Are Alternative Investments Causing Inflation?

A worrying trend has been emerging over the last couple of years – the super rich have stopped saving and started spending.

Now you may be wondering why this is considered to be a worrying trend as surely they are helping the economy by paying for goods and services as opposed to hoarding their cash in offshore savings accounts.

Which is a completely rational train of thought but the reason for it being a worrying trend can be summed up in one word – inflation!

And what we have seen over the last couple of years is a situation whereby the top earners, worried that their money is no longer holding it’s value, are foregoing the usual investment routes, such as stocks and shares ISAs, and putting their money into alternative investments.

This, in turn, causes an increase in the cash value of real goods and so inflation goes on an upward spiral.

And even when the Bank of England began a process of quantitative easing – creating money to buy assets, increase credit growth and stimulate the economy – this did not work as expected as, although the potential supply of money was there, it did not translate into a real supply of money as investors were not investing financial assets such as government and corporate bonds.

Instead, those with the wealth were buying into alternative investments like art, wine or good, old-fashioned bricks and mortar.

And it appears that it’s not only the super-wealthy that have stopped saving as figures from HSBC have shown that those earners in the £100,000-£150,000 pa bracket are also looking to spend their way out of recession.

A survey of 1,000 UK consumers found that those with a household income of over £100,000 expected to increase their spending by 7.8 per cent in 2011 and were also likely to decrease the amount that they save by 10 per cent.

Richard Brown, head of savings and investment at HSBC said: “It seems saving is giving way to spending for many affluent households in 2011. It will remain to be seen as the year progresses if this is indeed the case and the correct decision.”

One reason why this may not prove to be the correct decision is that, although their cash probably won’t hold it’s value in the medium term, alternative investments such as expensive wine may only be growing in value due to it’s current popularity artificially inflating it’s cost.

Investing in the housing market can be volatile at best but such is the lack of confidence in the economy, coupled with the Bank of England’s current love of printing money, that many high earners are opting to invest in things that they feel will retain at least a high percentage of their value.

And whilst this could lead to an even greater increase in inflation, it’s also worth considering the flipside of the coin; that consumption could affect growth and it may well just precipitate a turn around in the economy.

To paraphrase HSBC’s Richard Brown, it remains to be seen whether alternative investments, and spending over saving, will prove to be the correct decision.

This guest post from the other side of the pond, was written by Les Roberts. He is an aspiring top earner and journalist at Moneysupermarket.com.

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