Deflation or Project Zimbabwe?
The International Monetary Fund (IMF) predicts inflation to rise over 3% for most countries by the end of 2021, and the global economy could get even more diluted if central banks overprint. This has happened famously in Venezuela, Zimbabwe, Hungary, and even China. Could it happen to another major economy?
There’s no point selling fried chicken today for $2 if you expect to buy raw chicken tomorrow for $3. Value chains and businesses grind to a halt when there’s too much money in the system. It loses its scarcity, its value, and currencies become worthless.
When Germany went through its hyper-inflationary period one hundred years ago, a guy took a wheelbarrow full of cash to a baker. The baker refused his cash but settled for the wheelbarrow! In order to conduct day-to-day transactions, a black market opens up wherein goods pay for goods, or foreign currency is brought in that people trust.
Investors can protect themselves from getting swindled by the swell, hypo-or-hyper, with stocks that have pricing power. If there’s something we can’t live without, a brand can get away with the occasional price hike to keep up with inflation. Investors can also look for businesses with minimal tangible assets. You don’t need billions to maintain and fix software like you need billions to repair and improve industrial plants.
There’s also other asset classes to take into consideration, as we talk more about in Academy. You can buy hard metals like gold, which are said to track inflation. Gold acts as crisis insurance in case hyperinflation hits, and riots get investors scrambling for a safe haven. Bonds are the worst inflation fighters because their coupons are set in stone, fixed by definition, and thus can easily be outpaced by the invisible tax.
It’s only useful to be contrarian if you’re right, and many say we shouldn’t worry about inflation for now. There could be a long stint of unemployment ahead, so prices can’t skyrocket. We may even be in for some deflation in the short-term, according to former European Central Bank policymaker Peter Praet.
“There’s a collapse of demand,” he argues, and the end consumer isn’t seeing the trillions printed. Stay light on your feet, everyone. We don’t know what kind of decade we’re in for!
