 This conference will now be recorded right guys, so if you could just yeah mute your mics brilliant No worries, and if you do want to say anything be you know be my guest You can basically just unmute your mics if you want to ask anything of this anything you're not following definitely You know just just type it or you can you can ask me so It was S. Terra who asked me quite a detailed question regarding Inflation increased inflation and what it means overall, so I'll just read out the question and I'll go through it Try to clarify these things so she said highly on similar question to the one above which was basically Here which was basically Vivek's question last week, but I shall come read it from here so So Just what's the video on inflation and interest rate rate Relationship and a bit confused so based on the video. It seems that increased inflation equals decrease In purchasing power of a currency, which is a weaker currency that is Correct. Yeah, that is actually correct. And if we look at you know the definition of For example deflation This is basically what it means so in economics deflation is the decrease in the general price level of goods and services So deflation occurs when the inflation falls below zero so inflation Reduces the value of a currency of time, but sudden deflation increases it so think of inflation as a Sort of devaluation in a sense, right? So the sweet spot for central banks is two percent Over the year. Yeah They Have this in their economic models and I guess the Western world This is the target For a for I guess a healthy currency and healthy, you know, healthy economy, right? and They have this two percent target at the moment. Yeah now if Prices if inflation goes above that it actually means that the currency is Devaluing right devaluing Now an extreme so let's say for example, it's a five percent Yeah, it means that it's being it's being devalued. Yeah, so inflation reduces the value of the currency over time so So if you get in high inflation it means that it costs more of that currency to buy a particular service or goods so think about it for example a Mars bar or a chocolate bar, right for those of you who are not in the UK Let's say a chocolate bar cost you one pound this year. Yeah, and Next year it costs you one pound ten pence Yeah Your currency the currency has been devalued Because it costs now more pounds or dollars or Euros or yen wherever you are right in the world Yeah To buy so this year 2020 It cost you one pound next year. It's gonna cost you One pound ten or one dollar ten one euro ten cent here It's because it's costing it is taking more of your of the currency To buy the same Chocolate bar does everyone follow so your currency is being devalued if it every time prices go up So if it goes up next year to one pound twenty Things would be in your currency is being devalued because it's costing more of that currency to buy the Same item. Yeah, so that Inflation yeah, generally is a devaluation of currencies and pretty much fiat currencies are guaranteed to all devalue Right because that's the target that is the central bank target now With deflation, it's the other way around right so deflation is actually your currency is getting very expensive and When a currency gets expensive, it's actually a problem. It's actually a massive problem Does anyone know why an expensive currency is a problem or an economy or for GDP or What the relation is let's have a look exports absolutely Ben so exports are Basically an imports and trade balance is what a country, you know, basically Cells or or buyers right imports and exports If a country sells or exports more than they take in yeah, then they are in what is known as a trade surplus Yeah, just think about if you run a business or just think about your general household Yeah, where if you're you know you your wife your partner your husband whoever right and your kids if you're making more Then you're spending then you're in a surplus if you're not then you are in a deficit All right, so if countries are importing more than they're exporting then they're in a deficit See I see I think I've a split deficit, right? But so so in order to be competitive in order to be competitive on exports in fact, it's desirable for a Devalued currency not too devalued, but just a devalued currency, right an exchange rate a cheaper exchange rate is Actually advantageous because if I'm selling something and let's say for example, Ben and Let's say Samayita and Ebay. We're all selling the same product. Yeah to the world But they can buy it from Ben cheaper than they can anyone else then the world is gonna go to Ben, right? It's just literally it's the same thing as economics Yeah, so a cheaper exchange rate Yeah, boosts You know exports meaning That's when it comes to GDP Yeah, you should have GDP should be growing right you should have a surplus and you should you know, it's it's good for an economy now The world is in a recession at the moment Right, the world is in a recession due to COVID so When it comes to a recession Anyone who's selling anything. Yeah, which is basically everybody all countries want a cheaper exchange rate Don't they because they want to sell as much as possible to the world therefore boosting GDP growth or