As we have been writing for several months and again last week in these same columns when presenting our 2022 forecasts, the key to our future lies in future monetary policy and, in doing so, in the evolution of interest rates. interest on government bonds. Indeed, as long as the “money printing presses” of the central banks operated at full speed and above all more than reason, the interest rates of State bonds remained artificially low and the outbreak of public debts remained, by this very fact, painless.
Accustomed to this a priori unstoppable magic trick, some are asking for more. Why not continue the “money printing”? they tell us, pretending to ignore that the recent behavior of central banks is dangerous. Indeed, this double mismanagement of public debts and free liquidity has contributed to fueling financial bubbles of all kinds and to causing inflation to flare up, which, almost everywhere in the world, has been reaching peaks since the beginning of the 1990s at best. 1990, the worst since the hyperinflation of the early 1980s.
The latest price statistics published in the United States are just as eloquent as they are worrying. In December, the annual change in consumer prices there reached 7%, a peak since June 1982. As for that of producer prices excluding energy and food products, a leading indicator of inflation, it rose to 8.3% in December, a record since June 1981. Faced with this major strategic error, the central banks no longer have a choice: they must stop their massive injections of liquidity, or even raise their key rates. Of course, as they did in 2021, they could remain in denial of reality and further delay the deadline.
Only here, the longer they delay, the more they will lose credibility and the more they will be forced to act harshly when they change strategy to try to limit the inflationary outbreak. This will result in a very sharp rise in government bond rates and a dramatic economic relapse. In other words, either the central banks act quickly and now and the rise in interest rates on public debts and therefore credits in the broad sense will be contained, or they remain deaf and blind and these will experience an even stronger outbreak.
Whatever happens, we must therefore be prepared for a sharp rise in interest rates on government bonds, and in particular for France, which has accumulated an explosion in its public debt and its trade deficits. French public debt has already broken a historic record of 2,834.3 billion euros in the third quarter of 2021 and will soon reach 3,000 billion euros, or 120% of GDP.
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As for the French trade deficit, it recorded a double historical record in November, at 9.7 billion euros over one month and 77.6 billion euros over twelve months. Since 2004, France’s accumulated trade deficits have reached 913 billion euros. Something to remind us that both to finance its public debt and its external deficit, France has a crying need for investment, particularly from abroad, but which is in danger of drying up in the coming quarters. This will fuel the rise in bond interest rates.
This mini bond crash, which will perhaps become a maximum if the central banks do not do their job conscientiously over the next few months, has already begun. Between January 7 and 11, interest rates on ten-year government bonds thus reached 1.8% in the United States, 0.3% in France and almost 0% in Germany. And that’s just the beginning. By the summer of 2022, they should be around 2.3%, 1% and 0.5% respectively.
In this context, the stock markets will remain very chaotic over the coming months. As has been observed since last summer, volatility will therefore be particularly strong on stock market prices and in particular on digital and related stocks which are increasingly expensive, i.e. whose spread between the stock market valuation and future profits is getting higher and higher. Even if many investors around the world want to forget it, we have to face the facts: all bubbles end up deflating, a fortiori the most extravagant ones.
Let us also remember that after having soared by 1100% during the Internet bubble of the years 1990-2000, the Nasdaq lost 78% of its value in less than two years. However, from March 2009 to November 2021, the same Nasdaq soared 1,165%. What will happen to him tomorrow? It has already fallen by almost 8% since its peak on November 19, 2021.
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Faced with these multiple dangers, some do not hesitate to call for investing in cryptocurrencies, which would thus constitute exceptional safe havens. Without wanting to upset the followers of this “new religion”, let us also emphasize that caution must remain in order. The fall of these for a few weeks has moreover enough to set the record straight.
In conclusion, no offense to those who wish that the mismanagement of public debts and the profusion of “money printing” never stop, let’s not forget that everything has an end and that reason always ends up to take with. In this context, 2022 could very quickly become the year for paying the bills for the excesses of the past and in particular for 2021. Fasten your seatbelts!
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Marc Touati, economist, president of ACDEFI
His new book RESET – What new world for tomorrow? has topped the best-selling budget essays since its release on September 2, 2020
Find all his videos on his Youtube channel. The last of which, “Stock market, interest rates, cryptocurrencies… fasten your seatbelts!”