Thursday, February 23, 2012

Why inflation could be bad for sustainability

Adding a few rooms on the third floor of a univeristy building in Santarem.


       How do you invest your savings when 100 dollars now will only buy half as much in a few months?  Before Brazil switched over the real in the mid-90's, it's old currency was inflating at a rate of 50% per month.    And although the real is now one of the strongest currencies in Latin America, the history of inflation has had lingering impacts on the culture of saving.  Instead of putting the family's nest egg in a saving's account or mutual fund people add on to their houses -- another room or an additional floor.  In Santarem, a lot of buildings looked like they were unfinished when really they were just beginning a new stage.  And it makes sense -- what investment can a family make that is most likely to increase in value over time?  Cars depreciate rapidly after purchase.  There's education, of course, but what if you've run out kids?  Real estate seems like a pretty good bet.
      There are probably other solutions to this problem.  During the civil war in Angola my grandmother's brother was able to get his salary paid to him in pounds.  In fact, investing in foreign bonds would be another way to secure your money.  But what if you are a local merchant or a farmer without access to international financial markets?  Capital investments -- a new tractor, a new floor -- might be the only way to go.
   But having to spend in order to save could create a haphazard development scenario.  The nice thing about investing is that it allows you to plan longer term -- to wait and buy the new equipment when you're ready to expand production or build the addition on the house after the second kid is born.  The sum total of all growth in fits and bursts could make city planning chaotic and business coordinating tricky.  And if investment has to be concrete it requires materials be consumed and natural resources extracted -- liquidity in savings would be better for the environment.
      I might have this all wrong.  Perhaps interest rates are usually tied to inflation rates in countries with an unstable currency, so saving isn't that big of an issue.  Or maybe there is some other way to keep investments liquid.  There are probably tangents I haven't thought of either.  I'm curious to learn more and hear other people's thoughts and experiences.

No comments:

Post a Comment