Protecting Your Money from Inflation ~ Part 1
Not a financial advice
The world is facing economic challenges due to the pandemic, and each country has its own strategy. In particular, the U.S. government is borrowing money, which is being monetized by the Fed, to support its citizens and businesses. However, there have been unintended consequences of the massive stimulus programs, one of which is higher inflation expectations and rapid devaluation of fiat currencies. Our team has put together some thoughts on how you can protect your purchasing power during an inflationary crisis.
Last month on Capitol Hill, Treasury Secretary Janet Yellen indicated a possible return to full employment by 2022, while Federal Reserve Chair Jerome Powell downplays inflation. Higher employment rates while downplaying inflation? Didn’t quite make sense to us. This is a hot topic between economists as higher employment rates, which are accelerating with March’s major beat of nearly 36%, often lead to higher inflation. Now, what do we need to understand to protect our assets against inflation?
Understanding facts and potential end results
What are the government’s plans?
- The government is trying to achieve lower unemployment rates by printing more money.
- Possible tax raises (in Yellen’s words, “revenue raises”) to pay for stimulus programs.
What is the expected end result?
- Price increases in goods and services = inflation
- Fed to be forced to buy more bonds as U.S. stimulus drives up interest rates — by Ray Dalio
- $1.9 trillion fiscal stimulus bill will spur more treasury offerings by the U.S. government, further damaging “supply/demand problems for bonds.” — by Ray Dalio
A quick explanation of bond yield and potential inflation
U.S. 10 year treasury bond interest rate has risen to a pre-pandemic high of 1.75% and what this means for the economy is, again, potential inflation. Why? Treasury bonds are debt issued by the U.S. government. Investors buying bonds will earn interest, which is now at 1.75%, until the maturity date and guaranteed to get the principal back on the maturity date. It sounds like a risk-free asset, but remember, whatever you paid to purchase treasury bonds might not have the same value 10 years later. When yields rise, investors would typically be attracted to buy treasuries. The problem is that, as inflation expectations outpace yields, you will have negative real yields, and investors would balk at buying treasuries, limiting the demand. In order to prevent a rapid decline in demand of negative real-yielding treasuries in an environment when supply will be increasing (Biden is already talking about increasing the next stimulus from $3.5 trillion to $4 trillion), the Fed will have to increase its bond-buying program in an attempt to drive yields lower and relieve the image of inflation.
Even though the stated 10-year yield is above 1.7%, the real yield of the 10-year is actually below 60bps because the inflation rate is over 2.3%…you’re losing money by holding treasuries!
You can also find all these data on the U.S. Department of Treasury website.
Supply chain challenges further increasing inflation?
In addition to the above, the global supply chain is taking a big hit resulting in a higher cost to move goods worldwide, with Suez Canal blockage bringing further chaos to global shipping. The blockage was causing nearly $10 billion in shipping disruption every day during the week it was stuck. According to CNN, “More than 80% of global trade by volume is moved by sea, and the disruptions are adding billions of dollars to supply chain costs. Globally, the average cost to ship a 40-foot container shot up from $1,040 last June to $4,570 on March 1, according to S&P Global Platts.” The blockage not only disrupted global trade, but also increased shipping costs and prices of energy commodities, which eventually resulted in an uptick in global inflation.
Increased inflation is highly likely to occur because of all the factors described above.
We will further discuss the Forex implications and how crypto instruments could be utilized to keep us away from inflation. Meanwhile, if you are interested in the stablecoin projects, GYEN and ZUSD, please visit our website.
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DisclaimerThis content is not financial advice and it is not a recommendation to buy or sell any financial instruments, FX trading, cryptocurrency or engage in any trading or other activities. You must not rely on this content for any financial decisions. Acquiring, trading, and otherwise transacting with financial instruments or cryptocurrency involves significant risks.We strongly advise our readers to conduct their own independent research before engaging in any such activities.GMO Trust does not guarantee or imply that any cryptocurrency or activity described in this content is available or legal in any specific reader’s location. It is the reader’s responsibility to know the applicable laws in their country.
