morning thoughts...
Nothing got more headlines last week than China's sudden devaluation of the yuan. This latest currency war cannonball from the dragon nation can do some serious damage. But China's policymakers had few options. They had to find a way to pull their economy out of its current weakness, and nothing gets the export machine moving better than a good devaluation.
Global reaction was sharp. Some experts went as far to call it the spark to set alight a worldwide recession.
Governments across the developed world support inflation for the same reason a corporate CEO would support an increase in the price of his company's goods or services - especially if the company has a large amount of debt on its balance sheet.
Price increases would mean more profit, which the CEO could use to pay down the debt before the lenders come knocking.
So imagine if instead of inflation the CEO faced deflation. This would hurt profits and make debt repayment very difficult indeed.
Many governments are in a similar situation as the CEO. They've built a gigantic debt complex over the years, and servicing it gets more difficult every day. They hope for sustainable inflation in their economies because it would mean more tax revenues with which to pay down their debts.
But economic activity on the ground shows all signs of deflation. Just take a look at the GDP growth of most major nations across the world.
And so what we have is battle between the governments' attempts at inflation and their economies resisting with all their deflationary might. Without government and central bank money printing and record low interest rates, we'd probably have had a full-blown depression by now.
If the Federal Reserve decides to hike interest rates (a highly deflationary move, as you know) in this environment, it could be the proverbial last nail for the US economy. Perhaps the scales are beginning to tilt in favour of deflation.
If inflation is headed our way, gold and good quality stocks with pricing power will hold their value quite well. But if we get deflation, bonds and cash will be king. (Bonds increase in value if interest rates go down. And cash is always precious when other assets around are taking a beating.)
Wednesday wealth gains
Buy sun pharma , sbi , dlf
Buy nifty and bank nifty on dips
Buy icici 300 ca , tata steel 250 ca, upl 560 ca
Nothing got more headlines last week than China's sudden devaluation of the yuan. This latest currency war cannonball from the dragon nation can do some serious damage. But China's policymakers had few options. They had to find a way to pull their economy out of its current weakness, and nothing gets the export machine moving better than a good devaluation.
Global reaction was sharp. Some experts went as far to call it the spark to set alight a worldwide recession.
Governments across the developed world support inflation for the same reason a corporate CEO would support an increase in the price of his company's goods or services - especially if the company has a large amount of debt on its balance sheet.
Price increases would mean more profit, which the CEO could use to pay down the debt before the lenders come knocking.
So imagine if instead of inflation the CEO faced deflation. This would hurt profits and make debt repayment very difficult indeed.
Many governments are in a similar situation as the CEO. They've built a gigantic debt complex over the years, and servicing it gets more difficult every day. They hope for sustainable inflation in their economies because it would mean more tax revenues with which to pay down their debts.
But economic activity on the ground shows all signs of deflation. Just take a look at the GDP growth of most major nations across the world.
And so what we have is battle between the governments' attempts at inflation and their economies resisting with all their deflationary might. Without government and central bank money printing and record low interest rates, we'd probably have had a full-blown depression by now.
If the Federal Reserve decides to hike interest rates (a highly deflationary move, as you know) in this environment, it could be the proverbial last nail for the US economy. Perhaps the scales are beginning to tilt in favour of deflation.
If inflation is headed our way, gold and good quality stocks with pricing power will hold their value quite well. But if we get deflation, bonds and cash will be king. (Bonds increase in value if interest rates go down. And cash is always precious when other assets around are taking a beating.)
Wednesday wealth gains
Buy sun pharma , sbi , dlf
Buy nifty and bank nifty on dips
Buy icici 300 ca , tata steel 250 ca, upl 560 ca
