How may I safely protect my capital? Part II


The Fed intervenes in the markets in various ways. Now it is interesting to promise incentives: it encourages the purchase of bonds and debt because it ends up promising a higher return as a result of the increase in the percentage of reserves that must be kept in reserves, in addition to other policies that are aimed at achieving a series of objectives.

The Federal Reserve has a double objective: inflation close to 2% and full employment. Let us remember that central banks such as the European Central Bank only have a 2% annual inflation target. It is their mandate and they must act accordingly.

His strategy at present is certainly convoluted, because the canonical model of contractionary monetary policy is not being applied. It can’t be applied now, it should have been applied more than a year ago when the Dow Jones and SP500 were at all-time highs. The contraction in GDP is now deepening and unemployment could rise as a result of the battle against inflation.

And meanwhile, savers are not seeing their savings grow because they are not paying interest rates high enough to offer positive real returns. Inflation is higher, most of the returns are being positive in nominal terms (without considering inflation).

They really seek to amortize debt, which is the great problem of the United States and the vast majority of countries. In the process they end up paying a higher cost because interest rates rise (until the debt ends up being amortized). Now they sell bonds when they should be supporting the economy by buying state and corporate debt. But the FED is no longer our friend. Because its priority objective at the moment is inflation and not full employment.

Full employment is maintained (adjusted for frictional unemployment). The pace of hiring in the United States is not being affected as much. The adjustment is coming from the side of real wages. Yes, hiring is taking place, but at wage levels that is not covering the increases in inflation. However, the battle against inflation may result in a serious loss in terms of full employment. Especially if companies end up undercapitalized as a result of the recession.

Quantitative Approach

As the FED and central banks all over the world filled up with bonds, the hoarding of dollars and euros at sight increased. It did not lend, it did not overinvest, and innovation created deflationary forces. But when prices began to rise, wages rose, causing prices and wages to rise again. That is where a huge ominous spiral is unleashed that ended up causing runaway inflation.

The serious problem has been that public debts have not been reduced. Deficits rarely turned into surpluses and in buoyant times in the SP500 debt should have been paid off. They did the opposite, they expanded the balance because inflation was not a problem and at the beginning of the decade, there was not full employment.