As the media economists have insisted so much that we lived in a regime of financial “repression” as a result of the drop in interest rates, the coming rate hike sounds good to investors and savers. Freedom always sounds better than repression. But a more detailed analysis reveals a very different reality and a serious error in that definition.
In reality, the end of the “repression” has left many savers in dust, starting with those with investment funds and fixed-income pension plans, who have seen the value of their funds fall between 2% and the 4%. And what they have left, because the change of third of the ECB has only just begun.
But if there is a popular form of conservative saving in Spain, that is the purchase of “floors”. And in most cases, part of the investment is made with external financing, that is, by requesting a loan. Those who have fixed-income funds have already realized that they lived better with repression than with liberation. Those who had not realized are those who have invested in “brick” leveraging on a variable rate credit.
It must be that media economists have all their savings in current accounts and short-term deposits, which is the only thing that will benefit someday (let them sit and wait) of financial freedom. And it’s funny, because that goes against all theories of efficient and profitable investment. And against empirical reality, since, in the long term, it has always been much more profitable for the conservative saver to invest in a mixture of fixed income and real estate than to leave the money in a checking account. And even better still if he put some money in equity funds. Economists who complain about financial repression must not be good wealth managers, especially in retirement, because no one has achieved a satisfying retirement by “investing” in checking accounts.
Before continuing, it is worth clarifying a few things: one, that there is an inversely proportional relationship between bond interest rates and their price. When interest rates rise, the price of bonds falls (as has been seen in recent months). Second, that financial freedom comes with the rise in interest rates, which will cause the Euribor to rise in anticipation of the official rate hikel, which is likely to start the ECB at the end of the year. Thirdly, that the rise in the interest rate in the bond market pushes up the interest rate on fixed-rate loans.
And we’re not talking about “parrot chocolate”. If the European Central Bank itself thinks that inflation will even exceed 2% in the coming years, they will have to at least bring the official rate closer to that 2%. If I were to raise rates, for example, to 1.50%, it is 1.90% above what they are now (now they are negative at –0.40%).
And I do not want to tell you if in the end the forecasts fail you – something not strange at all – and we entered a period of relatively high inflation, for example around 3% or 4%. In that case, the ECB will have to push to lower it to 2%, which is its price stability objective. If that happens, a lot of people will go home looking for those who said that financial freedom was like manna or something.
I have not the slightest doubt – nor did I have any before, which is why I have insisted on this on several occasions – that if the costs are not very high it is worth converting the variable rate loan into a fixed rate loan now that the fixed rate is still reasonable. The problem is that the banks knew that they were the real beneficiaries of the end of financial repression. For them it is like mana. In the form of automatic updating and improvement of your financial margin (they charge more for existing and future credits). And since they didn’t swallow the clickbait of financial repression, they were careful to put commissions in case the client decided to embrace freedom.
Still, I insist In general terms, I think that if this commission is low or negotiable, the possibility of change should be assessed. I do not think that in Europe we are going to have a very high inflation, but I do not agree with what Lagarde said that we will return to an inflation similar to that before the pandemic. “No way”, as the Americans say: the risk is on the rise.
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