Caught in their ship of debt, individuals struggle, but the banks bring them back, in yellow coins, to the counters… – Inflation is in the news. Not a day goes by without the mainstream media talking about how purchasing power is eroded. So, of course, everywhere in Europe, individuals are trying to save their savings and their assets. A fight that is not easy to win when you choose to fight it by following the rules of traditional finance…
Like a madman will throw empty banknotes at the bank and then hope…
Not all countries in the world and even in Europe offer fixed-rate regulated bank books. If it is possible in France to “shelter” a comfortable sum of money by filling in one’s Livret A and its LDDS (whose ceilings are set at €22,950 and €12,000 respectively) to obtain a return which , following the rise in key rates, has now reached 3%. Not all of our neighbors benefit from such easily accessible and, theoretically, secure investment products..
It should be remembered in passing that regulated savings books are guaranteed by the state and that it is therefore, except in the event of state bankruptcy, theoretically impossible for the funds placed there to disappear. Yours truly will soon come back to the bank deposit protection mechanism, which is a big joke. But back on topic.
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State debt, the only refuge offered to many savers
In Portugal or Spain, for example, the most reliable investment offered to individuals lies in the acquisition of the country’s debt from the Central Bank.. That is to say by the subscription of bonds.
This is why, following the rise in rates, the latter are taken by storm by individuals who are trying to save their savings from the inflation that has come to nibble them. Some naively see in these investments a lifeline extended by the States:
“We don’t want to risk the effort and sweat of a lifetime. That’s good not like bitcoins! »
Of course, if you’ve watched Titanic, you know there’s not room for everyone on that damn wooden board.
Most private investors are well aware that the yield provided by these national Treasury bonds (which is currently close to 3% in Spain) is far from compensating for the inflation suffered (5.8% at the latest news).
By investing their savings in the debt of their country, the Spaniards manage to obtain a negative real return of -3% instead of the -5.8% generated by inflation.
In Portugal, the rates served by government bonds are close to 4%, which again implies a rush of investors towards this investment vehicle.
But, is it really that low risk? And is it so judicious to invest one’s savings to buy the debt of a State whose policy is at the origin of the erosion of these same savings?
And they run, they cling to debt…
Many people praise the merits of these government bonds as a non-risky investment.
Yet, while it’s obviously correct to say that bonds are less risky over stocks or other more volatile securities, it’s important to understand what a bond is.
A bond is a debt, by buying it, you lend money to the State which undertakes to pay it to you. rreimburse on a certain date and according to financial conditions fixed in advance (the rate). Once you have invested, you hold a claim against the State, which has become your debtor.
As these bonds are negotiable, you can sell them to a third party who will buy them back from you before the maturity date. This makes these investments relatively liquid.
When the key rates of central banks increase, the newly issued bonds more highly remunerate the lenders who will then arbitrate by comparing the risk/return ratio offered by volatile assets (equities, cryptos) against so-called “non-risky” assets. » such as savings books or government bonds. As a result, the higher the rates, the less the incentive for investors to invest in assets that are more volatile, or deemed more risky.
The Lannisters Still Pay Their Debts, But the States Don’t
However, lending to the state requires trusting the state. The latter being a creditor like any other, it is possible for him to default.
In reality, almost all the States of the world have already found themselves at least once in a situation of default.
However, in the same way that a company’s creditors are the first to be affected when the company disappears/liquidates, the holders of government debt are the first to suffer from a sovereign default.
While recent sovereign defaults have not affected countries in the European zone, seven States have failed to repay their debts since 2020: Russia (a somewhat special case), Sri Lanka, Belize, Zambia, Suriname, Ecuador, Argentina and Lebanon. If we go back a few years, Greece was unable to repay in 2015 a debt of one and a half billion euros to the IMF.
Protect your assets by choosing hard money rather than easy debts
Apart from the fact that lending your money to a State whose monetary irresponsibility happens to be at the origin of the erosion of the value of this same currency seems to me doubtful to say the least. The protection of a heritage should be done by choosing the anti-fragility, by choosing to fight against the debt machine rather than to supply it with fuel again.
In other words: what is, or what are the assets most likely to retain value over time and help beat inflation?
The answer to this question is quite simple. Only “hard” active ingredients, that is to say difficult to produce and whose mass and overall volume vary very little. The Covid crisis will have shown it well, FIAT currencies can be printed ad infinitum and without prior consultation of the population. If they can be a relatively satisfactory monetary medium in terms of exchanges, they are no longer so when it comes to stores of value.
I’gold and themoney are hard currencies on the physical plane. Same as protocol-specific monetary policy Bitcoin makes it the most serious hard currency proposition in the digital world.
If the price of gold has almost doubled over the past twenty years. It goes without saying that it was not the same for the value of our national currencies. Whether it is the dollar or the euro, all state currencies are continually eroding.
Even if bitcoin is still a highly volatile asset, it will have escaped no one that its performance offers its holders effective protection against inflation over the long term.
In a rational world where good money drives out bad money, FIAT currencies should theoretically disappear and take with them the products offering a yield that does not make it possible to combat the erosion of their value. This is why we must expect a strong reaction from States when they realize that they are caught in the trap of their own policy. Will they go so far as to confiscate your cryptos ?
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