The Bank of England has announced the latest round of quantitative easing (QE) today expanding it’s bond-buying programme by £100 billion. The move is intended to stimulate the UK economy which as been hit hard by the coronavirus lockdown. The Bank has also voted to keep the base rate at 0.1%.
As previously discussed in this blog, currency printing drives down each units relative value. However, due to the current down turn in the economy the negative impacts of the addition of new currency may not immediately be felt.
Longer term though, this, combined with low interest rates is bad news for savers. The inflation caused by this move will mean that the purchasing power of your bank balance will shrink faster than normal. There are ways in which you can mitigate this risk which we will discuss later in this article.
Deflation Before Inflation
It is likely that we will see asset prices drop considerably some time in the short to medium term before we see the type of uncontrolled inflation some are predicting. This is because we are coming to a peak in a bull market and many assets are already overvalued.
A good example of this is Hertz which was able to convince speculators to buy new shares while it was filing for bankruptcy. The company has since suspended the sale following discussions with the Securities and Exchange Commission.
It is likely that this deflationary period will create many buying opportunities for the right assets. However, some companies with weaker fundamentals may not survive the downturn. It may also be a good time to start a business with the likes of Airbnb, CNN and Uber all being started during economic downturns.
Limited Supply
Precious metals and cryptocurrencies like Bitcoin have limited supplies and therefore may be used as a store of value to protect against excessive money printing.
Bitcoin was created at a time of economic crisis partly for this very reason. A message was added to the first Bitcoin block about this exact subject, you can read more about that in an earlier blog post.
UK Property
With a limited amount of space and a growing population the long-term prospects for property in the UK look good. That said, areas like London which appear to be reaching a peak in valuations are likely to take a hit. Areas like Peterborough, Hull, Sheffield, Burnley and many others look more promising.
During any deflationary period demand for HMOs is likely to increase due to downsizing and family breakdown. This coupled with the increasing number of Councils implementing Article 4 (requiring planning permission to convert a residential house into an HMO) is likely to increase the value of licenced HMOs in time. Of course, this is dependant on area and where property is already overvalued decreases in price are likely to be seen.
Protecting Against Inflation
You can also protect against inflation by ensuring that your money earns enough interest to be able to withstand the loss in purchasing power. Unfortunately, it is no longer possible to do this with a savings account at a bank. However there are options such as peer-to-peer, cryptocurrency-backed and private lending. You can learn more about them in the blog post entitled Beat The Banks – Earn 8%+ PA On Your Savings!