Comment survivre dans un système monétaire instable? par Charles et Emmanuelle Gave

The speaker begins by admitting that the current state of financial markets, particularly the bond market, is incomprehensible, a sentiment he's held for 60 years. He clarifies that when discussing bonds, the focus is always on government bonds, as corporate bonds involve additional credit risk requiring extensive analysis. When buying a government bond, one expects a regular nominal income, equal to the yield at purchase, and repayment at the end of the contract. However, the reliability of this repayment is now in question, particularly for countries like France, the UK, the US, and Italy, unlike Switzerland, which is perceived as stable. Central bankers, instead of ensuring currency stability and safe savings for ordinary people, have become instruments for maintaining an unstable social-democratic economic system. They've pursued policies supporting unsustainable spending, leading to a self-fulfilling prophecy where they aim for 2-3% inflation, expecting the bond market to follow. However, bond markets in countries with serious central bankers, like Switzerland and China, are diverging, indicating a loss of confidence in the bonds of other nations. This has also driven people into equities, as they seek alternatives to unreliable bonds. The speaker introduces a framework of three interconnected systems: the economic, financial, and monetary systems. Each is complex, and their interactions further complicate understanding. He notes that the monetary system, in particular, is showing monstrous signs of instability, which will have ripple effects on the other two. The stable monetary system that existed from the 1980s is now collapsing, while a new, stable monetary system is rapidly emerging around China. Recognizing this shift is crucial for investment and lifestyle decisions for the next 15-30 years. He illustrates this with a law that holds true in stable monetary systems: the "return to the mean." In a stable system, like that of Sweden and the US from 1970, the profitability of their 10-year bonds would converge. When one became expensive relative to the other, investors would sell the expensive one and buy the cheap one, generating superior returns. This suggests they operated within the same monetary system. However, this dynamic has broken down. He shows a graph comparing Swiss and German bond markets from 1945 to 2020, which historically exhibited this return to the mean. Around 2021-2022, this correlation vanished, meaning Swiss and German monetary systems are no longer the same. This is attributed to Germany's integration into the Eurozone, which forced its monetary policy to align with less fiscally responsible countries. The "demise of the Bundesbank" is presented as a key event. Historically, from 1970 to 2012, real interest rates in Germany consistently hovered around 3%, ensuring that small savers could earn a decent real return without risk, thus fostering capital accumulation. This shared objective with Switzerland meant their bond markets were correlated. The Euro crisis in 2012 forced a choice: either the Euro would collapse, or the Bundesbank would lose control over long-term rates in Europe. The latter occurred, leading to German rates falling to zero or negative to prevent other Eurozone countries from collapsing under higher interest rates. This meant Germany lost control of its long-term rates from 2012 to 2020. This isn't the first time monetary systems have separated. In the early 1970s, the dollar decoupled from gold, leading to its decline. During that period, Germany, under the leadership of figures like Karl Otto Pöhl at the Bundesbank, maintained its commitment to higher real rates (3-4%), even as the US Federal Reserve pursued lower rates. Germany became the anchor for bond markets, forcing the US to eventually raise rates under Paul Volcker to restore dollar credibility. This led to a period of equilibrium from 1980 to 2012, where Germany controlled long-term rates, and the dollar served as the reserve currency for oil transactions, with its credibility ultimately anchored by the Bundesbank. The creation of the Euro, in a sense, undermined this Bundesbank control. When the Swiss realized this, their bonds surged as investors fled German bonds. The second anchor of the old system to break down was the dollar's link to oil. Historically, US government bonds provided direct access to oil, making them a cornerstone of international reserves. However, events like the Venezuelan crisis and the war in Ukraine, where Russia's foreign reserves were seized, demonstrated that holding US dollars no longer guaranteed security or access to vital commodities. This led to a widespread questioning of why countries should hold US Treasury bonds, pushing them towards alternatives like gold and Chinese bonds. Before 2020, Chinese and US bonds also showed a "return to the mean" pattern. But from 2020, particularly after 2022 and the Ukraine war, this correlation vanished. This signifies the collapse of the dollar-oil link and the two main anchors of the international payment system: the Bundesbank's guarantee of bondholder security and the dollar's link to oil. The world is moving from a stable to an unstable monetary system. However, elements of stability are emerging around China. The Indian and Chinese bond markets, which previously showed no correlation, have started to converge over the last decade, suggesting China is creating a new stable monetary zone. This transition from one dominant system to another is rarely smooth. The current instability is evident in France, where the profitability of invested capital is poor. Historically, during periods of monetary system breakdown (1970-1982), gold significantly outperformed equities. Once a stable system was re-established, equities surged. Now, since 2012, and especially since 2020, gold is again outperforming, indicating a return to monetary instability. The speaker highlights the growing French debt, reaching 3,500 billion euros (116% of GDP). Unlike Italy, which has a primary budget surplus (meaning its budget surplus before debt payments helps reduce past debt), France has a primary deficit. France is borrowing to pay interest on existing debt, a "cavalry" situation. The annual debt service is currently 60 billion euros, based on an average interest rate of 1.70% on existing debt, thanks to years of near-zero rates. However, market rates are now around 3.5%. As old debt rolls over and new debt is issued at higher rates, the debt service is projected to skyrocket to 120 billion euros if the entire debt were at 3.5%, and potentially 180 billion euros within four years if another 1,000 billion in debt is added, especially with an impending stagflationary recession. This means a massive transfer of wealth out of the French economy, reducing the living standards of French citizens. The speaker estimates that 90 billion euros will be diverted from the economy, leading to a 50 billion euro annual reduction in French living standards, creating a vicious cycle. Furthermore, an inflation-driven recession is imminent. Rising costs for food, clothing, and especially oil (expected to be 40% more expensive) will further squeeze household budgets, disproportionately affecting working-class citizens, not the wealthy "Bernard and Chantal" archetype. The speaker expresses frustration that these calculations, which are simple projections based on current trends and compound interest, are not being addressed by politicians. He argues that the current generation of politicians lacks the understanding to grasp the severity of the situation. He points out that the quality of life for ordinary people has significantly deteriorated over the past decades. While China has seen a phenomenal rise in living standards due to its policy of encouraging savings and rewarding savers, Western countries have done the opposite, leading to a widening gap. He criticizes the "Maginot Line" mentality of believing that monetary system "tricks" can save the financial and economic systems. These tricks have been exhausted over the past 25 years. He recalls a past argument with a politician, Jean-François Copé, who dismissed his warnings with an argument from authority ("we know what we're doing"). The speaker asserts that such politicians, despite their elite education, often lack real-world experience and understanding. He challenges listeners to use AI to project France's budget deficit and borrowing needs over the next 4-5 years with a 3.5% interest rate and a 250 billion euro deficit, predicting alarming results. The question then becomes who will buy this debt, as the European Central Bank (ECB) has limits, and other countries are facing their own challenges. If the ECB buys all this debt, it risks following Japan's path of currency devaluation without the benefit of a strong industrial base. The speaker concludes by reiterating that the monetary system in Europe and the US is collapsing, making contracts based on these currencies unreliable in the financial system. Therefore, investments should be in assets like equities or gold, or in the emerging stable monetary system around China. He emphasizes that this is not about pessimism or optimism, but about adapting to changing realities, much like Keynes, who changed his opinions when events changed. The current situation demands adaptation, not adherence to outdated beliefs.