Why Inflation erodes your wealth_Featured Image

Why Inflation erodes your Wealth and can Investing Protect – A Historical Outlook

Inflation can eat away your savings. Learn about inflation and why investments should be used to overcome its dampening effects

Since the dawn of mankind, life has continually proven itself to be oxymoronic in the sense that it can be highly complex but at the same time, easily decipherable. Riddled by a series of challenges and complications, our lives tend to grow ever more complicated unless these challenges are not pre-emptively stopped. Such adversities breaks one’s spirit, ensuring perisment beneath the sands of time, or fuels one’s spirit forcing even a common man to RETHINK and continuously READAPT to the various facets of change. Out of all the complexities that we as humans face, uncertainty is the most pervasive of all naturally occurring limitations.

Even the most cynical amongst us would agree that life is filled with endless opportunities. Yet, the highest rewards are given to only those who meticulously plan and execute contingencies. Such attempts to restrict the advent of countless uncertainties and emerging victorious thereafter is the inherent purpose of all investment strategies. In order to mitigate the scourge of uncertainty, successful people invest their time, energy, and wealth to secure a bright future for themselves and their families.

Embracing uncertainties in life_Image
Fig 1. Embracing uncertainties in life by Carl Richards, The New York Times.

What are the various factors that induce a need for investments?

To exemplify the reasons as to why it is only through well placed investments that one can ensure securing long-lasting economic prosperity, it is IMPORTANT that we explain and assess the viability of currency, the primary medium of transactions available to the general public, both of the present times and that of the past.

Money and Currency – Historical Background

Money is defined as a medium of exchange, a measure of value, or a means of payment. It is the remuneration of the economic energy invested by an individual to complete a pre-agreed task. Throughout history, it was copper, silver, and gold that were primarily used to conclude commercial activities, representing money (Massey, Thompson, & Johnson, 2017).

Consequently, these valuable metals formed the very backbone upon which trade could sustainably progress. As gold was scarce and high in demand, it proved to be an excellent fixed asset that had a stabilising effect on the economy and simultaneously – a hampering effect on INFLATION (i.e. the sustained rise of the cost of goods and services resulting in reducing the purchasing power of money (Comley, 2013).

Many commodities were tried and tested as a substitute for gold by many types of socioeconomic systems but to no avail. A valuable asset (i.e. gold) can only be used as a currency provided that it fulfils all the necessary prerequisites, namely usability, scarcity, tradability, and transposability (see Fig. 2).

Currency Vs Money_Image
Fig. 2. “Currency Vs Money – Which do you prefer?” by Andrej McClendon, Steemit

Unfortunately, the nature of man remained unchanged and countless empires tried to DILUTE or DEBASE the amount of silver and gold circulating in their markets.

Nowadays, democracies themselves have been sabotaged by those who “represent” us. In tandem with capitalism’s ability to propel inflation and especially since the inception of the Nixon Act of 1972, the most predominant world currencies have been debased far too carelessly.

Inflation

Whether it was the mixing of bronze with copper during the middle ages or the utilisation of quantitative easing or fractional reserve banking in today’s economy, one of the likely side-effects of the debasement of world currencies in these ways leads to widespread inflation.

When paper currency came into being, its value was determined by the amount of gold that could be bought with it. After the Bretton Woods Conference of 1944, in the aftermath of World War II, the worth of 35 dollars was kept equivalent to 1 ounce of gold. The subversion of the system, and the subjugation of mineral rich countries soon after, started when the gold standard was abandoned by the developed nations.

The inception of paper currency and its regulation in accordance to the “monetary growth per unit of output in relation to the rest of the world” was set in place. This enabled the principle of econometrics to be applied, leading to the inception of inflation predicting models.

As the realities of economic life and the equilibrium value of currencies were amassed together to represent the balance of payments; leading economist came to the conclusion that inflation can not only be PREDICTED but also efficiently REGULATED!!!

