I am curious if we're entering a period where western governments must run deficits and central banks must purchase said debt at sub zero interest rates to keep the economy running.
In principal this could occur if there were large capital “sinks” in the economy where paper money is being removed from circulation or it's velocity plummets. This could occur if for instance certain economic actors could acquire large cash flows that they then deposit into illiquid non productive assets.
E.g. Housing, universities, Large rent speaking corporations with offshore accounts, individuals with the same.
As someone living in Europe, I’m really not sure how to financially insulate myself anymore. It’s not clear which asset class is safest to protect against inflation or a large negative economic event
Own your home, keep a small emergency savings account (~10k EUR), invest outside the bloc (VT, VTI, VEMAX). You've got robust social safety nets, any returns are gravy. Some currency risk is unavoidable.
(educational purposes only, not investing advice, pay a pro a fixed fee for an hour or two of time)
Germany will never run an trade deficit out of a stupid sense of pride, it's completely irrational, so 99%.
Just think about it. If Greece needs x billion € to pay its debt off the most logical way to deal with the problem would be to just buy a huge amount of Greek products rather than send x billion € directly.
>But if the asset bubble bursts and your home loses most worth.
Luckily the primary function of a home is to provide shelter. You don't have to worry about being out on the street if you're unemployed (pending you can afford local taxes).
Sibling comment gets it: regardless of everything else, you must "consume" housing, either as a capital good or in rent. Home ownership insulates you from shocks to the rental market.
It's possible that the house price falls by 10%. It is very, very unlikely that rents will crash by 10%; they're sticky, at best you'll see a very slow slide over years.
Yes, you must consume housing. But if you can't pay off your mortgage in a reasonable time frame (10-15 years), "owning" it doesn't give you any security, at least against sudden job loss. If house prices crash and you lose your job, you might be kicked out of your rented apartment, but that's it. At least here in Germany, if you were in the same situation as home owner, you'd lose your house and have to pay back the debt resulting from the lower house prices (unless you file for bankruptcy).
> But if you can't pay off your mortgage in a reasonable time frame (10-15 years), "owning" it doesn't give you any security, at least against sudden job loss.
If you're still paying your mortgage, do you really own your home?
> If you're still paying your mortgage, do you really own your home?
You own your home in this scenario just as much as the entity on the other side of the equation owns the income stream from your mortgage.
A mortgage is a collateralized loan. You agree to give up ownership of your collateral if you fail to meet the terms of you contract. So yes, you own the home now, subject to constraints.
Ownership is almost always subject to some constraints. Nobody says “do you own your home even though you can be taken out of it (and jailed) if you refuse to pay taxes on it?” even though that’s arguably a more extreme condition upon your ownership. While I am sympathetic to conversation about the broader meaning of ownership, this “mortgage => !ownership” thing is a tired meme.
If you don't own your home, that is a far higher priority than trying to protect a comparatively tiny sum of savings from inflation hitting the dangerous heights of 5%.
Far more important is keeping your salary up with inflation, since for most people 1y salary > savings.
> keep a small emergency savings account (~10k EUR)
Hopefully you don't mean in a bank? If history is any guide that's useless with capital controls initiated before the public even gets whiff of it, see Greece and Cyprus 2008. A bolted-down safe in your house seems to be the caveat on such a statement. Money in the bank simply isn't yours and far too many people don't realise this.
I don't like these kind of "insurances". It is very probable that when multiple banks go belly-up this could lead to serious inflation. You will get your money back in nominal terms, but what will you be able to buy from it? I even think that we should somehow count these "insurance" to the central bank balance sheet. If shit hits the fan the cb will sure as hell monetise the government debt needed to guarantee these amounts.
A small emergency savings account isn't there to insulate you against a sovereign debt crisis. It's there to insulate you if you lose your job and need a few months to pay your mortgage while you find a new one.
> It's still wise to at least consider the possibility of a bank failure, qv Northern Rock.
Most industrialized countries have insurance of bank deposits up to a certain point. So even if the bank goes poof your savings are still safe.
It would simply be prudent to have money in more than one bank (or credit union), as if something bad happens then things may get chaotic in the short term.
The best you can probably do is have some debt which will worth less and less over time as its nominal value stays the same whereas you get cost of living (CoL) increases with your salary so have more money in really terms to pay it off.
Other than that equities have (generally, but not always) had good enough nominal returns so that you get a real return increase in your investments.
You short the USD by borrowing in USD, spending USD while it is still valuable and then wait for it to devalue. Deflation is a bad thing so the Fed won't let it happen.
Of course the flaw with this is that I get 4% interest on personal loans so I actually can't make money off of this strategy.
For inflation, you probably want to diversify broadly among productive assets.
For insurance against negative economic events... that's a more rapidly evolving, short-term issue. To the extent you can do it, it is a matter of identifying near term risk sectors, and minimizing exposure to the and/or having investments in areas negatively correlated with the at risk sector.
I'd go with an ACWI ETF, if you want returns. Gold is also an option, I suppose, if you want to hedge against the economy and don't really need any returns.
> I am curious if we're entering a period where western governments must run deficits and central banks must purchase said debt at sub zero interest rates to keep the economy running.
I think that as long as the EU wants to keep the political Euro project going, there is no way around such policies, since having rates go up could cause Southern European countries to default and would cause the EU to implode.
Cash spent on housing, universities etc doesn’t “sink into a hole and disappear”. Someone else on the other side of the transaction got it and can spend it. On the other hand, raising taxes to collect said cash to neutralize the debt would be a “sink”.
Its silly how many otherwise smart people forget that income = expenditure. Whatever you spend is someone elses income. That money doesn't get incinerated.
Sounds about right. There seems to be little political will to actually "euthanize the rentier", or even put a cap on how much income rent-seekers can accrue nonproductively. The result is that "landlords are eating everything."
Do you remember that MMT thing? That thing that says the government can create as much money as it needs and if there is inflation (doesn't matter if CPI or not) then you tax the part of the economy where inflation happens to return the money.
A wealth tax on deposits and land would be ok. The rich can buy bonds or stocks if they want. If there is a shortage of companies you can always create new ones. If there is a shortage of money or land it's much harder.
In principal this could occur if there were large capital “sinks” in the economy where paper money is being removed from circulation or it's velocity plummets. This could occur if for instance certain economic actors could acquire large cash flows that they then deposit into illiquid non productive assets.
E.g. Housing, universities, Large rent speaking corporations with offshore accounts, individuals with the same.