Robert Ironside Comments On The Current Global Economy
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Robert Ironside, Ph.D., Knowledge Bureau faculty member, course author and financial professor discussed his views on the state of the economy in a recent interview with Knowledge Bureau President Evelyn Jacks.
Q. How can we think about investing into the best of the bad outcomes our current global economy is experiencing? Do you have any concerns that existing investments in "safe, guaranteed investmentsî are at risk? |
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A. 'I think the likely outcome will be recession followed by significant inflation as the only way the developed economies (probably led by Japan) can stave off an outright default (although this might still be several years in the future).
Remember, inflation is just another form of taxation. Any form of tax is a transfer of purchasing power from Party A to Party B. The inflation tax is a transfer of purchasing power from creditors to debtors. It works by reducing the purchasing power of the nominal dollars loaned out. Thus I buy a $1,000 bond today that matures ten years from now. If we have significant inflation between today and ten years from today, the bundle of goods and services that my $1,000 will purchase will shrink. This shrinkage is an effective confiscation of my wealth that is every bit as real as an income tax, but because it is so insidious, it can be imposed by the weakest of governments.
Therefore, in answer to your question, the major concern I have is about the erosion of wealth in fixed income securities. Many, many investors have moved significant portions of their portfolios into fixed income. In order to get yields above zero, many investors have started to lengthen out their maturies. If the securities have maturies beyond about five years, I think they are highly exposed to purchasing power risk (the loss of value due to inflation).
As to tax, that is a huge issue, because tax is levied on the nominal return, not the real return. Although investors should only be concerned with the real, after-tax return, most of them focus only on the nominal return. As inflation (and nominal returns) rise, the real, after-tax return falls in a linear fashion. It does not take much to produce a negative, real, after-tax return. The higher the nominal return, the more negative the real, after-tax return.î
Robert Ironside, ABD, PH. D is the author of several Knowledge Bureau certificate courses, including Financial Literacy: The Relationship Between Risk and Return.
Mr. Ironside will headline the Distinguished Advisor Conference being held November 14-17th in Orlando, Florida, where the theme is "Focus on The Family". View the entire agenda by clicking here.
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