Upcoming Inflation Tsunami shaken by the US economy
In economics, Inflation means that there is a general increase in prices. It is one of the driving forces in an economy, because inflation means a rise in the price consistently. It’s a good thing for business owners because they make a better profit, but if the consumer doesn’t have inflation in their wages or salary, that’s also not a good thing.
Meaning to say, inflation has a good and bad effect in the economy.
However, if inflation gets out of control, that becomes dangerous. For example, in 1923 in Germany during the First World War, the exchange rate of the mark against the US dollar steadily devalued from 4.2 to 7.9 marks per dollar, a preliminary warning to the extreme postwar inflation. The debt problem was exacerbated by printing money without any economic resources to back it.
Germany began to buy foreign currency with marks at any price, but that only increased the speed of the collapse in value of the mark.
Same in 1973 in the United States, the first casualty of the Nixon shock was the gold standard. The U.S. would no longer redeem dollars for gold, and the price of the precious metal fell 28% within days, dropping to $35 an ounce by February 1975. The press had a field day with puns like ‘Nixon breaks with gold’ and ‘Nixon shocks the gold market’.
What’s the lesson here?
US dollar is similar with what happened in Germany. Because US dollar now has no backing of any gold standard and up until now US bank has continuously printing too much money.
What is the US market at now?
As of 30 Nov 2021, the S& P 500 index tracks the top 500 stocks in the US stock market and the NASDAQ Composite, which tracks the top technology companies in the US. Both are currently at an all time high! When we talk about inflation, capital assets are not included in the “baskets of good” that is calculated. Therefore, how can rely on the current inflation rate reflect the impact on capital assets such as stock prices?
Gold Price is almost at an all time high too (US1,846.02/ounce). More importantly, Gold has always been a good indicator for upcoming financial crisis, e.g. referring back to 2007-2008 Global Financial Crisis (GFC), we can see a rapid increase in gold price from approx. US$800/ounce to over US$1,800/ounce). If inflation continues to rise and a depreciation in value of US dollar will impact rise in Gold price.
Above diagram shows the global inflation rate displayed in different colors. This is obtained from the quarterly (Q3) JP Morgan Guide to the Markets. The darker the red colour the higher inflation rate (above trend) and blue colour shows lower inflation rate (below trend). In 2021, if we compare the inflation rate between the US and China, as highlighted in red box, US inflation since July has been at around 5.4% (above trend) whereas China’s is at around 1.0% (below trend)
Inflation rate has been rapidly rising for the past few months in the US, in October 2021 the US inflation rate jumps to a 31 year high at 6.2%! This is becoming alarming if inflation continues to rise uncontrollably at this level, because the target inflation rate by the Federal Reserve is only around 2-3%.
What does this mean to you?
How can you counter future inflation risk?
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