The Divide Will Only Grow

The divide between the rich and the poor is set to grow even more markedly. Here's how you can prevent being left behind.

The Divide Will Only Grow

Despite being 'in it all together' there is a growing divide in society between the rich and the poor. It is happening here but is much more pronounced in some other countries.

Don't worry, this isn't my conversion to socialism but a frank assessment of how central bank policies are impacting all of us.

Globally, the central banks have been effectively printing money for a decade or so. Each wave of stimulus is larger than the one before and has proved to have a diminishing effect.  

The goal of this pump priming is to stimulate the economy, stave of deflation and prompt some inflationary forces. Eventually it will work.

What it has done right now is put a rocket under asset prices like stocks, gold, property and bonds. Anyone holding those investments should have done very well in recent years.

But not everyone has investments and the stimulus measures haven't done much for them. Hence the divide between the wealthy and the poor has grown.

In Australia, the pump priming has really only just begun with the RBA buying bonds to keep interest rates artificially low and the government throwing hundreds of billions in an attempt to stave off an economic depression.

While I think the impact of the Corona measures will be felt for a long time, I cannot see that we will be able to avoid a globalised inflation as a result of the dollars sloshing around looking for a home.

All major economies are looking to generate some modest inflation to help deal with the alarming debt levels. The thing about inflation is that it usually looks manageable until you quickly realise it isn't.

By the time it reaches the target band (say 2-3%) it has usually taken on a life of its own and moves way past the objective. This will be compounded if central banks continue to keep official rates artificially low. The end result will be the real cost of borrowing (for some) being actually negative.

This will drive asset prices even higher meaning those who hold these assets (except bonds) will be notionally richer.

Those who can't access capital or don't have investments, will be left even further behind the wealth accumulation ladder.

So what does all of this mean?

My take is that cash and access to credit will be very valuable in the months ahead. That's when we should see some investment opportunities brought about by the engineered economic disaster in response to COVID-19.

When that has run its course, I suspect we will see my stagflation forecast come into being. Our economy will still be struggling but the price of commodities, real estate, crypto, gold and the like will be much higher than they currently are.

It will be virtual wealth for many because most investors will be in the same boat but at least they will be in boats that are afloat.

Those who don't have capital to invest or some investments already locked in will be trapped in an inflationary world with limited economic opportunities, leaving them even further behind.

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