Tan Kin Lian's Blog: Prepare for high inflation

Tuesday, February 23, 2010

Prepare for high inflation

Dear Mr. Tan,
The deficit at Federal and state levels in USA seems to be the next big thing i.e. bigger than Greek crisis. California is already facing the problem of not enough money to pay their civil servants. Some other states are facing the same problem. There are articles written about it and it seems very serious.

Are you able to share your opnion in your blog as well as letting us understand what is the impact to Singapore since we are very dependent on USA for our survival. Also what can we do to protect ourselves in the event the above happens e.g. buy gold and keep since US$ is going to crush.

REPLY
The USA is facing a large deficit as they are not collecting enough taxes to pay for their government expenditures (at Federal and State levels). Right now, they are issuing bonds to fund the deficit and pay a low rate of interest.

They have to raises taxes to balance the budget, but the politicians are reluctant to do so. They have to cut expenses, but that is also unpopular. At some point of time, they have to print money to fund the deficits. This will lead to higher rates of inflation. Many other countries face the same situation and may have to adopt the same solutions.

We have to prepare for high inflation in the future. In this environment, it will be bad to be invested in bonds that give a fixed rate of return. We have to invest in equities and properties that have a variable return that will increase with inflation. On the other hand, high inflation will burst the asset bubbles in equities and bonds. Maybe the safe asset classes will be gold and cash.

This situation may take many years before the correction occurs. In the meantime, many people continue to ignore the problem. Can I have your views on this matter also?

16 comments:

Anonymous said...: There is still a great deal of trust in the US, whatever the state of the US economy and finances. The US live on the trust of the world.

Hence the US dollar will still the international currency for quite some time and will not be crushed.

If 2009 is considered the worst year economically for Singapore, can it be any more worse for the future?

Therefore I predict life will still be peaceful and stable in future just like in 2009 or even better. At least on the surface, that is. This is good enough for any govt.; February 23, 2010 9:52 AM
Anonymous said...: Last week,I came across a book about the economic crisis in a bookshop.With the US government in heavy bad debt,it predicted that there will be a another round of economic crisis after the current recovery. There will be collapse of the property market and deflation that will last till about 2035. What will be your advise for a "safer" approach to investments if you have a substantial sum of money? Francis; February 23, 2010 12:03 PM
Tan Kin Lian said...: It is quite confusing. Some people say "prepare for inflation". Some say, "prepare for deflation". It seems that the global economies are now in a mess.

In view of the uncertainty, may be better to keep cash, even though the interest rate is less than 1% p.a.; February 23, 2010 12:34 PM
Anonymous said...: I cannot forsee deflation happening in future. Would expect high inflation to happen but the question is when.
A lot ot talk about USD getting weeaker but if you look at other major currencies e.g. Euro, Yen, Pound are also not doing any better if not worse.
I will bet on Gold.; February 23, 2010 5:21 PM
Anonymous said...: US states continue to face the problem of not able to pay their civil servants.

US Govt continue to balance between not offending Japan/China and upholding their principles of human rights etc. on the fear that cash rich foreigners continue to buy their T bonds to support their deficit.

Is Jim Rogers' solution the only solution?

Leave US, give up US$ and invest heavily in China and commodities?

Somehow, he is making sense and best of all, he chose to live in Sgp? Why? Is it S$ is a strong $?; February 23, 2010 6:42 PM
Anonymous said...: It is unfair to the commoner who keep his money in the bank when what the government do is to print more money and devalue the currency.

Any way, this is still paper money, legally tender and we'll have to pay the tax using it.; February 23, 2010 6:51 PM
Celebrate! said...: The world leaders know that if they discontinue supporting their economies, there will be disaster.

So, the illusion must continue. All the countries on this planet are in collusion to support even if it means printing endless money. The alternative is unthinkable.

Buy gold if you feel more comfortable with it, but you cannot eat it.

If I can, I will be planting my own vegetables and filtering my own water!! Money will be useless.

But do not worry. All the governments will not allow the world economy to collapse. They have already agreed at Davos.

Look at Greece.. everyone comes to the rescue... look at UK.. property prices have climbed back..
Look at our property prices..look at our GDP and export numbers.. all up!

The train cannot be stopped.
enjoy the ride!; February 23, 2010 9:28 PM
wjsim said...: It should be public fact that there is no way the US will pay its debt. The only reason why Greece is bankrupt is because Greece can't print Euros and hence is forced to do the responsible thing. USA meanwhile is getting the whole world drunk on cheap USDs and getting away with 12 trillion USD of debt and rising (compared to Greece's 500billion USD). It will be US's turn when Uncle Sam raises rates and finds that he spends more and more of his tax revenues paying interest on the debts.

I've personally exited the USD last year when it rallied a bit due to the rush from US assets into cash. AUD and CAD have good backing due to their export of gold. Jim Rogers follows the Austrian school of economics and that's how he saw it coming and moved to Singapore. Yes, Singapore is the best for the rich if that makes you any happier :P SGD is stable, one of the lowest tax rates in the world (almost labeled tax haven by US), no sovereign debt at all, best place to be if you don't want your Ferraris scratched etc. Got ERP to clear roads for you too.

