Will Government rescue packages cause economic disaster?
EVER since Central Banks around the world started their policy of money printing, known as "quantitative easing", there has been speculation as to whether this would lead to inflation or possibly even hyper-inflation. One of the reasons why inflation has not eventuated is that while cash reserves have increased, they have not been lent out. Thus stronger economic growth has not eventuated and excess capacity has not been eliminated.
The other alternative, deflation, means persistent falling prices. This has occurred previously in the 1930s and over the last 20 years in Japan. When associated with high unemployment and falling wages, deflation is regarded as a bad thing.
This becomes self-feeding as consumers defer decisions to spend and invest. The risk of deflation should not be discounted with still high unemployment rates in the US and Europe. Other contributing factors to possible deflation are subdued bank lending and falling commodity prices.
Much then depends on growth. It seems likely that inflation has probably bottomed. In Australia this is partially countered by a currency falling against major world currencies, thus boosting inflation. However overall in Australia there appears to be little upward pressure on inflation which is running in the bottom half of the RBA's 2% to 3% range. If the dollar trends towards $0.80, one would assume deflation is unlikely.
The implications for investors are significant. If, as expected, deflation does not eventuate, shares, property and other growth assets would be the preferred investment class. If we do experience a period of prolonged deflation, then cash, bonds and other interest rate securities would be preferred.
Mark Davidson is an authorised representative of Ord Minnett Ltd, AFS licence 237121. This article contains general financial advice only and does not consider your personal circumstances; you should determine its suitability to you. Before acquiring a financial product you should consider the relevant product disclosure statement. Past performance is not a reliable indicator of future performance.