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!

You can check out Measuring Worth for a cool (scary) calculator that shows you how currency loses value over time.

The good news is there are ways to get inflation beating interest rates. Each method has it’s pros and cons and we will look at 3 of the best options.

#1. Cryptocurrency Lending

Don’t worry, you don’t have to buy any Bitcoin for this one. There are companies that lend out cash to businesses secured by their cryptocurrency holdings. They require fiat currency (pounds, dollars, etc) to lend out to these businesses. If you lend these businesses your cash you can earn 8% on your money. A company called Nexo will accept your Pounds and Euros, while Blockfi will accept your dollars.

If you are interested in cryptocurrency at all then the good thing about Blockfi is they offer the option to have your interest paid in Bitcoin or Ether! This is a great way to get your feet wet in crypto without having to buy any directly.

The potential risks with this method is the fact that unlike a bank your money is not backed by deposit protection schemes. Do your research into any company you invest with and understand their risk management strategies to keep your money safe.

#2. Peer-To-Peer Lending

Peer-to-peer lending is where you loan money to businesses seeking finance. There are a number of platforms in the UK that you can use to lend out your cash. It is possible to earn around 8-10% on your money with this option. Most platforms require you to select which loans to fund and in what amounts (though there are automated options as well).

The potential risk with this option is that the businesses default on their loans. You can mitigate this by diversifying the businesses you lend to and ensuring you only lend a small portion of your savings to each. You should also remember that it is not usually possible to withdraw your capital during the term of the loan so make sure to only invest your long-term savings.

#3. Lending To Property Investors

If you have savings of £100,000 or more you could consider lending to a property investor. Often, investors need cash to purchase properties that they will refurbish and refinance. You can lend at 8-12% (or sometimes more) and have your loan secured against the property. The investor will normally refinance the property in 6-18 months and return your interest and capital. If they can’t refinance for any reason they will keep paying you the agreed interest rate until they can pay back your capital.

The potential risk with this method is that the investor defaults on the loan. You can mitigate the risk by securing the loan against the property and ensuring the loan-to-value (the amount you lend compared to the market value of the property) isn’t too high.

Remember...

Always do your research before parting with your cash. Be careful and understand the risks associated with any investment.