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Vorsicht Inflation

Ladies and gentlemen, no one likes to talk or think about inflation. We do. Remember? Albert Einstein’s theory of relativity has recently celebrated its
100th birthday – or I’d rather say, we celebrated the anniversary. Albert Einstein has done
a lot for all of us, even us, economists. For example, he thought the greatest invention
of mankind was compound interest. Let’s look at compound interest: But not in the interest
version, as I would call it, but in the inflation version. Because in inflation, compounding
considerations also play an important role. Let’s assume we have a relatively moderate
inflation rate of 2 or 2.5% per annum. A bit like what Mr. Draghi is dreaming of. What happens then? Here we have the price of a croissant that currently would cost, say, 2 Euros. Now let us assume that we have
an inflation rate of 2.5%, no big deal. What does that mean? It means that at the end of
the year the same Croissant now costs 2.05 Euros. Not really what we would consider a
substantial price rise, right? Whether croissants cost 2 Euros or 2.05 Euros doesn’t really bother anyone. But, ladies and gentlemen, Albert Einstein’s
compound interest means that – if you look at it over a longer period -, you come to
the following conclusion: I have calculated the average annual inflation in Switzerland – nota bene almost inflation world champion from 1960 to 2015. Over 55 years: 2.6% on average per annum. This moderate inflation causes the “croissants”, which have cost 100 in the 60’s, to cost 420, 55 years later. This is the consequence of a moderate inflation
rate of 2.6%, using sort of compound interest. This might not surprise you, ladies and gentlemen.
But if you think in terms of the purchasing power of your money, then this number shows
you, that the purchasing power which was 100 in 1960s, now is just about 25. In other words,
you have lost 75% of the real purchasing power of your money. Now you may say “Yes well,
but those are more than 50 years. Who cares?”. You might care if you put something on the
side for your grandchildren or great-grandchildren in the form of cash or interest-free nominal
assets. Then you simply need to know that, in 50 or 60 years, even at moderate inflation, in real terms all this is just worth one quarter of what it is worth today. To sum up: Note: Low inflation hits imperceptibly. As a consequence you do not react. This is
exactly the reason why low inflation in the long term hurts the most. You don’t feel it in the short term but long term you get hammered dramatically. Even the most successful
countries have seen average inflation rates of 2-3% per annum in recent decades. Less
successful countries much more. And believe me, ladies and gentlemen, with the current orientation of monetary policies around the world, inflation in the next 30 years will
not be as moderate as in the last 50 years.

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1 thought on “Vorsicht Inflation

  1. Albert Einstein wurde 1879 geboren, wir feiern dieses Jahr seinen 137sten Geburtstag. Video sonst – wie immer – top, Danke!

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