assisting in in boosting GDP growth if the currency is too expensive Which is basically what you know is happening in Europe, right with deflation Yeah, where they're below their their 2% target, so that should be 0% Yeah, the currency or minus in in the case of maybe, you know, Japan or the Swiss Frank I don't think they're in minus inflation anyway, but not now, but they were It's something from deflation for years. It's because in fact the currency is expensive and they don't need an expensive currency in a recession because why because it hurts exports and it has a knock-on effect on GDP and they on they can't be competitive and This is the reason why we're wearing what's known as a currency war. Yeah, a currency war is Competitive devaluations and let me just get this up. Yeah Let me just delete this and is everyone following me so far by the way, is anyone I don't want no one to be left behind Is everyone following so far if you're not, let me know currency And see why war Yeah, so the currency war one second. Let me just double check everyone's following bent. Yep, Daniel Lidarian Welcome Lidarian and welcome to everyone who's just come in fits. Welcome to you guys, right? So a currency war Yeah, is known as competitive Devaluations to central banks are competing to devalue. Yeah is a condition in international affairs where countries seek to gain a trade Advantage over other countries by causing the exchange rate of their currency to fall in relation to other currencies and why would they why are they doing that because of The fact that we are all in there. We're in a global recession. Everyone's competing to sell Yeah, everyone's competing on exports and trying to grow their economy and and an expensive Currency, yeah, so a currency that's suffering from deflation for example It's not helpful. It's not helpful at all. So going back to the question which is Low inflation Equals interest rate cuts. Yes, because an interest rate cuts basically Does what is the intention is to devalue the currency, right? So low inflation Devalues the currency which should not necessarily a stronger currency. It's not necessarily a strong currency It boosts inflation Yeah, because if you have a strong currency was this off if you have a weak currency Yeah, a devalued currency Right, so devalue Remember it costs more of going back to the Mars bar situation or the chocolate chocolate bar Analogy, yeah, it costs more of that currency to buy a Mars bar therefore Devaluation boosts or should boost Inflation, yeah inflation will rise The more a currency is devalued so let's look at and before we just just just to give you an extreme Yeah, of what does everyone know what hyperinflation is Yeah, hyperinflation everyone know what hyperinflation is of us heard of hyperinflation. Yeah, okay so so Low inflation Yeah, low inflation. I'm gonna say low inflation. I guess what we mean is Yeah, so low inflation would indicate that the current the currency is actually strong Right, or say we say low inflation below the two percent target So below that two percent target. It means that the Covenancy is strengthening alright So strengthening which actually The result of that if it's below the two percent target, let's say for example, it's one or zero point five Yeah, or even zero they have to boost it to what two percent, don't they so they have to end up cutting rates Yeah, they have to end up cutting rates which then should have the effect of boosting the Weakening the currency so in a way in fact, I guess maybe I've read this, you know, slightly wrong. I understand When I read this in my mind, I kind of did it a different way, but I understand why you've done it in this sequence So low inflation Actually means yes a strong currency But the result of that would be for the for an interest rate cut to devalue to weaken the currency. So That is basically how that goes so low inflation equals a strong currency Therefore you would need to cut interest rates. So in practice you could pretty go like one two and then Three by the way is the is is I think estera. Are you are you in here? Are you in here by the way? Are you in here? Hopefully, you know, no still not in here. All right, because I'm I really want the one But is everyone else follow that by the way, is everyone else following? Oh, it's almost does everyone's gonna go over it again Everyone's following. Yep. Brilliant. Brilliant. Brilliant. So high inflation. Yeah, which is which is Hyperinflation. Yeah Hyperinflation You want interest rates Basically high inflation equals weaker currency and then the result of that is Interest rate hike Yeah, so one two Three, yeah, so hyperinflation hyperinflation Everyone knows or has heard of or in recent history matter of fact, I think it was Venezuela Does anyone know about, you know, Venezuelans? Massive problem when it comes to inflation, right because inflation is basically prices. So let's look at Venezuela, this is trading economics. Look at this their inflation rate is at 1,813 percent. Think about it. The central bank target is normally about 2 percent And we can look at their inflation rate in October 19 on, you know, around October 19th last year Let's go to five years. Look at this in 2019 their inflation rate was 350,000 percent