Current market conditions and the threat of inflation have been prominent issues since last year. Paired with the fact that the recovery time for the recent fall in the market will be much longer than falls in the past quarter-century, it’s important to look into how everyday Americans will be affected by impending inflation, which will begin to become visible in approximately three to five years.
Many experts see the current situation as comparable to that of the early 1980s, yet that set of circumstances is actually quite different since it was based on international as well as domestic conditions. At that point in time, not only was the U.S. undergoing inflation increases, but strong economic countries, like the United Kingdom and Japan, saw concurrent high rates as well. Additionally, in the 1980s, wages increased simultaneously with the inflation, which made consumer-buying power more viable – that is not happening today, as any American will tell you!
According to Volume 33 of the Strategic Times, a publication of Advisors Asset Management, the recent nationalization of banking has created stabilization, but the monetization from the government will cause increases in domestic and international regulations, higher prices for commodities, outsourcing, an increased pool of labor (which keeps wages uncompetitive), and a spike in inflation. This last result is the most important to keep in mind – inflation is so detrimental because it takes away buying power (the crux of a capitalist market), and that is why the increased support and stimulus from the government, which is approaching U.S. GDP levels, is so dangerous.
Consequently, as the economy has spiraled down, U.S. company production levels have decreased and have increased the output gap, which has meant a loss in jobs. However, as grim as this notion may be, allowing companies to decrease production and widen this gap between full capacity and actual production causes pricing pressure to halt and decrease inflation. Inevitably, there is a catch-22 situation because employees will lose jobs and companies will not see the demand component of this strategy for about three years, so by that point consumers will also lose buying power, but inflation will decrease. Surprisingly, the dollar will still remain the reserve currency of the world according to the Times experts. As a result, current commodities priced in dollars will seem attractive to other countries, but not to American investors.
From a macroeconomic standpoint, it seems like this situation is a vicious circle, but how will these conditions affect everyday Americans? Will it be significantly noticeable? Put simply – it all depends on how your portfolio is constructed. For those invested in mutual funds, there are considerable impacts because many funds include foreign and domestic assets. American Funds Investor Magazine’s Summer 2009 Issue suggests everyday investors take these factors into consideration:
- “Translation effect” impacts returns – a weaker dollar means that it will take more of those dollars to buy shares, but when selling these shares investors will see larger proceeds.
- Revenue and profitability of global companies
- Investment evaluations – many global companies’ revenues and costs are in various currencies, so their profitability is less influenced by fluctuations; currency exposure is good!
- Currency issues are not drivers of returns – just like anything in the economy, currencies go in cycles, so their impacts may be short-term in your portfolio.
Above all, investors should look to invest in other quality assets – particularly, the corporate, municipal, and mortgage markets that look viable right now. However, as testified by American Funds, diversification is still valid and investors must remember to be wary, but logical. Karl, Zeili, a portfolio counselor from American Funds, suggests that for those who need a fixed income as part of their assets, municipal bonds are a great investment as they often have higher risk-adjusted returns.
The biggest point to keep in mind regardless of your situation is that inflation is an inhibitor to growth, and although the impacts will not be felt in three to five years, the average consumer will feel the bulk majority of the effects. Companies will feel the impact as well but will raise their prices and pass their inflationary costs on to the consumer. Preventing inflation is key to maintaining the viability of the dollar, so short-term effects that seem daunting are actually safeguards for the future.