Inflation, how to defend your savings

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L’inflation it is rising and, in the long run, it can significantly decrease the value of the money saved with great effort over time. But what exactly is it, how did we come to this and most importantly, what are the strategies to be implemented for get to safety? We asked Daniele Cottino, known on the web as Giacomo Saver, «Former repentant banker», trainer and independent financial advisor through the site segretibancari.it (for further information: segretibancari.com/etf-inflazione).

Let’s start with the basics: what exactly is inflation?
«A generalized rise in prices, which brings with it a monetary devaluation. If prices rise, in fact, the same quantity of money will buy a smaller quantity of goods and services. For this reason, inflation has effects on the transfer of wealth between creditors and debtors: it is as if I lent the car to a person, and after a while the latter would give it back to me without the wheels “.

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What triggers the rise in inflation?
“It may be the rise in the price of raw materials, as has happened recently: during the lockdown, in fact, production capacity was underpowered, and when the economy started up again, demand was not compensated for by a greater quantity of goods and services, so everything was discharged on prices, as always happens in these cases to bring the market back into equilibrium. Then there is inflation triggered by expansive monetary policies or fiscal policies, such as citizenship income in Italy, or Biden’s support in America, because the availability of free or low-cost money is an incentive for immediate consumption, but also for debt “.

Was the current scenario predictable?
“In my opinion, yes. On the one hand, in fact, expansionary monetary policies have in the first place inflationary financial markets, and this inflation would sooner or later spill over into real goods and services. What was not foreseeable, to some extent at least, was the shock of the supply of raw materials, energy products and so on. I think inflation was not only predictable, but also a bit deliberate: Covid leaves states with very high debts, and for them inflation is a way – in a sense – of devaluing the debt. In practice: instead of making an unpopular choice (“gentlemen, we can’t take it anymore: let’s renegotiate the debt”) I am accommodating towards moderate inflation, which over time precisely decreases the weight of the debt ».

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What is the situation of Italy compared to other countries?
“The whole world is actually going through an inflationary scenario, and it is no coincidence. On the financial markets there is a rule, which is called “regression towards the average”: when you deviate too much from a long-term trend, in a positive or negative sense, then you return there, perhaps with an overcompensation of the opposite sign. Well, we have lived for twenty years where inflation has been practically zero. Just think of Italy, where we had a shock of the euro between 2000/2002, when prices doubled, and then everything has remained still until today. This is why I believe that inflation will raise its head in the coming years: now we are experiencing the flare-up, perhaps there will still be a minimum of resurgence, then gradually we will see a normalization. But I imagine that 2-3 percent inflation will remain in the economic system for the next decade ”.

And how much would an inflation of 2 percent for the next ten years reduce our purchasing power?
“In the event, the current 100 euros will be equal to 80”.

If this is the scenario, how can we defend our savings?
“The most elementary thing is to keep little liquidity on current accounts. It is necessary to invest, possibly in anti-inflation financial assets such as: index-linked securities (BTPs indexed to European inflation BTP Italy, active or passive funds that invest in index-linked bonds…); real estate, not only thinking about the direct purchase, but also the funds that allow you to purchase real estate; raw materials and in particular gold, which in real terms, perhaps alternately, has always defended purchasing power over the long term, because it has a very strong correlation with the rate of inflation ».

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