How you outsmart inflation

Dollar soon at a rate of 2,80 DM?

(year 2000)

 

Headers of the article:

What effects the Euro exchange rate has on the inflation rate
Rates of price increase of gasoline and fuel oil
Forecast for the rate of price increase
Quantity or quality?
What to do about inflation?
How you can profit threefoldly by the inflation

Based on experts’ estimations the US Dollar might be at a rate of almost three DM in the coming year – the Euro keeps falling. All explanations of the European currency keepers as well as politicians of how the Euro is a stable currency almost sound like the pension adjurations of the former Secretary of State for Employment (“The pension is secure” – today we now how secure it is: “All that’s secure about the governmental pension plan are the gaps in coverage”, talking to Andre Kostolany).

But it is not our intention to go into details on the stability or instability of the Euro here.

Something that has been more or less underestimated so far is the effect of the dropping Euro exchange rate upon the inflation rate (or rather: price increase rate) in the area of the Euro. Because along with the sinking Euro compared to the US Dollar comes a gradual increase of the inflation rate in the areas of the Euro. In order to dam up this increase the European Central Bank is raising the key interest rates. All this happened in six steps since November 1999; raising the key interest rate from 2 % to 4,5 % in ten months actually says all about the effects of the weakness of the Euro.

The only thing is that this action has been in vain up to now; just at the latest increase the exchange rate of the Euro as compared to the US Dollar dropped to a historical bottom. Experts are afraid that another increase of the key interest rates might dam up the boost of economy in the area of the Euro before it has even begun to fully move ahead, because money is simply getting more expensive again.

The reactions show that the Euro is the second league when it comes to the international image, or the valuation. Of course the US Dollar is ahead of us concerning several points:

The American economy is booming since many years. The economy in Europe is limping from one crisis to the next. The boom that can be observed at the moment is mainly due to the falling Euro, by the way: the orders from abroad increase in numbers since they become more cheap for the buyer paying with dollars.

No one has been expecting, to this degree, that gasoline (price increase since the introduction of the Euro up to 65%), fuel oil (up to approx. 60%) and, consequentially, also natural gas and electricity would become more expensive.

And if someone wants to take a vacation in the US or another region of the US Dollar in this world, that person pays 44% more by now – a monthly price increase of 2,2% since the introduction of the Euro.

If someone buys software via the internet and pays for it with US Dollars he also pays 44% more since the introduction of the Euro – a fact with an effect that becomes all the more painful to all those institutions that are building their future on the internet.

Further indirect consequences of the falling Euro are increasing transport costs and, with that, increasing consumption prices, higher taxes on the expensive gasoline and so forth. The spiral, once started, cannot even be stopped by increased interest rates of the European Central Bank. All the European Central Bank can do with such actions is to dam up the growth of the amount of money by simply making the money more expensive, but not by creating the international trust in the currency for all of Europe.

For an indisputable fact is: the trust in the common currency is missing. The booming economy in the US is the decisive factor for the power of the dollar, resulting in a weakness of the Euro. Only a continuing growth of the European economy, which does not fall behind the area of the dollar, will make the Euro gain momentum. But it seems like we need to wait for that for another while.

Thus we estimate that soon there will be an average rate of price increase in the Euro area of 3-4% - or (/and) the key interest rate will increase to 6 up to 7% again.

But in fact there is another totally different aspect to the subject on inflation, which isn’t being looked at so much.

The inflation rate statistically determined in the Euro area is based on the so-called basket of commodities – an imaginary basket in which rents, ancillary leasing costs, household appliances, food, cloths, public transports, gasoline, general car costs, medical care, insurance, travels, holiday, phone etc. flow in. The Eurostat (an institution of the EU) merges the evidences determined by the national statistical federal offices with a harmonization method into a unique index.

However this basket of commodities, being constructed abstractly, leaves one component disregarded – which in fact plays a bigger and bigger role in the matter of inflation. It merely measures quantity, not quality.

For there remains another question to be asked: how much quality do I get for my price? Or in other words:

How much less quality do I get for the money that I pay today as compared to earlier times with the same price?

So while cheap products are coming from bigger and bigger manufacturing facilities and the manufacturing costs are getting more and more rationalized and made less expensive, the quality products either disappear totally or become exorbitantly expensive.

In order to ensure an equal amount of quality, the producer needs to align with the prices for raw materials, delivering industry and wages every year, but also with education of specialized personnel and other staff.  So when raw material and wages and, with that, also the products of the delivering industry become more expensive then a price increase for the same quality is unavoidable.

