“The end of free money. Really ? » Editorial by Charles SANNAT – Insolentiae

My dear impertinents, dear impertinents, With the rise in interest rates “we” think it’s the end of free money. Logically the rates go up. And if rates go up, equities will crash and real estate will crash. As sure as 2 and 2 make 4. However, I think that the situation is likely to be much more nuanced than that and I will try to detail a little this point of view, let’s say it iconoclast. First, let’s take up the most important point of the Fed’s statements. Objective 3% rate! Yes the FED did not say that it was going to raise its key rates to 15% but only to 3. Yes I only say because, from the height of my 47 years, I have seen rate increases and decreases . Interest rates at 3% are not really the end of the world! In 2009/2010 the Livret A account still brought you 4 or 5% per year and it was not the end of the world, except for Lehmann Brothers which went bankrupt it is true, but finally, the sun still rose on the planet. So what the FED is telling you is that it wants to break nascent inflation by very quickly raising its rates to 3%, a level at the limit of the economy’s pain threshold but which the FED deems high enough. to break inflation but too low to send the whole economic system into recession. My view is that this strategy will screw up, fail, fail, or fail. Why ? Because no rate hike will significantly slow down an inflation that is not linked to “demand” but to “availability”. What is rare always becomes expensive. The only way to significantly lower inflation in such a case is to raise interest rates very high and deliberately trigger a recession to reduce demand in large proportions. But if rates go too high then there will be widespread insolvency, so they can’t go very high. If we only raise them modestly then inflation will continue to build. Inflation that develops is inflation that always ends up accelerating, as is the case for example in Turkey. Why ? Because people’s expectations will be inflationary. If you think that prices will be higher tomorrow then you buy immediately even if it means storing. And you are right ! But by doing this you drive up prices and it is with this mechanism that inflation is self-sustaining! You have the opposite phenomenon with deflation. If you think it will be cheaper tomorrow, you don’t buy and therefore the prices go down even more!! And you are right to wait. Actual rates! Finally think real rates. It is the differential between the interest rate and inflation and it lets you know how much you will be broke this year! With inflation at 8.5% in the United States and rates not yet at 3% but let’s say they will soon be at 3, you will lose at least 5.5% this year if you are American in purchasing power. Worse. While we think that the rates are rising, in reality they are falling even more in terms of real rates! With inflation at 1% and negative interest rates at -0.5%, as a European I lose 1.5% of purchasing power each year. But with average inflation in Europe over 7% and rates at 1% (which have therefore become positive again) I now lose more with positive rates than when they were negative. My loss is 6% in purchasing power! So, so will you tell me? Simple. People are going to want to leave money and go into assets. They will prefer to buy real estate at random rather than keep pennies in the bank which lose value. The conclusion is simple. While everyone tells you that real estate will go down with rising rates, it may well be more complicated than this simple relationship. So to allow you to see things more clearly, I went looking for real estate prices since 1200. Yes 1200, the date! The Middle Ages, which makes it possible to talk about real estate crises over the very long term and throughout history, kings, wars, or even changes of regimes. I show you that the problem with real estate is not the level of interest rates!! At the moment we are living in, the relationship between rates and real estate is distorted, because you have other variables that come into consideration and in particular the relationship between interest rates, price levels and inflation. To this must be added the parameters of the current war. But that’s not all. Changes in use AND the energy transition must be taken into account. Shake it all up and you’re going to get an absolutely unprecedented situation for the real estate market that’s going to knock the market out of control and it’s going to completely atomize and explode. I explain everything to you in this special file devoted to real estate, the most important investment for all households in our country. A file to read before making any decision to buy… or sell! To read it, download it in your readers’ spaces here. To subscribe the information is there! It is already too late, but all is not lost. PS in 1200 the king was Philip II… he did not leave a lasting memory in our history textbooks! Prepare yourselves ! Charles SANNAT “Insolentiae” means “impertinence” in Latin
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