Is Inflation good or bad? 3 undeniable outcomes of inflation must needed to consider

A famous economist said that. Inflation is like a weed.

Today I want to talk to you about inflation.

There is a lot of talk these days about the outcomes of inflation.

 

Concept of Inflation

When inflation hits, financial markets become tense.

First of all, the bond market (ECONOMIC MOAT: THE TRENDY INVESTMENT METHOD THAT MAKES YOU FEEL COMFORTABLE!) starts to suffer.

Bonds are so sensitive to the word inflation  that you can wake up from your sleep.

Bonds are assets that exist to preserve their original purchasing power.

Suppose Michael has 100 dollars. He digs the money in a jar and buries it.

He's now buried in a jar instead of buying it.

 

And after exactly one year, you take the money out of the jar and go to the store to buy something for $100.

But the problem is that the price of a product that was $100 a year ago has become $105 as prices have risen.

Michael is frustrated. With difficult words, the purchasing power of $100 Hong Gil-dong had was not preserved.

Michael has a different idea. He came up with the idea that he should lend money to something that pays interest.

So he lends the money to the state or to a bank without burying it in a jar.

If you express lending to the state in a slightly noble language, you are investing in government bonds...

Lending to a bank is making a deposit.

If you invest in government bonds or make a deposit in a bank, what will you get?

Yes, you will receive interest.

So, when you break your deposit after one year, you get $105 in principal plus $5 in interest.

If you take this money to the store, you can buy a product that has gone up in price to $105.

Yes, $100 of purchasing power was preserved by investing in bonds.

[caption id="" align="aligncenter" width="512"] Inflation over the years[/caption]

Let's move on to something a little more depressing here.

The price has gone up by 10%. $100 stuff turned into $110

After barely making a year's deposit and receiving $105, Michael is once again frustrated in front of the store.

He worked so hard, but he can't buy the thing because the inflation rate is higher than the deposit rate.

Then Michael would never make a deposit.

He realized that it was a much smarter way to just buy something right away than to lend money to someone and earn interest.

Intuitively, the price increases by 10%, but it would be difficult to say that a person with a 5% term deposit is a wise person.

So Michael now thinks he's going to be buying things right away instead of investing in bonds, so what's the problem?

People will want you and I to buy things quickly before prices rise excessively, and in the process, prices can rise faster.

The possibility of a bubble in the asset market could also increase.

And the bigger problem is, it will be difficult for countries, banks, or companies to borrow money from.

Even if you receive interest, the price rises so quickly that you lose money, so who would invest in bonds that lend money?

Then, to the extent that it is difficult to obtain money, you will have no choice but to use that method to somehow save money. Did you feel it?

Yes, it will raise interest rates. If prices go up, you'll have to pay more interest to borrow money.

Check out this video for more explanation.

https://www.youtube.com/watch?v=epwmSYBfUzw&ab_channel=MotilalOswalFinancialServicesLtd

The 'Good'  outcomes of Inflation

When inflation rises, interest rates rise. Rising interest rates can be called rat poison for the bond market.

If inflation rises and interest rates rise, will only the bond market feel the burden?

Let's think again about the financial market situation last year (Related: FROM GROWTH TO INFLATION… WHY THE FED CHANGED DIRECTION).

The real economy was in a downturn, and the stock market was very hot.

A lot of people agree.

The reason the stock price rose last year was not because of the growth of the real economy, but because of the power of liquidity.

It is said that the stock market was super bullish thanks to the substantial amount of money released by the central bank. I agree too..

[caption id="" align="alignright" width="388"] Interest rates and inflation: their impact on Economy[/caption]

However, interest rates rise.

Rising interest rates mean that you have to pay more interest to get your money.

So, if interest rates rise and it becomes difficult to obtain money, won't it become difficult for stock investors to borrow money to buy stocks?

Or, if interest rates rise, you can safely receive interest even if you do not invest in stocks.

Yes, there may be a problem that the demand for stock investment is gradually diminishing.

 

I mentioned the word TINA in the last article

(Check Out : 4 REASONS INTEREST RATES ARE SOARING HIGH THESE DAYS)

Do you remember?

TINA stands for There is No Alternative.

Interest rates are so low that it is impossible to raise money through savings.

Real Gyeonggi do is in a slump, so it is difficult to expect a rise in wages.

TINA is used to mean that there is no other alternative than investing in stocks because there is no other alternative.

But what if interest rates jump sharply?

Yes, then it could be bad news for the stock market as TINA shakes.

I'll wrap this up here.

When inflation rises, interest rates rise, and there can be fear that a rise in interest rates will shake up the entire asset market, including the stock market.

Yes, there is also the uncertainty of the current asset market as a whole. By the way, if inflation goes up... if interest rates go up... will stock prices necessarily fall?

Not necessarily.

Even with inflation, there are good inflation and there is bad inflation.

Let's see what it is.

This is what good inflation looks like in the above image.

The game gets better. People are getting more jobs

Get a higher salary. And consumption increases.

As consumption increases, companies increase production lines to make money by selling more products.

In the process of expanding the production line, investment will increase significantly and employment will increase even more.

More employment means higher wages and more individual income.

This in turn stimulates consumer demand.

As consumer demand increases, prices will naturally rise.

And an increase in inflation will naturally lead to an increase in interest rates.

Growth comes out, and prices rise in the process. So how will the stock market react? Interest rates have risen, but growth is so strong

And as consumption increases in society as a whole, the margins of companies will also increase.

The interest burden has risen, but if companies grow stronger, the stock market will continue its strong trend.

Yes, prices have risen, but growth is stronger, so if you overcome that level of inflation, there will be no major problems in the asset market as a whole.

You could call this beautiful inflationary ‘good inflation’.

The 'Bad' outcomes of Inflation

There are good things and there are bad things.

Do you remember the case of the loss of logistics due to the blockage of the Suez Canal???

If it leads to a logistics crisis, companies have to spend more to buy raw materials.

An increase in raw material prices leads to an increase in production costs.

[caption id="" align="alignright" width="332"] Inflation Causes & Effects[/caption]

From the company's point of view, it acts as a negative factor for lowering margins.

As the cost increases, you can increase the selling price.

However, it is quite burdensome to raise the selling price in this corona situation where the economy is slowing down.

In particular, price competition is fierce through large Internet platforms such as Amazon, and if you use a clumsy sales price increase policy here.

Then, as much as the increase in cost cannot be passed on to the selling price, of course the margin will be further reduced.

Yes, prices are going up.

As inflation rises, interest rates rise, which in turn increases the interest burden on economic entities.

And the cost burden on companies increases.

However, it cannot raise the selling price as it is not a price increase that comes from strong growth of the economy like good inflation.

Then, as the performance of companies deteriorates, the stock market will inevitably become nervous. Yes, bad inflation is coming.

There are growing concerns about inflation around the world right now.

What kind of inflation is inflation now?

Is it inflation as the real economy is rapidly improving thanks to vaccines and stimulus measures, or is it bad inflation caused by supply chain disruptions and rising energy prices?

When looking at the asset market in the future, I think the key is to see what kind of inflation it will be. Today's essay is shortened here.