it's now come down to obviously, you know 1000 or nearly 2000 percent, yeah Basically when prices were here and you can do a do a Google search and type in, you know, Venezuelan hyperinflation or You know, Venezuela inflation and then go back to 2019 and look at what was happening in Venezuela And I remember this as well is it didn't necessarily get that much coverage on, you know, on TV Not in the UK. I mean it was there in it for about a week or so and then it kind of just, you know You kind of died off, but their money wasn't worth anything. Yeah, it was it was literally couldn't buy you a thing Yeah, people were literally walk those money in the streets and I saw like a I think it was like a YouTube video where, you know, kids were playing with just the money just to, you know In a playground because it was literally it's worth nothing Couldn't buy anything with it or say anything, but you could hardly buy anything with it's pretty practically worthless but the point is is that This is when when inflation gets too high. So imagine this is your 2% target down here and you're, you know 350,000 percent That is a devalued currency. That is a major devalued currency Yeah So inflation reduces the value of a currency over time that that happened in the space of You know Six months or whatever it was or is it, you know from 18 years of basically a space of a year It was devalued. So everybody following still everyone following me so When we go back to understanding the question You have it actually you have it right as Tara when you wrote this I just think maybe In the way that I maybe have understood it It's kind of like I said, just maybe put in it in a different way and hopefully that does clarify What this is so next part of the video Higher interest rates, right? Would equal the currency getting stronger in fact. It's the other way round. So central banks Remember will raise interest rates. Yeah, so they will give you a better return If the currency is actually getting weaker because remember what inflation is. Yeah, so inflation Reduces the value of the currency over time. So the more the inflation goes higher in fact That is devaluing the currency. So the currency is actually getting weaker. Yeah, and When lowering interest rates Yeah, is actually used to Devalue a currency Yeah, well, actually matter before I go into that. So why raise why raise interest rates? Why raise interest rates if the currency is getting weaker and it's because when you think about like If if you walk down the street and you go and you see again three banks on the high street One's offering you 2% one's offering you 3% one's offering you 5% Most people are gonna go with the 5% return right because you're gonna get if I put in a thousand pound I'm gonna get 5% of my money. Yeah, and think about that times You know, however many people are on the street at the time Everyone is walking down that street and sees those free banks. They're gonna put their money in the higher yielding Yeah, the higher yielding bank Yeah, so So when a currency starts to get weaker central banks have to entice people to Save and put money and and and you know to try to strengthen the currency Yeah, to buy that currency and hold that currency and invest in that currency by giving them a higher interest rate Because it's being devalued and if he gets devalued too much who wants to hone who wants to own You know a currency that is going to that is that isn't gonna buy much, right? So they have to give you an incentive and that is what is known as Interest rates and giving you a higher interest rate Yeah Is everyone is anyone not following is anyone not following type of N if you're if you're not following and November Yep, so all right everyone's following brilliant. Oh could the person who's got their mic on could you could you mute your mic for me? Or I'll mute your matter of fact. I'll mute HP welcome HP. I think it's maybe your first time, but welcome warm welcome to you So so the point is is that when a currency actually gets weaker Then they have to raise interest rates when a currency is getting too strong Yeah, in order to stop traders or Investors wherever it is. Yeah From piling into that currency what they have to do is say all right, and we'll only give you 0.5% for example Yeah To try to get you to not hold that currency maybe to spend that currency more Etc because the currency is too strong. They don't want you to invest in that currency Yeah, so that's the reason why and they're not going to incentivize you to hold that currency That's the reason why When a currency gets stronger Yeah, the currency gets stronger they have to lower interest rates to get you not to Put your money in so think about it the opposite way. Yeah, if the currency was getting stronger and they were giving you 5% Then people would be piling into that and then we think about again GDP and exports Yeah, and exports what they sell Yeah, it will it would hurt exports because the exchange rate would be so expensive I mean how many of us shop in you know when you think about a comparison think about H&M think about Zara think about Primark for those of you who are in the UK and think about the volume and any cheap shop Or can say cheap but any shop where you can be you can