Investors must rebalance their portfolio for a post C-world of higher inflation

by | Aug 18, 2020

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From Boris Johnson’s ‘Build, build, build’ to Rishi Sunak’s ‘Spend, spend, spend’, the Government is determined to deploy its heavy artillery to support the economic recovery. Roxana Mohammadian-Molina, Chief Strategy Officer at property lending marketplace Blend Network argues that the resulting world of structurally higher inflation and protracted low interest rates demands that investors act now to rebalance their portfolio and look at alternative investment products.

In recent months we have grown used to sights hitherto unimaginable, including that of governments throwing money at anything that moves. Last week, Prime Minister Johnson unveiled his £5bn New Deal plan to reboot the economy.

A few days later, it was the turn of Mr. Sunak promising to plough £2bn into a government jobs scheme to shield the young from unemployment and a further £1.6bn into theatres, museums and music venues in a bid to rescue the country’s arts and culture sector from the brink of collapse.

 

Voices warning about the seeds of the next debt crisis have started to raise in a synchronized manner across the world. They argue that with debt levels already at a record high, Covid-19 raises the risk of a credit crunch in a world of low interest rates. Economics 101 teaches us that there are four routes a Government can follow to deal with higher debt.

First, a country can grow its way out of debt, which is when a country’s growth rate is higher than its interest rate. In this case, the country’s debt will be on a sustainable path – this can also be if the country’s population growth means the size of the debt relative to its population shrinks.

Second, a country can inflate its way out of the debt. Traditionally considered by some as the easy option and a quick fix, this is hardly the case. Indeed, inflation has deeply negative economic impacts and side effects that may well outweigh what governments get from reducing the debt burden.

 

Third, a country can use austerity, although the intellectual tide has turned against this practice in recent years, not least after some Eurozone countries faced very negative experiences with austerity following the Global Financial Crisis in 2008-2009.

Fourth, a country can default or restructure its debt. There is no fifth way out of debt.

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