Strategies to Protect the Money from Inflation

The world drifts along a ridge between deflation and inflation. There is a tendency towards deflation because the important central banks have lowered the interest rates almost to zero. The inflation rate is still comparably low or even negative in some countries because many prices of consumer products are slumping due to the weakening demand. There are still no signs of an economic recovery. The wave of layoffs of employees rises. It indicates that we could be faced with many years of deflation as the Japanese have suffered during the nineties.

The governments, however, have put worldwide trillions of dollars in order to bailout crippled banks and to stimulate the economies. They are aware about the Japanese lesson and they want to avoid it. The Fed and the British central bank deliberate unconventional measures if the crisis goes on. Quantitative easing is the actual keyword. The Fed and other central banks start buying government bonds or corporate bonds on a high scale. This measure supplies more money to the market. Quantitative easing is another term for printing money. Everybody knows that it can end up in inflation, not at once but within about two or three years.

Inflation and deflation are devilish, but deflation is the worse devil than inflation. Deflation could mean a decade of economic stagnation. Inflation devaluates the assets, but it also devaluates the value of the debts. The governments have spent trillions of dollars in order to fight the financial crisis. They could favor to unleash more or less inflation in order to relief them from the heavy burden of accumulated debts. The deficit of the US national budget jumps within a year from 3 percent to 12 percent of the GDP. Moderate inflation is helpful to stimulate consumption and investments. Inflation, however, swallows the people’s money. And nobody can be sure if the Fed and others will be able to limit the inflation to moderate rates or if they lose control on it. The value of savings and assets is at risk.

Strategies to protect the assets from inflation

Individuals have different opportunities to protect the cash and other assets from inflation:

Every expert opinion mentions buying gold as protection against inflation. This makes sense because gold can be converted easily to cash if cash is needed. It serves as a kind of cash during times of high inflation.

The problem is to switch at time from the deflationary tendency to an inflation protection strategy. Investments in bonds are favorable during deflation. It is therefore recommendable to invest only in high quality bonds with a short term until expiration. Only bonds of well positioned industries should be considered: e.g. food, pharmaceuticals, utilities, energy. Government bonds, corporate bonds of banks, car makers should be left out. There is a risk of a bubble in US government bonds. If government bonds then German ones can be drawn in consideration. An interesting alternative are inflation-linked bonds or funds with inflation-linked bonds. The borrower has to include the inflation in the yearly coupon. Inflation linked bonds or funds are available on all market places in the most important currencies.

Investments in stocks are viable during inflation eras. The performance of stocks usually beats the inflation. It is, however, difficult to determine when people should start buying stocks again. The stock markets are still very volatile and risky. Only experienced and wealthy risk-takers like Warren Buffet can risk investing in stocks while the whole world flees the stock markets. It is the best time to buy if everybody is anxious and it is the best time to sell if greed prevails.

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