“Cash Is Trash” is a common theme as of late as inflation rages from the massive monetary interventions of 2020 and 2021. However, is “cash really trash?” Or, does cash still provide a valuable benefit to portfolios in terms of risk management?
One of the common mistakes that individuals make regarding inflation is to assume that current inflationary pressures are now permanent. As shown below, while bouts of inflation can last for extended periods, it is never permanent. Notably, periods of “spiking” inflation lead to recessions and deflation, as consumption contracts and economic growth slows.
In the 60s-70s, rising inflation got offset by high savings rates, strong economic growth, and low household leverage. The current bout of inflation is the direct result of monetary interventions creating excess demand versus supply. However, while economic growth got an artificial bump, household savings are low, coupled with high household leverage.
The consequence of a decade of monetary policy by the Fed forced “savers” into “risk assets” by pushing rates to zero.
With “zero interest rates” on savings, and inflation running nearly 8% as of this writing, it is no wonder that many believe “cash is trash.”