basically buy Quality goods or some quality goods, I guess for a lower price You're gonna have a lot more people going to those shops then anyone for example buying Louis Vuitton for example or You know Lou Vuitton or whoever it is, you know, I mean Yes, those luxury goods You know do sell but not at the volume of a Cheaper store, right? That's does everyone followed for the part of that analogy. Yeah, so The point is is that you want to cheap currency to boost exports which boosts GDP you do not want when when when they're lowering interest rates It means that their currency is too strong and they're trying to weaken the currency in order to and especially in a recession especially in a recession so Hopefully that clears everything up. So she says so my confusion is that in one part of the video It seems that higher interest rates mean the currency is weaker And in the other part of the video the higher interest rate means that the currency is Stronger, so I hopefully I've cleared that That up just literally in the section you know above and I understand I totally understand where traders get Mixed up and confused because it is a bit like upside down and things like that But once you understand the concepts of this Hopefully that should make sense and is again is everyone following me and You know, I just want to just want to double triple check that everyone understands this stuff because once you get this Then everything else will fall into place then I can talk freely about other concepts for example the New Zealand dollar I can talk about, you know Some other questions without having to kind of go back and explain this stuff So don't worry if you know, you're just still not too sure in it. Just let me know. Okay. I'm a bit confused Okay, so just arrived. All right, so Unfortunately, I can't necessarily go back on because you've come a bit late I can't necessarily go back on the whole thing again because I've been talking for maybe around about 20 minutes 25 minutes so you'll have to you know, watch it again and Again, just let me know Later on if you are still confused, but hopefully that clarifies Most things or should clarify everything as far as what's expensive or what's cheap so the next Question right was From job rate. I think it was he says I'll pick it back on the inflation related question to this one Right. So how does central bank posturing allow average inflation versus inflation target change? To allow in agitation versus inflation to change. How should we look at the weakening separately? Okay, right. So here's Again leading on to that Let me open up another another Create new boards, right So the Fed the Federal Reserve have introduced F a IT, right, which is basically this is at the Jackson Hole events in August and What that stands for is federal average inflation target so again What central banks? Have a mandate to do is to get inflation Yeah And right inflation to that magical 2% target Once they get to that 2% target and what normally happens is then they will start to you know hold rates Yeah, and if it gets above that 2% target, then they will tend to hike rates again Why would they hike rates because if it's above that 2% target? It's starting to be devalued right Which means that they have to incentivize people to You know invest in that devalued currency. Yeah, so that stems that should Increase the value of the currency therefore bringing inflation down. Yeah, so you should increase the value value All right, and that should bring inflation down Yeah, as if if it was below and cutting rates Right, so cutting rates TTI and G sorry for my handwriting. I'm writing on a track pad at the moment So my hand was not the best but cutting rates would do what to inflation it would boost inflation because basically if it's below 2% then it's Appreciating right appreciating so it's getting expensive And cutting rates devalues a currency or should do Therefore it boosts inflation. So it does the absolute opposite All right, so inflation goes up Yeah, so this is expensive exp E n s i v e now going back to the question, which is Inflation 2% target. This is what this is what? You know central banks are implementing at the moment So as soon as inflation reaches that 2% target then they leave a hold if it goes above then they start to hike The problem is yeah for the for central banks at the moment is that they don't want to Hike too soon Yeah, and it's because if you hike too soon What is what is hiking doing? It's it's making the The value of the currency Um Would the aim is of a hike is to increase the value of a devalued currency and they want A devalued currency Why do they want it because again exchange rates? Yeah, so they want a cheaper exchange rate exchange rate To help boost exports Which then So I said s Which then boosts gdp Yeah, so they want a cheap Exchange rate they want a devalued they actually want a devalued currency. Yeah, so there's a balancing act Let's say for example inflation Gets to 2% and they can't control inflation only I mean the tool that they use to try to control inflation are Hikes holding cuts, but they can't That's how that's the only way they can try to control inflation. Yeah Now let's say for example inflation reaches 2% But the the the economy. Yeah