Surviving the brave new world
The first in a series on the implications of a low inflation climate that has turned investment decision-making on its head
Saturday 11 February 1995
But what happens next week or even next year is arguably less important than the underlying economic conditions driving the long-term movements of the markets. Anyone taking out, for example, a 25-year mortgage or investing for retirement should be worrying more about how the markets will behave over the next decade than over the short term.
The financial world, undergoing its biggest change for a generation, is likely to confuse anyone who still thinks in terms of the last 15 or 20 years. The conditions that apply now and probably well beyond the end of the decade are, in crucial ways, the mirror image of the 1980s.
The freewheeling Eighties were a decade of sometimes runaway inflation, soaring house prices, borrowing on an unprecedented scale, surging corporate profitability and, most of the time, soaring stock markets.
The most fundamental change is probably in people's expectations of inflation. Since the Second World War, the industrialised world, and Britain in particular, has accepted relatively high rates of inflation. Such a long period of inflation is something of an historical aberration, fostered by policies encouraging high employment and high economic growth.
After some false starts in the 1980s, there is now a genuine social and political consensus across most of the industrialised world that inflation must be kept low at all costs. In most countries, including Britain, it does seem to be under control.
Low inflation implies lower economic growth than we have been used to. Recent interest rate hikes in Britain and the US, for instance, are designed to damp down excessive economic growth that might otherwise have provoked a resurgence of inflation. That process looks set to continue for the rest of this year at least, with economists expecting base rates to head up from 6.75 per cent to between 7 and 9 per cent before levelling off.
Borrowing is already, and will probably remain, comparatively expensive. Although real interest rates occasionally rose sharply in the 1980s, there was always the prospect of a severe bout of inflation to erode the value of loans. That encouraged individuals and businesses to borrow. Many people stretched their finances by taking out a large mortgage with every confidence that the value of the loan would quickly erode.
But there is no such help from inflation in view for the next decade. So in this new world of low inflation and low economic growth, what is the private investor to do?
Over the next few weeks we will look at how the new conditions affect investment as well as how they might influence anyone planning to take out a home loan or some other personal borrowing. The markets have changed for good. Investors used to the old days must adapt because it is a different world out there. The challenge is how to make the most of it.
Children's bookseller wins The Independent's new author search
Board creates magnetic field to achieve lift
- 5 Paralysed man Darek Fidyka walks again after treatment by British doctors on brink of 'cure'
Jack the Ripper: Scientist who claims to have identified notorious killer has 'made serious DNA error'
Oscar de la Renta dead: Legendary US fashion designer dies after long cancer battle aged 82
Oscar Pistorius: The brutal prison life that awaits disgraced athlete
Banksy arrest hoax: Internet duped by fake online report claiming artist's identity has been revealed
Super-sized ships arrive in Britain: How big can they get?
Cameron is warned 'no possibility' of UK reducing immigration and that bid to bring in quota on migrant workers would be illegal
Residents should throw a street party and mix with immigrant neighbours, councils told
Russell Brand threatened with arrest after filming outside Fox News headquarters
London bus driver 'kicks gay couple off for kissing'
Jose Manuel Barroso warns David Cameron against making 'historic mistake' over immigration reforms
Worst Airports of 2014: Poll names Islamabad airport in Pakistan worst in the world
iJobs Money & Business
£23000 per annum + pension and 22 days holiday: Ashdown Group: An established ...
£27000 per annum + pension, 22 days holiday: Ashdown Group: An established ind...
£23000 - £26000 Per Annum: Clearwater People Solutions Ltd: Our client is curr...
£25 - 30k: Guru Careers: A Corporate Actions Administrator / Operations Admini...