Heres something interesting I’ve been thinking about following the collapse of the SVB bank. The US government is now in the position where it has to decide whether or not to raise interest rates again in a matter of days. One one side you have inflation running out of control and on the other side there could be a whole bunch of businesses about to go belly up. We’ve just now seen a bunch of tech companies run out of liquid cash and start to withdraw their savings. But is it just the tech sector that is experiencing cash flow issues? Is there deeper problems in corporate America with a whole bunch of other sectors poised to face the same fate in with any following rate rises? Hard to say. I’m just glad this is not my decision to make.
What caused this inflation problem? In my humble opinion, a big part of it was covid. After the lockdowns etc… its not hard to imagine many business would have had to have had massive turnover drops, or worse still run up massive debts. Sounds fair enough. So they raise their prices a little to start making some of this lost money back. Again sounds reasonable. So basically everyone’s put 10% on their prices to do this. Lets say a coffee shop was selling a coffee for $5 they now charge $5.50 and so on in the hope that extra 50c can recoup some of the money they would have lost over the previous year. But also their suppliers have also done the same thing ie: transport, stock input prices etc… so then again they need to raise the prices from $5.50 to lets say $5.75 so suddenly you have a 15% rise on a lot of goods. That figure is basically how its looking in Australia at the moment anyway.
So if you weren’t saving money before the covid, how do you pay 15% more for everything? Many don’t so they either cut the coffee out or buy them less often. Or like in the case of the above mentioned tech firms they need to pull money out of savings to combat the rising cost of existing. Now some of us can work a little longer to make the short fall up, or just not save as much but this affects those on fixed incomes (ie pensioners) who can’t cover the rising costs of living. So what do we do? We can either raise interest rates to reduce spending or just accept inflation which erodes the value of any savings (and any debts as well).
Inflation hurts those that don’t earn money any more. Lets say you are 70 years old and close to retirement. You have $500000 in the bank which might yeild average payments of $25000 a year if you’re retirement fund performs half decently. But in an environment where we experience 10% inflation that $250000 can only buy 90% of what it did a year ago, what if it happens another year running then you’ve taken a really serious hit to your retirement standard of living. But on the converse side, if that person with the $500000 has also bought a house his house has also gone up substantially in the lead up to this point.
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