What’s the purpose of money?
It converts the job that you do, whether you’re a builder, a doctor or a teacher, into a good life. It provides you with food, clothes, a house and a car. Money oils the wheels of humanity. It really does make the world go round.
So much of our daily conversation, our daily life and the news we read is around money. We talk about inflation, savings accounts, stock markets, debt crises and austerity.
Traumatic history
The history of money has frequently been traumatic. In the 20th century the scourge was inflation. And why did we have inflation? One cause was a global population surge and we couldn’t industrialise quickly enough. Too many buyers seeking out too few goods pushed prices up. The great fear was runaway hyperinflation, of the type suffered by Germany in the 1930s.
Central banks globally were meant to combat this threat. The implementation of monetarism, controlling inflation through interest rates and the money supply, was perhaps Margaret Thatcher’s lasting achievement. That’s why we have a Monetary Policy Committee today.
In the 21st century things have changed and far more quickly than expected. As China and India have come on-stream in the global economy, suddenly the world is producing huge quantities of goods, swamping buyers. So prices are falling. At the moment, inflation is ultra-low, but as emerging markets continue to industrialise, deflation will be the norm.
How can we cope with a future of deflation? Interest rates are now near zero in many countries and quantitative easing has been used across Europe and America to reflate economies. What next? What about helicopter money? Instead of printing money to buy bonds, we could print money to hand out to people?
China and India growth:Â a good thing
The emergence of China and India frightens many people. After all, the growing number of industrial and professional jobs in these countries has led to falling employment in America and Europe. Yet as we have a greater ability to produce more of what we want than ever before, surely it’s the fault not of China and India, but of our current financial system that things are going wrong.
Some people have argued for protectionism to stop the flow of goods. But I have a better idea. Why not print money that we could give to people to buy these goods? The only reason people didn’t do this in the past was because of the inflationary risk. But in a deflationary world, a little inflation would actually be good. You just have to measure the level of money being printed so the supply of goods and demand from consumers is balanced. There will still be jobs, but we’ll need to adjust to a world where everyone works less.
And where does this leave investors? Well it’s fairly obvious who’ll be making the most money – the countries that supply all these goods, principally China and India. I fully expect these countries to produce astonishing returns in the next great bull market. That’s why I consistently recommend that you invest heavily in China and India, and also in companies that will benefit from the global consumer boom. If you choose your shares well, I think there has really never been a better time to invest. Investors today still talk more about GE, Boeing and BP than Huawei, Lenovo or Alibaba. That will change.
The world is moving very fast. It’s the people who can keep up with this change who’ll be the investing winners of tomorrow.