gdp Is still we're still in maybe the recession phase or we might be in the recovery phase of the economic cycle Yeah, so we're recovering If they increase rates Or hike rates too soon It may damage the recovery because it makes Exports more expensive and it hurts gdp because they don't want An expensive currency Correct, they want to keep their currency devalued So what the Federal Reserve has done with their basically their masterstroke is said Is they're basically doing an average? Yeah, this is average Right average inflation Rather than just saying all right at 2% or 2.5% we're going to hike rates What they're saying is is that as soon as it hits 2% but let's say for example over the year Yeah, the average inflation over the past year was actually maybe 1 0.2% even though the latest figure may hit 2% target They're actually looking at this Average 12 month period, I think it is they're looking at before they before they consider Hiking rates or holding rates or whatever they're going to do so that they can allow The economy To go into just past the recovery phase into the expansion phase Yeah, of the economic cycle and potentially the boom phase. They don't want to choke off The the economic recovery before it's even had a chance by hiking rates Everybody follow me Everyone following yep, that's exactly it brilliant brilliant and if you understand this If you understand this there's the outside of this What more is there to really you know, no, that's you know, you don't necessarily to know everything else to make money Right if you can understand this concept, then you understand That You start to compare currencies now, right? So then you put And let's be let's do an example, right? So at the moment a real life example Let's create Yeah Real life example, so let's look at everyone's favorite eu Right, so the fed have introduced their basically game changing f A i t system, right? So vivek says if there's before I get into that, right vivek says if the interest rates are hyped The central bank wants to devalue the currency But as investor trader, would you try would you buy that current? All right, so before so What the thing is what you need to think of vivek? Yeah is Why would they hike rates in the first place? You know, I mean, they won't the the central bank won't hike rates if inflation isn't At their two percent target or above at least above their two percent target So it if it follows in order, right? So it follows. So it's like it's basically you're looking at gdp And inflation Yeah, are the two things? INF all right, so let me let me do it this way then you have you have you have Have any of you heard of the circle of control? basically the circle of control is like a a It's a it's a concept where it helps basically best way I can put it is like basically Relief stress and put things in order right in your life There are things that you should worry about and things that you that you that you shouldn't worry about there are things the things that work the work that you worry about should be The things that you can actually do something about and it's called a circle of control And there are things that you cannot worry about. Yeah And that is outside of the circle of control Yeah Yeah, if you're worrying about things and not it's going to make sense in a sec If you're worrying about things that are outside of your control Then you're going to basically be very stressed out because there's nothing you can do You know, if you're trying to squeeze an extra hour out of the day Yeah Unless you know, you've got some magical power where you can you know Spend space and time you're fighting a losing battle, right? There's only 24 hours in a day You can't make 25 hours. So why even? You know stress about that now the point is is that GDP and interest rates are in a central bank's world That they're outside of their control, right? So GDP It's here and inflation is here But what is within their circle of control? Anyone What is within this circle of control exactly interest rates, right? So monetary policy Right, so interest rates Right quantitative easing stimulus bond buying You know, you got it, right all of that stuff. Whatever they want to call it that Yeah this And this is outside of their circle of control So What we need to think about Is what the central bank needs to think about is is trying to they're trying to balance inflation and the The the economy via these monetary policy tools So if you can think about it like that so then The question when you say if the interest rates are hiked Yeah The central bank wants to devalue the currency Why would they devalue? Why would they hike rates? You know, I mean if if if the inflation which is basically outside of their circular control Is if inflation is below their two percent target, let's say for example, it was a You know one percent. Why would they hike rates? They would only hike rates if it's three percent four percent five percent above that two percent target Yeah That makes sense for that Maybe all right, so let me so let me carry on with the um, so let me carry on with the eu example, right? So the eu example Yep, okay, brilliant. Vivek. So the federal reserve at the moment are doing average inflation All right, that's their policy now