the treasury (read here how exactly it works ). Ultimately, it is not the inflation rate that is decisive, but the difference between interest rates and inflation, the so-called real interest rate.
Wealth keeps depreciating in value if the interest investors get is lower than inflation. In economic terms, your loss of purchasing power can also be interpreted as a redistribution from the investor or lender to the state, which gradually lowers its debt ratio without having to cut spending. Critics also speak of an “expropriation of savers”.
But how can a government ensure such redistribution? Either inflation would have to rise without the interest rate rising. Or the interest rate would have to fall while the inflation rate remains unchanged or increases.