If governments want to pay the huge amount of debt they have incurred after the financial crisis, the most likely macro scenario I forecast is based on what it is called financial repression:
- Negative real interest rates (bond rates under inflation).
- Capital controls (difficult to move money abroad).
- Moderate to high inflation.
The idea behind this method is to shrink the debt in a couple of decades in real terms. It is not new. It has happened in the 70s.
But how do we protect ourselves if the above is correct?
- First, obviously keep no bonds and the minimum cash for emergencies.
- Second, invest in assets that pay back like certain stocks or real estate to rent. You manage your own risks.
- And third and most important, use reasonable mortgage, the longer the better. Why? Because it is the only way normal people can jump to the other side of the shore and take advantage of what the government does to diminish its debt as we will have debt ourselves.