The the european central bank are basically saying they're doing the old model Which is basically as soon as prices or it's right inflation gets to two percent Then we will we will consider hiking rates Yeah, or if it gets above that then we consider hiking rates gets to three percent four percent, etc. Yeah now the federal reserve Have the advantage because they can wait remember i was saying to you about gdp And not choking off gdp Yeah if You make the currency if you make a currency Expensive you start to hike rates It actually has a negative effect. It can have a negative effect on gdp And if you're not out of a recession fully yet Right because remember inflation Is not in their circle of control. It's outside. So you can have inflation go to three four percent, for example But you can still be in a recession So What the fed has done what the fed has done Is they've said all right, even if it hits free of two percent whatever it is. Yeah this month or next month for On whatever dates We are not going to raise rates. We are not going to hike rates We're gonna do nothing because we're looking at the average over 12 month period. Let's say I don't know exactly what it is, but I think it's over a 12 month period Right, so they they're not going to hike rates. Are they they're not going to hike rates As soon as their inflation target hits two percent or above two percent overshoots But now but let's look at the european central bank because they haven't They haven't Uh decided on their system yet, right? They're still using the old system. So if europe now Reach their two percent or above two percent inflation target Remember that's outside of their control. They try to control it with interest rate hikes or cuts Yeah, or qe etc. Yeah If it reaches two percent or or above two percent Let's say for example in a particular date They will be forced to hike to so yeah to hike rates sooner Then the u.s Therefore therefore Who is going to remain Competitive when it comes to gdp anyone That you're exactly u.s. Dollar right absolutely The u.s. Are going to remain because their exchange rate is cheaper than europe Therefore that should boost gdp because they have a better they have a much better exchange rate They have a cheaper exchange rate They're going to get more customers if i'm in if i'm in the uk and i want to buy let's say for example beef Right from the eu or i want to buy beef from The from from from the us now that when i'm not tied You know the uk are not tied by brexit and we can do our own trade bills Who am i going to buy my meat from the same meat? Yeah, i'm going to buy it from the us because the us i can get more money I can say my money i can get more products or i can get better products or whatever it is for a cheaper exchange rate I don't want to shop at In europe for the same quality meat. Let's say for example and pay more So the so so the eu are more sorry so the us dollar sorry are more likely To get international investors and buyers Investing and boosting their economy While europe will lag behind And this is what the competitive devaluations are about Competitive devaluations currency wars This is what the currency war is Yeah, you're seeing it. You're seeing it on the charts. You're seeing it on the charts Euro dollar Yeah, you've seen it since the beginning of this year Yeah Say beginning of this year i would say from from april may Yeah, you've seen the euro increase in value and the dollar decrease in value Let's go to the dollar index Yeah, look at that since march april Dollar index has devalued But what has happened to inflation? So if you guys have been following me, what do you think has happened to The dollar's inflation has it gone up or has it gone down? This is the question Down someone said down. All right. Anyone wanted to second that? Ah Yep Misha Up up exactly. That's exactly it. It's gone up. Yeah, and let's have a look Let's have a look at Bola inflation countries US inflation inflation rate Look at what's been happening since april Inflation rates Yeah So inverse correlation. Yes, but you have to understand I don't know who what your name is. It just says waiting for name, but Yes, it's inverse, but you if you can understand why and I know you came late. So it's 100 percent It's probably not clear You know to you because you did come late But if you can understand why after watching, you know, when you watch the video, you'll you'll you'll know That this is an effect and this is what happens to inflation when a currency D values, sorry A currency d values like this Yeah, now let's do the opposite now. Let's go to Europe. Yeah, so we looked at the euro dollar And we've seen Europe and euro go higher since, you know, april may june july, right? And it's all be up here What should have happened to inflation? What should happen to inflation? So an expensive currency an appreciating currency should do what to inflation. There you go down Yeah, so let's go to europe euro area inflation. Look at that Kind of rose a little bit, but ever since it's just literally remained negative So everything i've been talking about Everything i've been talking about you've just literally seen So now the question becomes this is where the question comes is how do we make money from this?