The Future Of Money

Prabhat Sakya — Mon, 04 Apr 2016 08:00:46 +0000

What’s the purpose of money?

It converts the job that you do, whether you’re a builder, a doctor or a teacher, into a good life. It provides you with food, clothes, a house and a car. Money oils the wheels of humanity. It really does make the world go round.

So much of our daily conversation, our daily life and the news we read is around money. We talk about inflation, savings accounts, stock markets, debt crises and austerity.

Traumatic history

The history of money has frequently been traumatic. In the 20th century the scourge was inflation. And why did we have inflation? One cause was a global population surge and we couldn’t industrialise quickly enough. Too many buyers seeking out too few goods pushed prices up. The great fear was runaway hyperinflation, of the type suffered by Germany in the 1930s.

Central banks globally were meant to combat this threat. The implementation of monetarism, controlling inflation through interest rates and the money supply, was perhaps Margaret Thatcher’s lasting achievement. That’s why we have a Monetary Policy Committee today.

In the 21st century things have changed and far more quickly than expected. As China and India have come on-stream in the global economy, suddenly the world is producing huge quantities of goods, swamping buyers. So prices are falling. At the moment, inflation is ultra-low, but as emerging markets continue to industrialise, deflation will be the norm.

How can we cope with a future of deflation? Interest rates are now near zero in many countries and quantitative easing has been used across Europe and America to reflate economies. What next? What about helicopter money? Instead of printing money to buy bonds, we could print money to hand out to people?

China and India growth: a good thing

The emergence of China and India frightens many people. After all, the growing number of industrial and professional jobs in these countries has led to falling employment in America and Europe. Yet as we have a greater ability to produce more of what we want than ever before, surely it’s the fault not of China and India, but of our current financial system that things are going wrong.

Some people have argued for protectionism to stop the flow of goods. But I have a better idea. Why not print money that we could give to people to buy these goods? The only reason people didn’t do this in the past was because of the inflationary risk. But in a deflationary world, a little inflation would actually be good. You just have to measure the level of money being printed so the supply of goods and demand from consumers is balanced. There will still be jobs, but we’ll need to adjust to a world where everyone works less.

And where does this leave investors? Well it’s fairly obvious who’ll be making the most money – the countries that supply all these goods, principally China and India. I fully expect these countries to produce astonishing returns in the next great bull market. That’s why I consistently recommend that you invest heavily in China and India, and also in companies that will benefit from the global consumer boom. If you choose your shares well, I think there has really never been a better time to invest. Investors today still talk more about GE, Boeing and BP than Huawei, Lenovo or Alibaba. That will change.

The world is moving very fast. It’s the people who can keep up with this change who’ll be the investing winners of tomorrow.

The post The Future Of Money appeared first on The Twelfth Magpie.

More reading

Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Why You Should Be Worried About Deflation

Peter Stephens — Wed, 18 Feb 2015 16:38:52 +0000

This week saw the lowest level of inflation since the consumer prices index (CPI) was introduced in 1988, with it reaching just 0.3% in January. Clearly, this could be viewed as good news since it means that the cost of living ‘crisis’ is petering out and that household budgets are going much further than they were even a few months ago.

Deflation Risk

However, low inflation can quickly become deflation and, in fact, the Bank of England now believes that a short period of deflation will take place during the next few months. This, though, is being viewed as a good thing by many consumers and economists and has even been referred to as ‘good’ deflation due to its positive impact on the purchasing power of wages.

Deflation, though, carries with it a major risk that is incredibly difficult to get rid of. In fact, Japan has been trying (and failing) to rid itself of deflation for around twenty years, with numerous fiscal stimulus packages failing in the long run to cause the price level to increase. The effect of this has been a so-called ‘lost decade’, where economic growth has faltered and Japan has, in relative terms, become poorer.

Spending Delays

The reason why deflation can be a severe problem is that it encourages individuals and businesses to delay purchases. This is a completely logical response to falling prices: if you can buy something cheaper in a week, month or a year’s time, then why would you buy it now? The effect of this is to reduce consumption and this can push any economy into a recession. Subsequently, with confidence being low, it is very difficult to bring inflation back and it becomes something of a ‘snowball’ effect.

Looking Ahead

Clearly, the UK is not yet experiencing deflation and, if it does, it could be argued that the Bank of England has the necessary tools to fight it in terms of reducing interest rates and using further quantitative easing. However, as Japan has showed, they may not be enough and the impact of deflation on any economy can be devastating.

So, while deflation may at first seem like a good thing, its impact on the wider economy can end up having a direct influence on your and your finances. As such, it may not prove to be the positive phenomenon that many commentators would have you believe.

The post Why You Should Be Worried About Deflation appeared first on The Twelfth Magpie.