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Strategies & Market Trends : Booms, Busts, and Recoveries
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To: TobagoJack who wrote (44144)1/1/2004 9:59:10 PM
From: gumnam  Read Replies (1) of 74559
 
Hi Jay

Both inflation and deflation can be bad. But an orderly inflation, or rather orderly financial markets with inflation can be great to build up real wealth. Infact banks and other such financial institutions are the best performers in this scenario. Reason is simple - they leverage a tiny book value massively by borrowing short term and lending longer. ( Interest rate curve is almost necessarily upward sloping with front end real rates negative in inflationary system). There is the example of several brazilian banks in the 1980s and early 90s that benefited in this system. It is really a transfer of wealth from financially naive to the savvy.
Ofcourse the operative word is orderly inflation. If we have a crisis or a system meltdown, then banks and financial institutions will suffer greatly.

Real industry as a whole will suffer in an inflationary system. They benefit from inventory but PEs suffer and cost of funding goes up a lot.

Deflationary system on the other hand offers very opportunities to make fortunes.

If we start seeing moderate to not so moderate inflation, we will be able to steal an unfair share of the loot. But we will hav to change the way we measure our own performance.

Cheers
Gumnam
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