We get another example from the agribusiness: today we can get foods for prices which partially haven’t been lower in the 70es. But: home agribusinesses have been nearly fully pushed aside, especially when healthily cultivated food is demanded. Then the prices are so high, in comparison, that the actual inflation becomes visible.

So the subject of rate of price increase or inflation is much more complex than the monthly price index shows. And yes, also telephoning and travelling by airplane has become much cheaper as compared to the 70es, but then even the oil crisis back then did not bring us prices of 1,70 DM per litre of Diesel or 2,10 DM per litre of 4-star, as it is the case today.

 

What to do about inflation?

First of all, since many years we recommend investment into estates. No other form of investment is as secure as freehold property. Allowedly, also someone buying shares could assume that the shares of the worldwide most well-known large enterprises is a comparable high amount of security which real estates give over a longer time period. There are certain equity funds which are passing almost any crisis with flying colours in the end. But the real estate, the property of land, remains the safest form to secure oneself against the imponderability or instability of the money. By the way: many stock corporations are securing their assets by getting their own properties; as it is known, these are also playing a certain role in the evaluation of a share.

Experts will argue: yes, but in the past years there have also been a number of corrections on the real estate market. The prices have partially dropped tremendously, many investors wind up with vacant apartments. That’s right, and based on our opinion this shakeout has been legitimate. For instance, the high number of investments into real estates in the new federal states during the years 1992 up to 1997, supported by the special depreciation, brought us a tremendous building boom, but also a tremendous surplus of apartments. Meanwhile people have opened their eyes soberly and some investor now does not only need to worry about his property but also about his tax advantages, for also these might be cancelled in some cases. These are erroneous trends which have nothing to do with minding sane economic principles.

As a side effect of this development, the demand for freehold flats as capital investment has become a bit less. Wrongly, for a leased apartment in good location is still a useful and smart investment for securing one’s future and pension plan. So the property owner actually profits from the inflation to the three-fold amount:

First of all, the rental income increases by increasing rents as the years go by – that is the positive side of inflation! Here the owner of a leased apartment profits from the general increase of consumption prices and thus receives the inflationary surplus. These additional receipts can be used for the purpose of faster amortization. Our hint: use these additional receipts for a high-interest investment – for instant a fund or a British life insurance – then also in this regard you are at the winner’s side of inflation.

Second, the inflation also “liquidates” the mortgages – by devaluating the liabilities paid by outside finances. For these will not be adjusted in value according to the inflation. Here is just a little calculative example for that purpose:

A price inflation of “only” 2% per year means a decrease of the credit taken by 10% in five years. In case of a credit of 400.000 DM this is, after all, a tax-free dept redemption (due to inflation) of 40.000 DM within five years (as measured by buying power of the remaining money in debt) – a considerable sum amounting to rounded 666 DM per month! In order to get the same amount of interest one would need to invest about 130.000 DM with 6% interest rate somewhere – but one would still need to pay taxes on the interest rate, which surmount the saver’s tax allowance of 3.000 DM annually per person. And that is only the rate of price increase of 2% annually – so imagine the advantage at 4%!

Third, the market value of the real estates rises along with the rental increase. In other words, the higher the rental income, the higher will be the earning rate, which is an important basis to calculating the market value of a property.

Of course all these are processes which are only advancing very slowly. Someone acquiring a property today should get straight that his investment needs to be planned for a time period of ten and more years. The additional purchase costs alone, around 6-10%, make it impossible to quickly and profitably resell a property; should one still be lucky some time (e.g. getting a cheap property by means of a compulsory auction and reselling it in a short period of time with a good profit) then one needs to pay taxes on profits to the state. Thus the new speculative period of ten years thwarts a profitable sale within shorter time periods.

Let us keep hold of the following: the real estate has really not been devised for making short-term investment decisions. It is rather an instrument for securing one’s funds on a long term, for building up a second pension plan and for extending the realm of investments with real assets, and beside all that it usually remains a good peace of German architecture with a durability which can extend to several hundred years.

Thus our recommendation is: buy properties with good yields, and not primarily for the purpose of saving taxes, but with a rental yield of 5% and more. On our websites you find a large offer of yield properties, some of which are really interesting and highly profitable. These are yielding such a monthly surplus that the investment becomes a fast-selling item.

Outsmart the inflation and protect your assets by investing into properties immune to inflation; meaning properties in the form of freehold flats, privately owned homes, leased buildings, premises or other types of property values.

 

 

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