Strategies for High Inflation, Interest & Investment Rates
Any analyst looking at a country with high inflation, interest and investment rates, will conclude that something is wrong. The nature of the problem might be poor monetary policies, a politicized central bank, undeveloped markets, high debt or an irrational legal context. Regardless of the problem, high inflation and interest rates suggest a lack of investor confidence in the economy.
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Inflation and Interest Rates
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Inflation, or an excess of money in the economy, has many causes. It can come from a money supply that has outstripped its public use, or it can come from a decrease in output regardless of the money supply. It brings down the value of the dollar and, hence, makes your savings worth less while prices go up. High investment rates cause an increase in savings. Inflation, with its higher interest rates, can wipe out a bond portfolio, as bonds paying lower interest will lose value on the secondary market. It is possible, however, for long-term bonds to retain value, since present realities do not affect long term maturities, and since few tend to believe that any inflationary era will last indefinitely. This makes the "long term" a safe bet for inflationary investing.
Commodities and Safe Bets
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There are very few economists that would advise against purchasing gold during high inflation. Gold is universally known for holding its value and going up in price as inflation takes a bite out of the national currency. Consumer Reports notes that, aside from gold, health care and information technologies are the two best sectors under an inflationary regime. Historically, in periods of inflation, health care, utilities, financial services, information technology and energy show high returns.
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Foreign Currency
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When facing inflation, and its accompanying high interest rates, you need to consider who or what would benefit from this. Rationally, other powerful currencies might benefit from US inflation. So innvesting in the ruble, yuan or Brazilian real might be good short term hedges against inflation. However, you would want to avoid foreign currencies tightly connected to the American market, as where the U.S. market is an important place for these economies to dump goods. An example of a good investment would be the Russian ruble in 2011, due to not being nearly as dependent on the American market as some other countries and its connection with the Russian oil production apparatus that was also not dependent upon American cash. Unstable currencies, like the Euro in 2010 to 2011, should be avoided in times of inflation.
State Controlled Currencies
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A state controlled currency, such as the Chinese yuan, might be artificially kept high in times of American inflation, regardless of the country's dependence on the American market. The Chinese issue is that since Peking owns so many dollars, American inflation might lead to the "nightmare scenario" of the Chinese government bank dumping its dollars on the market for rubles or Euros. Holding onto yuans, in that case, could earn profits in the long-term under normal conditions and lead to skyrocketing value if the "nightmare scenario" becomes a reality. As of 2011, China and Taiwan are the only two major economies with state controlled currencies.
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