The creeping expropriation

Are Your Assets Protected From Financial Repression?

July 29, 2021 | Asset protection

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We live in a world where high government debt is the norm – not just since the COVID crisis. But instead of relying on unpopular measures to reduce debt such as tax increases or cuts in social spending, a method far more silent but just as dangerous is being used by the government: the financial repression. As a result, the assets of conservative investors suffer, as their savings melt away year after year due to the “wrong” types of investments. We explain how financial repression works and what you as an investor can do to avoid losing money. We live in a world where high government debt is the norm – not just since the COVID crisis. But instead of relying on unpopular measures to reduce debt such as tax increases or cuts in social spending, a method far more silent but just as dangerous is being used by the government: the financial repression. As a result, the assets of conservative investors suffer, as their savings melt away year after year due to the “wrong” types of investments. We explain how financial repression works and what you as an investor can do to avoid losing money.

Debt reduction through artificially low interest rates

Financial repression refers to government interventions that ensure that cheap funding flows toward the state. In the current phase, it is the central banks that are artificially pushing down interest rates so that the government can borrow “cheap” money to reduce its debt. The strategy is particularly effective when combined with inflation: The devaluation of money reduces the real value of the debt, it is “inflated away.” A prominent example of successful financial repression was provided by the United States after World War II. Due to the financing of the war, the national debt rose massively, but thanks to artificially low interest rates under the Bretton Woods Agreement, the United States managed to reduce its debt by half (!) in the next decade.

Most investors don’t realize…

The sufferers of financial repression are conservative savers whose assets are dwindling in the current low-interest environment in supposedly “safe” forms of investment. A fixed deposit interest rate of 0.5% p.a., for example, may seem acceptable at the moment – but if one takes into account an inflation rate of 2.5%, the fixed deposit assets effectively shrink by -2% annually. The deceptive thing about this: even if at the end of the year the amount in your fixed-term deposit account has even increased slightly, you can buy less with it than a year ago. This effect only becomes really clear with longer investment periods. At current interest rates and inflation rates, conservative investors will lose up to 25% of their purchasing power over the next 10 years. By the way: Depending on which products and services you tend to buy, your “personal inflation rate” may also deviate from the official inflation rate. With a personal inflation rate of 4.5%, your purchasing power would even decrease by 37% after 10 years. You can calculate your personal inflation rate here, for example.
Kaufkraftverlust Inflatoin
Example of losses in purchasing power due to inflation (source: own illustration)
In the current zero or negative interest rate environment, even the slightest inflation rate means a negative real interest rate and thus a real loss for your assets held in traditional savings accounts. Most investors don’t realize that these conservative investment oppurtunities aren’t safe at all – the only thing that is “safe” about these forms of investments is the fact that you will effectively lose money over the years. Negative real interest rates, by the way, are anything but a new phenomenon, as the German Bundesbank published back in 2014: “In the past decades, negative real interest rates have actually been the rule rather than the exception. Even before the financial crisis, namely in the 1970s, the early 1990s and the 2000s, bank customers did not receive inflation-compensating interest on their savings deposits in particular. These phases of real negative interest rates even outweighed each other historically…”

At current interest rates and inflation rates, conservative investors are already losing up to nearly 25% of their purchasing power over the next 10 years.

Outperform inflation by investing in qualitative stocks

While monetary assets (savings accounts, bonds, etc.) are at the mercy of inflation, tangible assets such as stocks, real estate or precious metals, which are based on real countervalues, can even benefit from rising prices. In the case of stocks, the selection of the right companies plays a decisive role, because not all companies cope equally well in phases of higher inflation. Companies with dominant market positions and unique competitive advantages offer excellent inflation protection, as they can pass on the increased costs of their more or less indispensable product directly to their consumers. As experienced value investors, the targeted selection of such companies is one of our biggest strengths. For conservative investors, investing in shares may seem risky. But smart investors who are in for the long run and do not allow themselves to be bothered by daily price fluctuations can increase their assets considerably. Over the long term, stock-investments dominate any other form of investment. Also, an above-average performance is not always linked to high price fluctuations, a fact that we could prove over the last 12 months in the real money test of brokervergleich.de.
brokervergleich real money test

Take care of your money!

Our appeal to you: Don’t let your hard-earned money lose purchasing power in seemingly “safe” forms of investment. Invest at least part of it in tangible assets such as precious metals, real estate, or shares. Should you decide to invest in shares, we will be happy to assist you with all our expertise!

Estably is the first digital asset management company from Liechtenstein to offer first-class wealth management from € 20,000 through a mix of technology and human investment expertise. Thanks to the portfolio managers' many years of experience in the field of value investing, above-average returns are targeted. This is intended to make professional asset management, previously available exclusively to large investors, accessible to everyone - conveniently, transparently, and profitably.

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