Both parties in the US are politically committed to spending now. Fiscal stimulus has been off the charts for a while now and set to continue.
On top of that, Fed has started cutting piling monetary stimulus on top of fiscal. Government borrowing is high and increasing. Debt servicing costs are high and increasing.
Surely the only way out is by inflation and financial repression?
How do we protect ourselves from this? Maybe:
Don’t hold cash and instead invest
What to invest in? Maybe
Hard assets: real estate, gold, commodities
Stocks: companies that can maintain pricing power and maintain value versus inflation. Nominal gains could be huge.
Inflation protected bonds? Maybe not if financial repression is on the menu
Isn’t answer to everything is always the following
Diversification in terms of regional exposure
Diversification in terms of asset classes
Diversification in terms of industry
You cannot really be protected against everything that can go wrong in US but I think US government might say whatever but is eventually going to look for interest of US citizens
And by the way, the whole real estate market in Switzerland is based on same principle. Debts higher than annual incomes for most people who buy the real estate. But people still buy real estate , isn’t it ?
Average annual income is what? Say 80’000 CHF. So with 80% mortgage, that would make a 100k house. So yes, people still buy real estate that cost over 100k. In fact, they’d probably buy a lot more if it really cost just 100k!
Having seen the catastrophic effect of austerity, setting Europe back for decades to come (potentially never to recover), seems spending your way out of problems works.
Unconvinced, especially in the US. I am not American so my European perspective may be skewed, but I think the US government could do a lot for American citizens but it’d hit on ideological walls more than anything. I am a massive fan of Johnson, Clinton and Obama, not at all of Harris, Biden or the loony wings of AOC and Bernie. Of course I’d need to add that for me Trump belongs in a public toilet on Birmingham’s Broad Street on a Saturday morning after townie night, or in Newcastle’s Pig and Whistle. UK people will get it
This is where expectations/calcualtions of future savings and capital gains are priced in. But in my humble opinion, the threshold for pricing in (whether real estate or stocks) lies somewhere around 20 years. When you start banking on developments over 50 or 100 years, it becomes pure speculation. Do I expect either Swiss real estate or the US economy to keep its value over the next 20 years? Yes. Do I presume to know whether it will be worth squat in 50 years? Nope.
Well they can. Japan has even more debt than the US so the US has a lot more capacity to borrow further.
Though the housing analogy is not quite apt, since they are borrowing to spend, not to buy assets. Most of the money is spent on healthcare, social security and interest repayments not on assets.
Ask the bank if you can borrow more than your annual salary to go on a round the world holiday and perhaps they’d not be so willing to lend.
Good thing people and countries are not the same I don’t even know why comparison to GDP even makes sense at all. (Yes you need some fiscal discipline, but analogies to household aren’t very helpful)
my concern is if inflation kicks off and fed doesn’t respond or under-responds by keeping rates low/lower as a form of financial repression to inflate away debts. value of dollar declines and nominal value of assets priced in dollars increase in response.
If USD is the concern, I’d invest in assets that are less affected by it. US companies with exports would have lower overhead costs and may keep higher earnings. Companies with low business in the US could also be shielded somewhat. Real estate in other countries should suffer less, as should bonds of fiscally responsible countries that would gain value relative to the USD if it gets inflated away.
The easiest way to handle it would be to have a portfolio of broadly diversified stocks, in which new companies will rise in value as former giants would fall, and some diversifiers like bonds (not US denominated if it’s your concern), gold or other assets in an allocation that allows for us to survive the fall (as markets would likely tank) and profit in the recovery when other countries take the place the US previously held.
It may not happen in our lifetime, though, empires are slow to fall and as long as the US maintain military supremacy and use their position to exert commercial dominance, the USD could fare better than it should based on pure monetary theory.
Edit: in short, I expect a mix of VT (or your favourite UCITS equivalent if you don’t want direct exposure to US regulators) and CHF denominated investment grade bonds to carry us well enough.
The recent decision seemed to show that employment concerns seemed to override inflation. What happens if we get a stagflationary environment? What will the Fed chose to do?
Rates are still at 5% with a 2.5% inflation, that’s a massive difference (and if it wasn’t for the low unemployement the rates would already be much lower, I think expectation is that rates should be fairly close to inflation long term).
People can say a lot of things about central bankers, but while they missed the mark at the beginning of the inflation spike they seem to be doing a way better job than anyone expected at doing some kind of soft landing.
Alright. I was just trying to compare the house debt to put an analogy around affordability vs. income. Most of the Swiss house owners cannot really afford the house if they need to pay the full value of it in their life time. Same seems to be true for US Govt, they tend to borrow to never really pay it off.
Maybe it was not fitting comparison. I get it , its not the same
Overall though, financial repression seems to be the way of least resistance for politicians navigating in a broken system.
Alternative? The ‚schwarze Null‘ policy in Germany that results in public infrastructure neglect so bridges crumble and relying on trains turns into a lottery…
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