Inflasia

Recently, the Bank of Korea (BOK) decided to keep "the base rate" at 5%. "The BOK is expected to freeze the rate until the end of this year as it is facing conflicting risks of higher inflation and a slowing economy," said Lee Sung-kwon, an economist at Goodmorning Shinhan Securities Co. The average individual can feel the effects of inflation when you buy gas, rice, or instant noodles. One of my favorite restaurants recently raised their price for a meal from 8,000 won to 9,000 won. That's about a 12% increase. T_T

High inflation does a couple of things:

1. It weakens the local currency. The Korean won has dropped around 10% this year against the U.S. dollar.

2. It slows economic growth.

3. It is bad for stocks.

In order to fight inflation, governments need to raise their interest rates. Korea's inflation is running at 4.9% and the BOK set the base rate at 5%. However, if inflation increases to 5.5% the BOK will have to raise the base rate. Why? Because you don't want to end up like Vietnam.

If you look at the chart above, Vietnam is totally screwed. Their currency (the Vietnamese dong) will soon become toilet paper. This will be similar to the Mexican Peso Crisis of 1994. Does anyone ever learn from history?

In 1979, the U.S. inflation rate was 13.3% By 1980, the U.S. Federal Reserve had to raise the prime rate to 21% to curb inflation. lol Recently, the cost of rice (+8%) and gasoline (+10%) have been increasing in the U.S. However, the price of TVs (-16%) , computers (-13%), cars (-1.2%), and women's clothing (-5%) have been declining. This is good news for those Sex and the City ladies.

In China, inflation is running at 8%. The Chinese government has a weak yuan policy because it's good for exports. Sound familiar? I don't believe this can continue. Therefore, I am still very bullish on the Chinese yuan. Take a look at this graph. I wish all of my stocks looked like that. If you want to protect your money, the Chinese yuan is a good place to be.

Disclosure: I opened up a yuan account while I was vacationing in China two years ago.