Author Topic: Australians: what you'd do with your savings if expecting a lot of inflation?  (Read 3946 times)

soobi

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Suppose you were expecting strong inflation for quite a few years to come. Lets say in the the 5-10% range.

What would you do with your savings?

When previously discussed on this forum things like mortgage debt, rental properties and Treasury Inflation Protected Securities (TIPS) are suggested http://www.mrmoneymustache.com/forum/ask-a-mustachian/how-do-you-prosper-during-inflation/ but in Australia our interest rates can't be fixed for long periods like they can in the US (30 years), our house prices astronomically overpriced, and we don't have TIPS.

Any ideas?

gooki

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Sharemarket.

Or housing, but you seem to have ruled that out.

HappierAtHome

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Wouldn't housing be a good idea, assuming you could buy it outright with cash, as in the long term it roughly grows at the rate of inflation?

And if interest rates go that high, wouldn't that mean that you would get a rate almost that high on bank deposits, thus making cash in the bank relatively attractive?

soobi

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Quote
And if interest rates go that high, wouldn't that mean that you would get a rate almost that high on bank deposits, thus making cash in the bank relatively attractive?

I think it's possible Australia is heading for a period of low interest rates, even as inflation increases. The RBA have painted themselves into a corner in my view, and thus they will "look through" inflation. In such an environment savings accounts and term deposits will offer negative real rates of return.

I'd like to invest in housing, but I feel house prices are grossly inflated in this country and subject to a significant correction at some point. Prices do seem to have some way yet to run, but picking the top of this bubble is a tricky business.  I appreciate not every Aussie here will agree with me on the housing issue.

HappierAtHome

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I hear you on housing. I'm planning to buy a 'family home' in about three years. I would love it if the market corrected in the meantime. But if it doesn't, I'll still buy for psychological and lifestyle reasons - I'll just be making damn sure that I have a huge deposit and the place is three times the larger of my two household incomes or less, so it won't be a tragedy if the price drops 50% after we buy it.

Basically, as long as you can REALLY afford it and you'll live there for 10 years or more, I don't see buying a home in abbubble as that terrible a concept.

Now, investment properties, on the other hand...

soobi

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Does anyone know if there is any kind of Aussie equivalent to TIPS?

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Sharemarket.

Any chance of elaborating? In a highly inflationary economy I don't expect that the ASX would be much chop in getting you real returns.

How does one protect their savings from being inflated away to two-fifths of bugger all if inflation starts to tear away?


marty998

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1) Buy real estate. Everyone needs a roof over their heads.
2) Buy Woolworths and Westfarmers shares. Everyone needs to eat.
3)Buy Beer stocks. Because when the shit hits the fan what else is an Aussie going to do except drink himself stupid.

In all seriousness, it won't take much of a rise in interest rates for the reserve bank to get inflation under control, should it start to rise. Glenn Stevens only has to mention "pick up in demand" and that scares everyone into keeping their wallets shut so there will not be an interest rate rise.

This_Is_My_Username

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Quote
Suppose you were expecting strong inflation for quite a few years to come. Lets say in the the 5-10% range.

What would you do with your savings?

Pretty much never going to happen.

The RBA is good at what they do, and are competent and accurate in targetting 2-3% over the long term.

Two of their three legislative objectives under the RBA Act 1959 require them to control inflation.

further reading:

http://www.rba.gov.au/monetary-policy/about.html

http://www.rba.gov.au/education/monetary-policy.html
« Last Edit: September 18, 2013, 08:48:41 PM by This_Is_My_Username »

This_Is_My_Username

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Quote
And if interest rates go that high, wouldn't that mean that you would get a rate almost that high on bank deposits, thus making cash in the bank relatively attractive?

I think it's possible Australia is heading for a period of low interest rates, even as inflation increases. The RBA have painted themselves into a corner in my view, and thus they will "look through" inflation. In such an environment savings accounts and term deposits will offer negative real rates of return.

Low interest rates and high inflation cannot happen for extended periods.  When the RBA increases interest rates, that causes a reduction in inflation.  In the case of high inflation,  the RBA would increase interest rates.

You are asserting that the RBA will choose not to comply with its enabling legisltaion (the RBA Act 1959).  That is a conspiracy theory, and laughably false.

-

Where are you getting these ideas from?  What sort of economic training or background do you have?


HappierAtHome

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Re: Australians: what you'd do with your savings if expecting a lot of inflation?
« Reply #10 on: September 19, 2013, 02:54:16 AM »
soobi, I'm starting to suspect I know you in real life.

Regardless of that: once you start believing that the government/regulatory bodies are going to fuck up the system completely... There are no options. If the system we operate within ceases to exist, there are no options currently available to us that are guaranteed to ensure our survival of the new, unknown system.

So you can either operate as best you can within the current system or accept that there is no plan for how to operate in the new reality you're envisioning.

happy

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Re: Australians: what you'd do with your savings if expecting a lot of inflation?
« Reply #11 on: September 19, 2013, 07:52:03 AM »
1. For me, the big value of learning to live happily and frugally is that it minimises some of these concerns. Doesn't take them away, but if one can live on  little money with a good quality of life this will go a long way. 

2.Jobs that result in CPI indexed pensions e.g. some public service jobs, as long as the indexation  is adequate  will also be helpful.

3. Diversification such as Bernsteins permanent portfolio (20% each of Shares/bonds/ Cash/ RE/Gold) interests me, but  I haven't been able to fully action it yet, let alone try it out in varying conditions.