Inflation – when cash turns to trash

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In Pride and Prejudice Mrs Bennet exclaimed about Mr Darcy: ‘..what jewels, what carriages you will have…Ten thousand a year! Oh, Lord! What will become of me. I shall go distracted.’ If Mr Darcy turned up today armed only with £10,000 he would come with a plastic earing in one ear and jingling the keys to an old banger.  

Never mind two centuries of debasement, we only need to look back a couple of decades to see the same trend hard at work. Rebased to 100, the  chart below tracks how much gold, gas, wheat and housing the same amount of pounds sterling would now buy. Five gold rings? Make that one, and probably only gold-plated. A loaf of bread? No, a few slices.  And on it goes.

 

Source: Refinitiv Eikon

 

Money has fallen in value against these basics more quickly than the general basket of expenses measured by the government. The debasement there has ‘only’ been 60%. Why so much lower? Gains in efficiency should always help to some extent and this period also includes the emergence of China as the top supplier of stuff of all kinds to the world. Cheap stuff. These days China is exporting less consumer goods than it used to because to a large extent it’s already competing with itself rather than undercutting western producers. The wage gap with other countries has narrowed sharply.

Aside from moaning about prices, the harsh lesson is that sitting on cash really isn’t an option at these times. A 1% interest rate on a deposit account barely accounts for the buying power lost in just a month.

Here is the Slater Growth Fund since 2014 versus the CPI index (in blue), versus gold (in,er, gold) and versus house prices in grey. Gold is a solid store of value but that’s all it is. Gold sleeps while shares live and grow. Central banks exist by grace and favour of governments. They house themselves in impressive headquarters but the reality they simply issue IoUs. Even commercial banks have to prove themselves by lending wisely. Central banks just ‘lend’ to their bosses.

 

Source: Refinitiv Eikon

 

Taking a longer view, in the next chart we compare gold to the UK stockmarket including reinvested dividends. You can see that shares left gold for dead between 1970 and 2000, but then gave some of it back. The compound overall return was 2% per year.

The second line in orange compares shares prices excluding dividends with UK retail prices. Here the return was 1.3%. Inflation data is always suspect but it’s all we have. Gold has been a magnificent asset during the long period of minimal interest rates. If central banks are serious about moving to positive real interest rates, then bullion will face a serious headwind, just as it did after the central banks belatedly started fighting inflation in the 1980s.

A return to honest money with positive real interest rates will be the springboard for higher productivity growth and sustained returns from equities.

 

Source: Refinitiv Eikon

 

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