The problem with gold is that it is a cumbersome investment with negative carry i.e. you have to pay to own gold due to storage, insurance etc. There are proxies like silver, AUD, CAD etc. If it means anything, I like AUD due to the high interest but I got in when the interest was at the lowest. Recently it has raised rates a few times so not sure if it's good entrance anymore as people bought up the price when the rates were raised.

Disclaimer: All opinions of wjsim are personal and not meant as advice. Please consult your financial adviser for professional advice.; February 23, 2010 9:38 PM
Anonymous said...: Ignoring the illusion in US is not a responsible thing to do thus making this discussion important.

An article written sometimes back claim that US citizens are buying gold to keep as they have no confident in US$ thus driving up Gold $ in the last few years.

Another way is to invest in stable currency e.g. Sgp, Keep in liquid.

Once when Aus$ or NZ$ are near to on-par with S$, we can re-enter the market. But please do not get involve in the dual currency trading offered by the banks as I read in this blog that this is a risky venture.

Maybe another way is to look at STI ETF or SGX or DBS shares as they are stable with good upside potential and pay dividend.; February 24, 2010 10:00 AM
I am postive!! said...: Lets paint the doomsday scenario:

USA stops all funding and removes all guarantees for debt from 2008 onwards ( previous agreements stand )
So as to heal itself onto the straight and narrow path of responsible lending ( means stop printing cash )

What will happen?.. chaos and mayhem in the financial system.. economies begin to crumble.. stock markets crash.

Would you like that?.. perhaps follow Baron Rothchilds investment style: buy when there is blood on the streets!

This scenario cannot and will not happen because the leaders of the world understand the consequences.
We are all inter connected and if anything, fear to have world war 3.

Many have enjoyed the peace and wealth during the past 70 years.
Many more ( China, India ) are enjoying too. It is too much to give up.. and all will do anything to keep it going.

Based on this sole fundamental belief, I am confident that life will continue as usual and on a trajectory towards more wealth and comforts.

It is not speculation. You see, feel and taste it.

See the crowds at restuarants
Feel the crush on the expressways
Taste exotic foods from Hokkaido
Hear the jackpot machines

What is speculation is the doom and gloom that people predicted since the financial crisis started in 2008. Has anything come true?
Are you starving?
Yes, maybe lost your job, but
could you find work?
No?.. are you expecting 100K a month?

Our GDP has gone back up
Cost of living has not changed
There are more Lexus and Mercs
Property prices are up
More tourist are here

Even the IMF has forecast growth for Asian economies. ( the world too)

Celebrate the return to wealth and stop propagating this speculative doom!!; February 24, 2010 1:30 PM
Anonymous said...: China was the first country to implement cash notes as early as 800 A.D..

Marco Polo was so impressed that he wrote "the emperor of China made so many notes each year that he could buy the whole treasure of the world, 'though it costs him nothing'.

In the end, the Ming dynasty abandoned the cash note system because they were always faced with the problem of overprinting of money and hyperinflation.; February 24, 2010 4:11 PM
Anonymous said...: Dear Mr Tan,

Keep cash appears to be a good idea amidst the mess but as prices inflat unknowingly, the value of cash deminishes. May be worthwhile to invest in blue chips or a property if there is no or little debt at the moment. However, within one's means! I kept cash for a long while but there is really very small return and things gotten very expensive.

I share with 'I am positive' that economy are blooming and not in gloom as high end chinese restaurants are full on Monday evenings and they could not sqeeze in a table for 2 at 830pm.

Observe if Natas is doing well this year as families travel with disposable cash!; February 24, 2010 4:57 PM
i am positive! said...: The USA Fed has already increased the lending rate... they are fully
aware of inflationary pressures.

Inflation will be moderate and controlled... stop this nonsense of forecasting economic disaster or living in hardship conditions.

China during Marco Polo's era did not have the inter connectivity that is available today. Although we learn from history, lets put things into perspective.

In our modern context, we are willing to co-operate and solve a common problem. The financial crisis in 2008 demonstrated it was achievable.

The root problem remains, but all the doctors and specialists pooled their know how and the patient lives.. and is growing stronger each day. They will not allow it to die.; February 24, 2010 5:12 PM
Anonymous said...: Also look at cars COE. It also indicate people confident in the economy.; February 25, 2010 11:47 AM
Chaw Ming said...: The US government has 3 options:
1. default - they won't do that
2. tax more and spend less - too little too late
3. print money which will might lead to inflation

It's possible the USD will weaken graudally over time and wise to allocate part of our portfolio to guard against that.

BTW, came across the same book mentioned by Anonymous earlier about impending Great Depression. Just be careful as the author's business model is to get you to subscribe to his newsletter which would set you back SGD600 a year. His track record of forcasting Dow of 30000 by end 2008 in his earlier books speak for itself. My suggestion is always to do your homework when choosing books and reviews on Amazon.com is a good start.; February 26, 2010 9:55 AM
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