Inflation: If the animal runs, it catches, if it stays the animal eats

The popular saying “If the animal runs, it catches, if it stays the animal eats”, is perhaps the best way to make a parallel with the publication “Nowhere to hide” – Ecoinometrics that I will use as a basis to talk about inflation.

nowhere to hide is an English expression that means “no place to hide”. It would be the equivalent of our “nowhere to run”.

The problem is that with inflation arriving at the intensity and speed with which it comes, even having nowhere to run, it can still reach and “catch”. The race of salvation really needs to be very differentiated. Staying still is completely out of the question.

Defining Inflation

The Ecoinometrics article begins by saying that traditional economists tend to agree that “some inflation is good”, then pointing out that this claim is questionable, but what is inflation?

Traditional economists, governments, government institutions and the mainstream media often define inflation as “the name given to rising prices for goods and services. It is calculated by price indices, commonly called inflation indices.”, according to the IBGE.

When in fact the price increase is just a phenomenon of the consequence of inflation, which is better defined as the increase in the current money/financial supply.

When the money supply increases, money loses value, as a result this money loses its purchasing power and, as a result, the price of goods and services purchased with that money “increases”.

Correctly defining the concept of inflation is important to discover the best way to fight, protect yourself or… run from it.

Ludwig Von Mises says that:

“Inflation, as the term has always been used everywhere and especially in this country, means increasing the amount of money and notes in circulation, as well as deposits and bank credits. But people nowadays use the term “inflation” to refer to the phenomenon that is an inevitable consequence of inflation, which is the trend of rising prices and wages.

The result of this deplorable confusion is that there is no longer a term that defines the cause of this phenomenon. Since we cannot talk about something that has no name, we cannot fight it. Those who pretend to fight inflation are only fighting its inevitable consequence (price rises).

Your adventure is doomed to failure as it doesn’t tackle the root of the problem. They try to keep prices low, while being firmly committed to the policies of increasing the monetary base, which necessarily make prices soar.

As long as this terminological confusion is not completely resolved, there is no possibility of fighting real inflation.”

LV Mises in Inflation: An Unworkable Fiscal Policy. Free translation.

Inflation targets

Having clear what inflation really is and that a large number of economists consider that, if controlled, it is positive for the economy, it is a common practice of central banks to establish inflation targets.

Yes, central banks intentionally they define inflation targets to be achieved, causing, also intentionally, that the money in the country suffers from a loss of value and purchasing power.

It is an arbitrary decision and it varies from central bank to central bank and also with the governance of each one of them.

A curious fact is that throughout monetary history, the inflation targets of the Central Bank of Brazil have always been higher than the inflation targets of the Federal Reserve (US central bank). Which explains the devaluation trend of the Brazilian real against the dollar.

It is not “by chance”. It is mathematically intentional and inevitable.

So, if we understand that inflation is an increase in the current supply, which inevitably causes a devaluation of the currency, bringing harm to people who depend on this currency (and are obliged to use it, and may be punished by law if they use any other alternative), it is easy conclude that the long-term effects are negative even when the Central Banks (BCs) manage to achieve the goals set by them.

But even if someone manages to argue otherwise, another problem that occurs is that these goals are hardly achieved.

According to Ecoinometrics, the average inflation target among BCs is two%.

In Brazil, Bacen has set a goal of 3.75% for 2021, but the IPCA – Broad Consumer Price Index, which is the main inflation indicator used in Brazil (and has questionable credibility in my opinion), already surpasses 10%. Almost 3 times more than the target.

And as incredible as it may seem, this is not just a problem for Brazil.

With the exception of Morocco, Hong Kong, Indonesia, China, Switzerland and Japan, all the other countries in the above list have inflation (according to their price increase rates) above the average target of 2% per year and a third of them double this goal, surpassing the 4%.

How to protect yourself from loss of purchasing power

Many traditional market specialists could recommend the allocation of resources in government bonds that follow inflation rates, but with a few exceptions (Brazil among them), the real annual income – discounted for “inflation”, cannot keep up with the disastrous consequences of monetary policy decisions.

I would go even further than Ecoinometrics, because if we analyze other inflation indices in Brazil, such as the IGP-M, which considers price metrics other than just the end of the market chain (which are prices for the final consumer), the loss of purchasing power goes beyond, having exceeded 17% in the year to date, resulting in a negative real annual return for government bond investors who are supposed to “protect the investor from inflation”.

In an accumulated result for the last 5 years, the loss of Brazilian purchasing power already exceeds the 40%, being the second country with the greatest loss of purchasing power (a direct consequence of inflation – which is the increase in the current money supply), only behind Turkey.

For a Brazilian investor to be able to protect his purchasing power, tying the same amount in the last five years, based solely on the IPCA – of questionable credibility, he would need to have achieved an average yield of 8% per annum in the last 5 years.

Not looking to increase equity, just keeping your equity intact in the best case – using the most tolerant and least comprehensive index on the market.

For most countries, the accumulated result for the last five years exceeds 20%.

It’s hopeless.

According to Ecoinometrics, your choices are:

• Spend your money on government bonds and watch your purchasing power dissipate;
• Spend your money on high-yield debt and risk losing everything due to the weak global economic situation;
• Spend your money on stocks that have already hit record highs by most standard metrics (top?);
• Or invest in the new world, ie Bitcoin and digital assets…

Some may think that the cryptocurrency market has grown too big and it’s too late, but the truth is that other investment alternatives still have a much higher market capitalization than the crypto market and a lot of money can still change hands.

In this image, each block is equivalent to $500bn in market capitalization.

We are still at the beginning.

And even in the beginning, the cryptocurrency market has already surpassed all other assets in the world, proving to be not only the best way for you to protect your purchasing power, but also to multiply your capital.

In the last five years, Bitcoin alone has valued over 7,000% and the total crypto market has increased by almost 20,000% in value over the same period.

There are several shared graphics in the “Nowhere to hide” article that demonstrate a steady and growing trend of more smart money coming out of other investments and being allocated to Bitcoin.

With the rising inflation around the world, investors have had to use assets with greater volatility and risk for asset protection, as the more conservative alternatives no longer fulfill their purpose.

This often turns out to be a difficult choice, especially for conservative profiles, but unfortunately (or fortunately) it is a choice that needs to be made.

We need to run, but we need to run fast, otherwise, “if you run – slowly – the animal catches and if it stays the animal eats”.

Read more:

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