One of the safest asset – Cash, is fast becoming the most dangerous one
In an environment of monetary debasement – that is when cash loses rapidly its purchasing power – all goods, services (R&D, patents etc.), and assets become currencies as investors and savers realise that the only way to protect the purchasing power of their money is to move from liquid into ‘illiquid’ assets. Consequently, money is no longer just Dollars, Euros, Yen & Chinese RMB, and short dated bonds, but also real estate, stocks, commodities, paintings, and even collectibles. Now, the same way as in a free market economy, currencies fluctuate in value against each other (so far the US dollar is mostly down), the various asset classes, which have increasingly become ‘money’, will also fluctuate against each other. And the way sound currencies tend to strengthen and currencies with poor fundamentals tend to weaken, the various asset class monies will, depending on their fundamentals, either appreciate or decline against each other. Take as an example the energy sector compared to homebuilders.
The ‘US homebuilding currency’ and real estate in general has not only depreciated massively against the ‘energy currency’ but also against ‘lousy’ cash, over the last three years by declining in absolute terms. Now, while the above may sound extremely trivial because in the past some asset classes have always out-performed others, the problem for investors that comes along with is not trivial at all. The reason for this ‘new problem’ is that in the past, cash maintained more or less over time, its purchasing power with compounded interest rates against a basket of goods and asset. So, whereas cash lost out against consumer price inflation and against oil and precious metals in the 1970s, it maintained its value against equities and home prices, which hardly appreciated during that decade. Also cash gained in value against bonds, which tumbled. Moreover, the loss of cash’s purchasing power (including interest) in the 1970s, against consumer prices and precious metals was offset in 1980s by cash appreciating strongly against consumer prices (disinflation) and commodities. But now, with the Fed and other central banks intent to keep asset prices up at all costs with artificially low interest rates, an era of continuous monetary depreciation has dawned upon us.
Whereas in the past, cash could be perceived as ‘reasonably’ safe, today, cash may, courtesy of modern central banking under the auspices of the US Fed, actually have become quite a dangerous asset class due to its depreciation not only against asset prices but also against consumer prices, if these were measured properly by government agencies.
In the past, savers, wanting to avoid the problem of deciding about investments & allocating their funds to different assets, could invest their money in short term deposits. But in today’s monetary regime – characterised by massive monetary & debt growth & central banks seeming to be perfectly happy at ‘printing money’, which leads to money losing purchasing power – savers are almost forced to invest into ‘something’ in order not to end up as ‘penniless billionaires’.
For Complete IIPM Article, Click on IIPM Article
Source : IIPM Editorial, 2008
In an environment of monetary debasement – that is when cash loses rapidly its purchasing power – all goods, services (R&D, patents etc.), and assets become currencies as investors and savers realise that the only way to protect the purchasing power of their money is to move from liquid into ‘illiquid’ assets. Consequently, money is no longer just Dollars, Euros, Yen & Chinese RMB, and short dated bonds, but also real estate, stocks, commodities, paintings, and even collectibles. Now, the same way as in a free market economy, currencies fluctuate in value against each other (so far the US dollar is mostly down), the various asset classes, which have increasingly become ‘money’, will also fluctuate against each other. And the way sound currencies tend to strengthen and currencies with poor fundamentals tend to weaken, the various asset class monies will, depending on their fundamentals, either appreciate or decline against each other. Take as an example the energy sector compared to homebuilders.
The ‘US homebuilding currency’ and real estate in general has not only depreciated massively against the ‘energy currency’ but also against ‘lousy’ cash, over the last three years by declining in absolute terms. Now, while the above may sound extremely trivial because in the past some asset classes have always out-performed others, the problem for investors that comes along with is not trivial at all. The reason for this ‘new problem’ is that in the past, cash maintained more or less over time, its purchasing power with compounded interest rates against a basket of goods and asset. So, whereas cash lost out against consumer price inflation and against oil and precious metals in the 1970s, it maintained its value against equities and home prices, which hardly appreciated during that decade. Also cash gained in value against bonds, which tumbled. Moreover, the loss of cash’s purchasing power (including interest) in the 1970s, against consumer prices and precious metals was offset in 1980s by cash appreciating strongly against consumer prices (disinflation) and commodities. But now, with the Fed and other central banks intent to keep asset prices up at all costs with artificially low interest rates, an era of continuous monetary depreciation has dawned upon us.
Whereas in the past, cash could be perceived as ‘reasonably’ safe, today, cash may, courtesy of modern central banking under the auspices of the US Fed, actually have become quite a dangerous asset class due to its depreciation not only against asset prices but also against consumer prices, if these were measured properly by government agencies.
In the past, savers, wanting to avoid the problem of deciding about investments & allocating their funds to different assets, could invest their money in short term deposits. But in today’s monetary regime – characterised by massive monetary & debt growth & central banks seeming to be perfectly happy at ‘printing money’, which leads to money losing purchasing power – savers are almost forced to invest into ‘something’ in order not to end up as ‘penniless billionaires’.
For Complete IIPM Article, Click on IIPM Article
Source : IIPM Editorial, 2008
An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative
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The Indian Institute of Planning and Management (IIPM)
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