In this Financial Informer Second Quarter, we discuss the recent inflation high against investment rates and the use and limits of a power of attorney appointment.

Up, up and away

Inflation is increasing and interest rates are going up. It is not unusual for them to move in the same direction because interest rates are the primary tool used by our Reserve Bank to control inflation. Whilst higher interest rates are not happy news for many, it is nevertheless good news for some. Negative real yields have not been beneficial for pensioners and income funds that rely on interest rates. The only asset class that benefits from higher interest rates is cash and for some, that is very good news indeed.

After more than a few years of low to almost no interest rates across the developed world and some developing markets, things have changed. Yes, interest rates and inflation are going up, up and away!
Inflation has hit a multi-decade high in the USA, the world’s largest economy. By March 2022, the US rate of inflation was sitting at 7.9%. That is the highest it has been since January 1982. The US government has also changed its view that inflation in the country is transitory; it now admits that inflation will be long-term.
That means that interest rates are going to go up because interest rates are used to curb and control consumerism which ultimately drives inflation. Higher prices will lead to less demand which in turn impedes economic growth. We may for some time experience stagflation in the US with stagnant demand and persistently high inflation….

Power Failure

Making decisions is an important part of our lives. Almost every day we make decisions relating to matters such as where we live, our health care, education, employment, social contacts and financial affairs, and dealing with the conclud-ing of legal contracts. The answer is a Power of Attorney…until it isn’t. Here we look into legal incapacity and when the Power of Attorney runs out of power.

For a legal transaction to be valid the law requires that the parties be able to under-stand the nature, purpose and conse-quences of their actions. Where these requirements are absent the law attaches no consequences whatever to the expres-sions of will by the person who purported to engage in the legal transaction.

Diminished capacity

Some people cannot make legally effective decisions because of diminished mental capacity. Diminished capacity may result from a number of causes such as mental illness, intellectual disability, brain injury or disease, a stroke, dementia or incapacity related to ageing in general. The general principle is that if a person is not able to fully understand or interpret all the consequences of their actions due to a mental illness or intellectual disability, it is said that such person lacks capacity to perform a specific act and the act is con-sequently void. It makes no difference whether the person has not yet been declared mentally ill and a curator appointed to him or her, or that the other party to the transaction was unaware of the person’s mental condition. The general rule though is that adults are presumed mentally and legally competent to manage their own affairs until the contrary is proved. The onus of proving that a transaction is invalid for lack of mental capacity normally rests on the party alleging it.