After the inflation rate in the US in the form of the consumer price index rose to 4.2 percent in April compared to the previous year, adversity threatened. Experts have long been forecasting an increase in inflation due to the increased money supply. In May, the euro zone also reached an inflation rate of 2 percent. So are the policies creating lasting difficulties? And how can you protect your assets from the threat of monetary devaluation?
Root cause research as a guide
First of all, it helps to classify current developments in a more differentiated manner. Much of the movement in inflation in the United States is based on a base effect year over year when much of the economy stalled. Many industries have been hit hard and with the economic openings, activity is returning. Prices are rising particularly in segments in which there are catch-up effects. In particular, prices for used cars, airline tickets and rentals for hotels and rental cars were responsible. Some of these developments have very individual reasons – but do not have lasting effects.
Is there a threat of sustained inflation?
We are convinced that even today inflation is a phenomenon – based on the description of Milton Friedman – in which too much liquidity meets too few goods and services. In the past few months, the money supply has increased significantly as a result of measures relating to Corona. However, the speed of money circulation is at an all-time low. Despite global, economic openings, no change is in sight. Even the direct payments made by the American government to the population were only partially used for consumption. Large parts of the money, on the other hand, flowed into savings quotas or servicing debts. In addition, loan volumes are currently falling in important regions such as China and the USA. The increase in the amount of money is reduced. It is difficult for us to expect sustained high inflation in this environment.
Does the Bitcoin help?
Still, inflation concerns are pervasive right now. As a result, investors are looking for ways to protect their assets from the threat of monetary devaluation. While real assets tend to be well suited, rumors are now circulating that cryptocurrencies in the form of bitcoins are a good solution. Even if the history of the crypto currencies is too short to be able to evaluate this sustainably, the first indications ensure that we have our doubts about this explanation. In particular, the main argument of an allegedly limited set of assets fails. There is only a limited number of Bitcoins – by definition, this cannot be increased and is therefore a rare commodity. Nevertheless, the total number of cryptocurrencies is not limited and has now reached staggering levels. From our point of view, an infinitely multipliable good will therefore not provide the decisive protection against inflation.
We do not believe that inflation will remain high anytime soon. However, rising inflation is not an automatic trigger for a crash in the stock market. It is more likely that inflation creates movements between investment styles and sectors. By contrast, liquid funds are particularly affected by the loss of purchasing power when prices rise. Protect property.
You can request the current capital market outlook from Grüner Fisher Investments free of charge at www.gruener-fisher.de.
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