This happens because the price of goods and services may rise as a result of increased demand for them or due to an increase in production costs, for example. The rate at which the general level of prices for goods and services rises, in turn, is what we call inflation.
As prices rise, people can buy fewer goods and services with a single unit of currency. To keep this rise in prices under control, central banks do their part to manage inflation and keep the economy running smoothly (this includes adjusting interest rates or managing money supply, for example).
In the US, the Federal Reserve shares its plans on monetary policy including its goals related to moderate long-term interest rates, price stability and maximum employment. This is important because a relatively constant level of inflation allows businesses to plan for the future since they know what to expect.
In a recent interview for CNBC, hedge fund manager Ray Dalio stated that "cash is trash" when asked about where investors should put their money. He explained, warning that investors should get out of cash as central banks continue to print money:
"The depreciation of the exchange rate and the printing of money over the next few years is going to be the biggest thing - cash is not gonna be good"
Ray Dalio argues that inflation tends to rise in the following years and that investors should allocate their money into assets that have an Annual Percentage Yield (APY) greater than the rate of inflation if they want to preserve wealth. Holding uninvested cash, on the other hand, is no good since this kind of asset tends to depreciate as money supply increases and interest rates decline.
Dalio recommends a global, well-diversified portfolio that includes bonds, stocks, treasury bills and assets that he believes are typically resistant to market downturns, such as gold. Please have in mind, though, that diversification does not ensure a profit or guarantee against loss and at times may not suit your investment objectives.
Please note that Passfolio Securities does not endorse Mr. Dalio’s recommendation. We do not make recommendations.
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