Inflation, stagflation, quantitative easing, interest rates

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Inflation and stagflation

Let us first briefly explain what inflation and stagflation are. Inflation occurs when a national currency loses value and prices rise. Depreciation occurs as a result of the release of large amounts of unbacked money into circulation. Stagflation then means that inflation has occurred, but at the same time, the economy has stagnated due to some unforeseen situation that causes a shock to the entire economy. The last time the US had stagflation was in the 1970s due to the oil embargo.

Quantitative easing

This time, the main trigger for inflation was the global pandemic and the associated lockdowns that severely damaged many industries. As governments tried to remedy the situation, at least partially, through financial injections, they triggered an avalanche effect. The issuance of new uncovered money leads to a reduction in its value. The pumping of new money into the economy on the scale demonstrated by the US Federal Reserve is unprecedented in history. In total, the Fed has already pumped over USD 8.5 trillion into the economy using the quantitative easing method. Other central banks have not been too far behind. For example, the European Central Bank launched the PEPP programme in 2020, releasing EUR 1 850 billion into circulation.

Interest rates

Central banks are also gradually raising the meagre interest rates they cut at the beginning of the pandemic in parallel with the aid programmes. This tool helps to reduce inflation as the cost of credit rises. However, this time the situation is more complex, and the simultaneous increase in interest rates could have the opposite effect to that intended. Since the last financial crisis, economies have become more dependent on cheap credit – the driving force for many firms and households. The rise in the cost of credit could, therefore paradoxically, worsen the situation, as so-called operating loans will also become more expensive. It could be the proverbial final blow in a case where many companies are already just about afloat without it. The logical solution for companies will then be to make their products or services more expensive, leading to further price increases.

Real estate and gold, the traditional hedges against inflation

Traditional anti-inflation hedges include investments in precious metals or real estate. But property prices have also risen significantly recently, and talk of a property bubble is beginning to emerge. And if the bubble bursts and property prices fall, real estate investments will lose their role as an inflation hedge. Precious metals, particularly gold, are therefore another option. Gold is a time-honoured way to hedge against inflation. Financial experts recommend investing a portion of your savings in gold, and investing in multiple types of insurance should be a given. In the case of gold, you should consider that significant appreciation tends to occur on the order of decades, making it more suitable for long-term investments. Also, take relatively high fees or commissions for purchase and possible redemption and possible complications in the storage of large quantities of physical gold into consideration.

Cryptocurrencies, the new hedge against inflation

Cryptocurrencies or digital currencies are among the new and increasingly popular options for hedging against inflation. Since these digital currencies exist independently of a national central bank and are programmed to have a limited and finite supply, their value cannot be reduced by arbitrarily increasing their number.

In addition, cryptocurrencies offer other advantages, such as the security of transactions thanks to blockchain technology, which is unalterable in reverse, the speed of transfers, even internationally, and, last but not least, almost zero transfer and transaction fees, even for large amounts of funds. Investors are thus betting on the flexibility and the innovation and growth potential of the technology sector. But nothing is perfect; cryptocurrencies also have their drawbacks.

The main disadvantage for some may be the high volatility of cryptocurrency prices, with sharp drops or rises in short periods, and some need for at least primary use of modern technology such as smartphones and financial apps, which are usually used to carry out transactions. It is also necessary to consider that everyone is responsible for their own investment decisions and transactions because, in most cases, there is no way to correct a wrongly entered transaction.


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