I’m glad to be back talking financial insights, one glass of wine at a time.
First they shut down the economy, to save lives. With the closure of the economy, production ceased. To compensate for non-production or reduced production, people were paid not to lose income. In this way, it was possible for people to continue to consume, reducing stocks of existing products and generating inflation, as demand was greater than supply.
Now, inflation is the topic of the day and apparently a surprise, but the pace of growth seems to indicate that it won’t be long before we talk again about the need to save lives, this time from a true global humanitarian crisis.
It is perhaps worth remembering that Alti Wine Exchange started to talk about inflation in 2019. The hundreds of billions of dollars and euros that have been created by central banks since 2007, of money taken from future generations and brought into the present, has distorted the economy, that now seems ready to implode, blown up with debt. This was in fact the reason for Alti Wine Exchange to come into existence and the reason we were predicting inflation of 7% in 2020.
Now that inflation is reaching 10%, the question is: will central banks stop inflation by raising interest, or will they pretend to control inflation, and generate more inflation?
This is their defining moment in history, their moment of truth.
Since 2019 Alti Wine Exchange started to speak to you about the need to be careful with money because of all the spending, borrowing and money printing, that we believed would lead where we are today.
We said ‘we believe inflation is coming’, when some believed deflation was the real threat.
Inflation is a phenomenon that tends to confuse people because it takes different forms. There is the natural self-correcting inflation. An agricultural disaster, for example, for whatever reason, leads consumers to buy less of a product in short supply and producers to produce more to take advantage of the price increase. The result: prices quickly return to normal and eventually lead to deflation.
But there is the other inflation, the one in which everything sees higher prices and everything seems to be in short supply. That is the monetary inflation, meaning money loses value.
The only known cure for inflation in the monetary paradigm we live in, is hikes in interest rates.
A serious adjustment now would probably cause social unrest and banks would probably experience widespread unpaid loans. This would also cost jobs, eliminate businesses and decimate lives.
Central banks will probably continue as they have been, because by inflating away the debt, governments get to repay debts with money that is being devalued and they will have more time. The risk is inflation continuing higher creating conditions for a debt crisis.
While drinking our daily glass of wine we will need to follow the interest rates in the bond market. The moves in the 10 year bond yields will tell the signal, to store more fine wine and other real assets to protect your money or to go back to your normal life.
That is why markets are important, because they supply prices. Prices are information, and in the case of bonds (interest rates) they will tell you when we will have a problem with money.
It is easy to understand that the decisions Central Banks will take from now on, will have huge repercussions. Because if on the one hand we have inflation, on the other we have a decline in real wages for those who manage to keep their wages.
For the past three years we have been saying here that every person should put part of their cash in real assets this is now more true than ever.