This ideology bore the seed of fiat currency. The ability of fiat does give a brief illusion of a “grow forever” economic system but is soon followed by a period of high inflation. Some argue that the methodology of fiat economies have yielded catastrophic repercussions for all nations and their residents.

Effects of Inflation
Fig 3. “Effects of Inflation”, by Mark Jeweli, Anforme Limited.

Economics & Interest Rates

A period of inflation and power of central banks to issue paper money can be crippling for both a layman or a battle-hardened investor, at least in the short term. However, it is the banks that have the capability to set baseline interest rates. Therefore, they meet multiple times a year to determine short term interest rate targets, which is likely to result in the increase or decrease of money in circulation in the economy. If the money circulation needs to be increased, more currency can be printed “out of thin air” to manage their current state of economic and social affairs. This, in turn, leads to high inflation, if done carelessly and frequently.

So, why is such a notion is of concern to an ordinary citizen?

Well, it is because the value of the currency that is being traded is diminished due to the rising COST OF BORROWING, as clearly evident nowadays from the examples of Greece, Italy, and Spain.

Savings & Business

As inflation erodes away the purchasing power of one’s money, the savings accumulated in banks are likely to be insufficient to curtail the rising costs of housing, food, or transportation. Furthermore, it also drives down the price of government bonds and even the interest rates offered become less incentivising. Only investments in certain assets like equities and properties may prove to be somewhat viable in protecting savings against inflation. This is due to various reasons including companies being able to raise more money to cover the rise in costs but there is always a big risk that they may incur losses in the process as well. It is for these reasons that not only should one be aware of the actual value of an investment but also have the necessary skill set to place the savings in a market niche or a commodity that is highly resilient to inflation.

Even in the twenty first century, in light of all our technological achievements, people still have not been able to contain the level of distrust prevalent in the globalised market. As a result, many countries are revamping their foreign policies and economic reforms. Recently, the Prime Minister of Malaysia, Mr. Mahatir Mohamad gave a proposition to issue a unique currency that is backed by gold but delimited to a specific region. If implemented for the sake of inducing stability, such contemporary propositions will employ the power to dismantle entire trading regimes.

Impact of inflation on firms_Image
Fig 4. “Impact of inflation on firms” by Tejvan Pettinger, Ecnomicshelp

Outstripping Inflation

It is imperative for currency to keep circulating as it systematically strengthens the economy based on factors such as, the creation of employment, supplementing higher demand for locally manufactured commodities, facilitating the velocity of money in usage and mitigating the advent of various activities that are associated with hoarding while opening up a plethora of crediting opportunities for citizens. In the UK, despite Brexit related uncertainties, wages earned by the workforce have considerably outstripped the inflation rate  after “years of stagnation”. With the rise in wages witnessed at a respectable rate this year, Brits are at a favorable position to secure their long term future by investing their savings in markets and assets that they UNDERSTAND and are PASSIONATE about. It is fundamental to have a thorough understanding of the chosen market, in the endeavor to outrstrip inflation, to distinguish the placing of the  savings as an investment rather than merely being a risky bet. To gain such knowledge, the first step is to examine and determine the investment objectives.

 

 

Recommendations – Consider investments

Under the influence of a centralised and, in some respects, a chaotic monetary system; methodological investments play an important role in raising the living standards of people. Although there are numerous types of investments to choose from and various types of goals, the primary goal of all investments is the “same – “survival”. As the laws of nature dictate, only the “fittest” have a high probability of continuing existence

Therefore, regardless of what objective one may have, an inflation-resistant investment portfolio must be considered by every individual to protect one’s existing savings from inflation erosion and of course, ideally to outstrip it, leading to the generation of new wealth.

We believe it is only through education that people can have a chance to win against the scourge of inflation. Watch out for our article on “How to invest into Properties – an Introduction” for more some introductory tips to consider when devising your investment strategy.

We at Zisk Properties educate our clients and empower our customers to fight against all odds. It is our belief that careful planning and multi-pronged strategies, backed by thorough and research and due-diligence to reduce risk, shall make our clients succeed in the midst of the uncertainty that affects our personal lives and our businesses.

 

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