Most Governments, especially those of the G7, fix their inflation rates by generally removing anything that goes up and replacing it with goods and services that go down in price. Of course this never reflects the true inflation rate which we estimate at around 8% in the UK. Sadly some economists have worked out that for pensioners the rate of inflation is a quite disgraceful 12%.
Put simply, if you aren't getting an 8% return on your assets, or an 8% increase in your salary this year you're going to be losing money. Fudging the inflation rate is fine when the general economy is good and inflation is relatively low but from now on we can only see major problems for the world's economy and in turn the politicians for basically tricking their electorate.
The Real Inflationary Outlook
Every month or quarter the Bank of England and no doubt other central banks publish an inflationary outlook paper which of course over the last 2-3 years has been full of pure drivel and manipulated statistics.
If they were to tell the truth they'd know that inflation poses as much of a risk as the current sub-prime mess. This is because the Central Banks are, as we've been indicating for many years now, one trick ponies.
Their only strategy to deal with economic or potential economic turmoil is to cut and slash interest rates. And while that strategy has enjoyed a lot of success over the last decade it has built up mounting and hidden pressures. Sort of like a volcano that looks serene on the top but underneath the magma chamber is getting super hot and very angry.
So with the current dreadful climate in the global banking system the strategies that the Central Banks are going to use are as follows -
- Increase the money supply - INFLATIONARY
- Use public money to bail out the bad banks - INFLATIONARY
- Further Central bank loans based on bad collateral - INFLATIONARY
- Cut interest rates - INFLATIONARY
Any or all of these strategies wouldn't be that much of a problem IF inflation was already subdued and under control but as we've said before inflation is rampant for most of us.
There was a telling but very sad article in the paper a few weeks back about a normal husband/wife/2 child family, both were working normal jobs (say Fireman and receptionist) but they could now hardly afford even a Mars bar as a treat.
The prices for food, fuel, mortgage, local taxes, insurance, travel and many general goods have all gone through the roof. That unfortunately for many is a hard reality right now so when the people in power tell them inflation is 'not yet a problem' or is '4.2%' they would possibly have the right to punch them in the face for being so insulting and preaching economic blasphemy.
Gold is therefore not only a great hedge against inflation it's also a vote of complete no confidence in the planet's current economic policy which is to basically offer more and more paper money. Gold at $1,650 therefore doesn't seem so far out of the market's reach and the forecast should surprise no one.
How To Protect Your Savings Against Inflation
Sadly, this is not an easy question to answer for those with cash savings because yes, you can easily say something like 'buy gold' but gold is a commodity which is open to wide swings in price and can obviously fall in value.
Therefore anti-inflationary strategies for savers should really focus first on capital preservation, and then trying to get a decent return.
Stay tuned because next month I'm going to help a family member with cash savings build an (semi) inflation proof savings plan. I say 'semi' because in the current climate I doubt that it's possible for anyone to hedge perfectly against inflation (with cash savings) so the only real strategy is to try and protect as much of the money as possible.
This will be an interesting case study and we'll be publishing it in next month's newsletter which will definitely be sent to subscribers by the 11th March 2008.
