Tuesday 1 December 2009

Is inflation on the way?

According to one commentator I follow, Japan has been pumping extra money into its system, seemingly with a view to making its currency weaker, which would make its exports cheaper and so stimulate extra demand.

If that was the plan, the first part of it seems to have worked, except in weakening the Yen vs the US dollar. The dollar went lower on world currency exchanges and Mr Pollock's reading is that the markets have started to wonder whether America will seek to do the same as Japan.

Pollock compares this situation to the beggar-thy-neighbour system between the two World Wars, when countries imposed tariffs on each other's exports to protect their own industries. Devaluing currencies was not so easy when they were backed by gold; now, nations can more easily expand their money supply to create inflation.

If other countries follow suit*, then the relationship of money to real things will alter and people will look to get rid of cash and buy things that will hold their value. Perhaps this is one of the factors behind the rise in the price of gold, but there's lots of other ways we could invest our money. Few are guaranteed to counter inflation, except products like National Savings Index-Linked Certificates; and even there we have the question of how the Government calculates the rate of inflation.

It is unsettling for the ordinary saver. Just when it seemed that "cash is king" and the prudent, frugal person was going to be rewarded by seeing prices drop (look at houses, cars, cruises, TVs and computers etc), the value of his/her money may be hit by inflation once again.

UPDATE (1st December):

* North Korea has just done something far worse. It has replaced the old currency with a new one, but only allowing a certain amount of the old to be changed into the new - effectively, a robbery of the larger saver.

UPDATE (4th December):

Koreans burning old money in protest, Korean government easing restrictions on converting currency (BBC) - (hat-tip to Credit Writedowns)
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