Changing Inflation: How to Protect Your Wealth in an Uncertain World

The latest US inflation figures were published a few days ago: 6.2% at an annual rate, worthy of an emerging country. Usually, the big moneymen are on the lookout for the slightest variation in inflation. Until now, it was considered public enemy number one, even before unemployment. This time, however, the American Federal Reserve is curiously playing the wait-and-see approach. A few months ago, it could still claim a threshold effect due to the pandemic, a kind of ephemeral rebound as it liked to believe. But now, with the highest rate reached in 30 years, it is no longer possible to turn a blind eye. It could not be otherwise after more than ten years of flooding the market with liquidity. One could even wonder why prices have not exploded more quickly.

Measures taken against inflation

So today, with inflation now galloping, the FED has decided to take action. Finally. However, one can be surprised by the decisions that have just been made. In a normal world, such inflation would have immediately rhymed with a drastic increase in interest rates. The central bank did it for much less than that, no further back than between 2016 and 2018, when inflation was only 2%. And now, what is it telling us? That it plans to reduce its asset purchase program early, next March, and then raise rates.

In other words, until next March, not only is the FED doing nothing, but it is even continuing to inject liquidity! It is a bit like having a fire in the house and throwing gasoline on it instead of going to get the water jet. This is all the more paradoxical since a rate hike generally takes between 6 and 12 months to take effect. This means that high inflation is likely to be a reality at least until 2023. And at the same time, the central bank considers that it is urgent to act…

The Origin of Evil

How can we explain this apathy of the great American financier? We must look for the reasons at the beginning of this century. At that time, rates were above 5%. The stock market was booming, with Internet stocks leading the way. Then, it was the collapse, a bear market lasting three years, followed by a drop in rates of the same duration, down to 1%. Except in the 1950s, we had never seen such derisory figures. It was the beginning of easy money, the one where almost everyone could borrow, regardless of their financial situation.

However, this did not last, because in 2003 the economic recovery was vigorous, pushing inflation up to 5%. The FED reacted immediately by raising its rates to 5%. At the time, as I was telling you, central bankers were fixated as soon as the rate exceeded 2%. No need to have a Nobel Prize to understand what happened. All those who had been able to benefit from an easy mortgage, despite a precarious financial situation, were no longer able to pay the monthly payments. This was the beginning, in 2008, of the subprime crisis, leading to the bankruptcy of the Lehmann Brothers bank.

Zero has arrived

Here we go again, the central banks come to the rescue. They put out the fire that they themselves have just lit. This time the Federal Reserve sets rates close to zero and declares that they will remain at this level for a very long time. A scalded cat fears cold water. At the same time, governments become more and more lax on their budgetary policies, to revive growth and avoid bankruptcies like Lehmann Brothers. This is the beginning of Too Big To Fail, which takes the form in Switzerland of the acquisition of UBS.

We always end up, one way or another, having to pay our dues. The unpaid debts of small owners have had to be borne by the banks. The latter, in turn, need help from the States, which themselves are starting to be in the red. This is the beginning of the government debt crisis. Since rates are already zero, central banks no longer have much room to act. They are starting to buy up securities, bonds from financial and sovereign institutions.

Whatever the cost

Governments are temporarily saved. Then comes the health crisis. Once again the fine promises of budgetary rigor are shattered. Massive acquisition of masks, vaccines and other experimental drugs, payment of emergency aid to economic circles and workers affected by closures. As a certain president close to us said, "Whatever the cost", while attracting his flock with the "free" vaccines.

As stated above, a debt must always be paid by someone. If it is not the debtor, it is the creditor. If it is not the creditor, it is the creditor of the creditor, etc. In the end, if no one can pay, it is the community that assumes responsibility. That is where we are today. After more than fifteen years of easy money, the debts of households, businesses and governments are colossal. Raising rates under these conditions would cause a cataclysm. We had a tiny glimpse of this with the subprime crisis, after a very short period of rates that were not even as low as today.

Inflation = solution?

No big moneyman wants to risk increasing the cost of credit. However, someone has to pay this debt. So there is only one solution: to move away from the paradigm of price control towards that of inflation. The debt can then fly away through the magic of currency devaluation. In doing so, it is the community that assumes it, that is to say all of us, through the loss of our purchasing power.

Every time we go to the baker's now and pay more and more for a baguette, we are repaying the follies committed by some households, some companies and most governments for years. Every time we take out our wallets, without knowing it, we are paying the bill for the debts not assumed by the big banks, the bonuses they have granted themselves year after year, as well as the vaccines graciously "offered" by Moderna and Pfizer. We are collectively assuming past mistakes. It goes unnoticed. No one is aware of it. A few cents here on an everyday consumer good, a few francs there on a service, surreptitiously, we are participating in the great debt clean-up. It is a form of great reset, not in the conspiratorial sense of the term, but economic. It has already started and it will continue for quite some time.

Our savings will soon be worthless

This is why the Fed is in no hurry. Inflation, the sworn enemy of central banks in the past, has become an ally to reset the counters. And we, simple ants, who have worked more than was reasonable, who have saved for years, who have remained prudent with debt, who have not abused government largesse, we are doubly penalized. First because, like everyone else, our purchasing power is diminishing. Then because our precious capital, earned by the sweat of our brow, will be worth little in a few years if we are not careful.

But rather than lamenting, as the cicadas would do, let's mobilize. Let's not let the fruits of our labor be stolen from us. To do this, nothing complicated, we must capitalize on assets that have a limited supply (unlike government currencies). This is the case for raw materials, and in particular gold, quality and value company stocks, real estate and also, to a certain extent, cryptocurrencies. In short, everything that does not depend or depends little on state maneuvers behind the scenes.

This is all a game of deception, a reshuffling of cards, some of which are beveled. Might as well choose the right ones.