Resident columnist Dickson Igwe
Twelve years after the world plunged into a deep financial recession, the Covid 19 Pandemic struck humanity in early 2020. Consequently, there was a continuation of Quantitative Easing by central banks led by the Federal Reserve to avert economic disaster.
QE, starting 2008, was creating money by key central banks through the selling of bonds and various instruments to investors to prevent a global depression. QE is a tool for fighting recession and anemic economic growth.
QE- sinking hundreds of billions of dollars into the banking system annually- went on for over a decade after the start of the 2008 Recession, creating trillions of dollars of liquidity. Essentially, this was creating money out of thin air and relying on investor and consumer confidence in the cash created to make it sustainable.
Confidence is core to economics. QE indeed kept recession at bay. However, the result of QE is a resurgence of inflation after years of low inflation.
Now, low inflation was actually considered a problem by economists for years. Low inflation can be a precursor to Depression. In fact, some level of inflation is viewed as good for economic growth.
QE prevented low inflation becoming deflation which leads to economic depression. A depression is a deep and long recession that destroys millions of businesses and jobs. A depression can last a decade.
So, Inflation has reappeared this early 2022. Inflation has been the outcome of a very successful effort to keep the global economy afloat and liquid.
The threat of ‘troublesome’ inflation started to become reality in late 2021 with warnings from the Federal Reserve and Central Banks that base rates would have to be increased to tame inflation.
Inflation is once again a threat to global prosperity and has reared its head this early 2022.
But then, if life could get no more difficult, the Russian leader decided to invade Ukraine in February 2022, potentially sparking off World war 3, and making the inflation peril worse with the threat of high oil prices fueling further price rises, owing to potential embargoes on Russian energy.
So how do average folk living on a tiny Caribbean island respond to rising inflation?
Investor Warren Buffet has asserted that in a time of inflation holding lots of cash is a bad idea. Why? Because cash loses its value when the inflation horse bolts from the barn. But does Buffet’s prognostications make sense to people on fixed incomes living paycheck to paycheck?
Most people in the Virgin Islands are simple savers with land and property as the assets that will see them into retirement and beyond. Some may have insurance, and a portfolio of stocks and bonds. Holding stocks is not the norm however.
The stocks and bonds culture is not rooted in the Virgin Islands as it is in the USA where millions have a stake in the New York Stock Exchange through direct ownership and through funds and mechanisms of various types.
And already we can all feel the effects of inflation: higher prices in the shops, higher fuel and gas prices, commercial and residential rent increases: general nervousness.
Runaway inflation is always a bad thing, especially for the poor, average folk on fixed incomes, and the elderly. Inflation drives up the feeling of vulnerability and insecurity, and makes financial planning difficult for both individuals and organizations. Ultimately inflation can lead to economic recession as consumers draw back their spending and businesses decrease their hiring and inventory.
Cash in savings accounts is not a hedge against inflation as interest rates from commercial banks hardly keep up with the rate of inflation.
The people who are least impacted by inflation are the ones who can pass on the costs of inflation to others. For example, the owners of the multinational corporations that provide the goods and services we all believe we need to survive are able to adopt pricing that keeps their businesses profitable.
Savvy investors in stocks and shares have a good feel for the market and can move cash about, from vulnerable to safer investments, and various financial instruments, that have historically been a hedge against inflation, such as government bonds; oil companies too can raise prices with no worries at a time of inflation. Consumers will always need to fill their tanks.
Sellers of staples such as basic food items, and organizations that provide crucial products for daily consumption: for example, we all must buy hygiene products, food, water, electricity, healthcare. Businesses that provide the preceding can pass on higher prices to consumers.
So how best to face the inflation beast if you are in none of the preceding categories?
Well, inflation is a time to tighten the proverbial belt. Patience is the best friend of the person who wants to beat inflation. Frugality is a virtue especially when inflation strikes.
Keep the old car for another year if it functions. Eat out less. Quit the Joneses culture and live within means. Shop smart and get the best for your cash. Buy bonds if you can, as bonds traditionally have protected investors from inflation, and earn interest. Property has traditionally been a hedge against inflation, and land prices tend to keep up with inflation.
Some argue that being ‘’cheap’’ will simply drive low economic growth. However, inflation is one time to be frugal. A fall in consumer demand at a time of inflation owing to public fear can help temper the inflation beast.
But above all, be patient. Inflation does not last forever.
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