Even today, after facing the severe financial crisis of the past that had international effects, inflation tends to scare the hell out of us. Fact is there is almost no remedy for inflation. A cycle of inflation is chiefly chartered by rising prices of almost all commodities. In such a situation, the exact problem that plagues the economy is the lack of resources against the overall demand from the consumers.
An Explanation to Inflation
The total inflow of resources is not sufficient to tend to the demand of the people and hence, the general price levels tend to drastically shoot up. This is the basic problem that is observed in maximum cases. There are some other causes within the economy that tend to push up the general price levels. There are several views and theories regarding the cause of inflation, the Keynesian view and Monetarist view being the commonly accepted ones. The following are some general and common causes of inflation.
- The legal tender money exceeds the total amount of resources available, drastically.
- Next, the total securities (i.e. gold, silver and other valuable commodities) in the custody of the treasury which usually maintains the balance between resources and money are disproportionate.
- Credit and debt are being misused by the banking system and the common public. Something that rarely happens.
- National income is drastically rising as a result of foreign earnings.
- Calamities, wars, disasters and wrong resource allocation also often contribute to the rise in the general price levels.
- Wrong resource allocation often leads to small-sized inflation cycles.
On the whole, though the inflationary cycle is of a relatively short duration, it is always good for the economy and the people of a nation to take proper measures as, this cycle does cause some havoc in the economy. For the common men like you and me, one thought that is always bound to trouble us in the times of inflation is what are the safe investments during the recession that will safeguard and nourish our meager savings. Well, let's take a look...
Safe Investments During Inflation
The Federal Open Market Committee (FOMC) in collaboration with the Federal Reserve uses 3 key tools namely, open market operations, discount rate and federal reserve requirements, to curb down the percentage rise in the inflation, bringing it down to less than 2-3% per annum. Conventionally, our usual investments such as mutual funds and annuities are programed to give returns, bearing in mind the purview that natural inflation (which is unavoidable) is going to push up the general price range by about 2-3% or so. However, these usual investments do not serve to be the right channel for investments during inflation. If you invest into the usual channels, what would happen is that by the end of the inflation, numerically speaking, the total amount that you invested would be greater than the total amount that you received back. In such cases, you will have to think of neutral investments. Here are some leads...
Inflation-Indexed Bonds
These bonds are a rock solid solution to your dilemma. Such bonds have a guaranteed rate of return which exceeds the percentage rise of inflation. For example, if the inflation is 7% then the returns are 17% (7% of inflation plus about 10% actual returns). Thus you don't have to worry about the rise of general price level and depreciation of the value of currency.
Treasury Inflation Protected Securities (TIPS)
Also known as TIPS, these securities which are tied down to what is known as the Consumer Price Index (CPI), which defines the rise of inflation. Just like the inflation-indexed bonds these bonds have a compensating return for the rate of inflation plus a return over the rate of inflation. Note that these investments are managed by the United States Government.
Real Estate Investment Trust (REIT)
Abbreviated as REIT, these trusts invest into real estate, and just like the aforementioned investment channels, they have a certain margin to accommodate and recover the returns. This becomes possible due to the fact that the real estate investments by the trust is at a reasonably elevated rates, and the time period of the investment supersedes the inflation. Hence on the whole the effect is that you get a rate of return that exceeds the inflation rate and also an additional return.
Off Shore and Foreign Investments
In some cases, foreign investments of longer terms and the ones which have a limited number of installments are often considered to be safe destinations. Your money remains safe, owing to the fact that the investment as well the returns are in the form of some other currency which is not affected by your nations inflation. Since this is a long term investment, by the time you get back the returns, the inflationary cycle in your country would be curbed down and the value of money would have returned to normalcy.
Bullion
Another option which is often recommend by several experts is that of investing in gold and silver. The logic is that this kind of investment has an ever rising graph of value. Hence, if you sell the bullion at the peak of inflation, or several years afterward, you will be able to successfully get some very substantial returns. Apart from the purchase price angle, the prices of gold or silver are not affected that substantially, during recession, in comparison to prices of food or necessities. Hence a good purchase price means that you would be able to make a handsome profit on the returns.
One of the best investments is to keep your money simply in the bank account. Such investment does not exactly give you 'huge' or 'high' rates of return on investments. However, by the time the inflation recedes down to (-) 2% or so you will be left with a small fortune in the bank as you have stored the money in the account at such a time when the value for money was the least. I hope that the elaboration on safe investments during inflation is resourceful.
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