Interest rates world-wide have been dropped to their lowest levels in history.
The US is currently running a 0% - 0.25% interest rate, and the country is pumping TRILLIONS of dollars into its economy via quantitative easing.
In Europe the same plan is being followed, in fact, there are in fact banks borrowing money from the European Central bank at -1% interest rates. This means banks are getting PAID to borrow money from the central bank.
Even in South Africa the SA Reserve Bank did ‘bond purchases' to restore liquidity into our financial system.
But with all of this money being created out of thin air - inflation is sure to soar right?
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How stimulus money is affecting inflation right now
It’s generally accepted that loads and loads of new debt entering the financial system would cause sky-high inflation. And inflation is a bad thing if you have money in the bank – because you lose the purchasing power of your money.
But we’re not seeing inflation right now.
The average of inflation rates for countries around the world sits at around 3%. And on 15 July Stats SA showed that South African inflation slowed to 2.1% year on year in May 2020. That’s the lowest it has been in 15 years.
Simply put – inflation is non-existent at the moment.
But doesn’t that contradict the ‘inflationary’ effects of stimulus?
Well, here’s the thing… Governments are doing stimulus and QE because of the lockdowns around the world. Thanks to these lockdowns demand for a lot of things have dropped. Less new houses are being built. People aren’t buying new cars, people aren’t buying new furniture etc.
Simply put – the stimulus and QE is simply replacing the money that’s left the system because people are spending less (either because lockdowns prevent them or because they have lost their jobs).
The reality is that the depth of this crisis is actually putting deflationary pressures on many assets…
House prices will drop, property companies are already reducing valuations on their commercial properties. The fuel price saw a massive drop as demand for oil lowered because people simply aren’t driving around at the moment.
What all of this means for you
The biggest risk with deflation is that dropping wages and decreasing asset prices could negatively affect you if you own a house with a bond on it.
Lower wages could affect your ability to repay the bond for instance.
But thanks to significantly lower interest rates – you’ve been given a reprieve…
So right now you should focus on paying off things like credit card debt and unsecured loans as fast as possible – while low interest rates help you better afford the repayments.
Because while we’re now seeing deflationary pressures – it will turn around again. And then you want lower debt levels for sure…
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What will send inflation up in the coming year?
As the economy returns back to normal and the Covid pandemic comes to its end (probably early-mid 2021), demand from consumers will increase again.
People will start building houses again, electronics will be imported at normal levels, and restaurants will open. Businesses will start hiring again, and people’s incomes will rise.
This increased demand means that more things will need to be made.
But here’s the thing – with this crisis a lot of businesses and manufacturers have (and still will) close down.
That means less supply.
I also foresee that a lot of farmers will plant less for next season – meaning we might see a lot of price pressure on food because of lower harvests in 2021.
This will put inflation back on the cards.
So, if you can afford to buy discount property right now – with low interest rates and pressure on property prices – it can pay off well for you in the next year or two… If you can’t – start paying off your debt now.
Here’s to unleashing real value,
Editor, Red Hot Penny Shares
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