The current scenario is marked by economic and social instability. Inflation and rising financing costs are a double penalty for households and businesses.
Past context vs current context
The context we are going through is not particularly easy. The last few years have been marked by ultra expansionary monetary policies which resulted in neutral or even negative interest rates. This strategy was complemented by “aggressive” asset purchase programs by the central banks, which generated enormous liquidity in the financial markets. There were several consequences that ended up distorting reality. As an example, the year 2020 (Covid) was the year in which there were fewer bankruptcies. Families and companies, regardless of risk or sector of activity, were (almost) always able to finance themselves at reduced costs. was installed a atmosphere of facilitation that provided excesses and, above all, a belief that central banks would always support the economy with low interest rates, which presupposed reduced financing costs. Excess liquidity had consequences in certain specific sectors. O real estate and financial markets are two of the best examples with steep climbs.
Change of plans
After so many years of expansionist policies, we reached a moment when one factor came to jeopardize everything: inflation. If, over the last few years, excess liquidity has never generated a general rise in prices, the reality is that a set of events simultaneously provided the escalation of this effect for numbers we hadn’t yet verified in the 21st century. Those responsible for monetary policies ignored this reality, referring that it was a momentary effect. However, as the months go by, and with inflation not slowing down, at this stage there is only one solution: aggressively raise rates and abruptly reduce liquidity that exists in the market (reduction and termination of asset purchase programs). Read also: Inflation: What you can do to counter it
Effects on financial markets and the real economy
Naturally, these measures end up putting obstacles in the way of many investors, because the support they had until now disappears. Worse than this is the fact that the urgency of withdrawing liquidity from the markets through an increase in financing costs and an approximation to the reality of the risk/return of the companies, can generate financing difficulties for many market players.In the real economy, the message that the authorities are sending is that we are at a stage where we must reduce consumption. Not only are they trying to tell us this clearly, but they are “forcing” us to follow this path. In a simple way, the inflation is already taking away our purchasing power. If we add the increase in rates, the financing costs (personal loans, housing, …) will be higher, so we will be left with less liquidity for day-to-day expenseswhich will “force” us to rationalize our consumption decisions.Read more: Is a storm approaching? What to do?
The advantage of always saving
It is in these more adverse scenarios that we perceive the importance of saving. Have one working capital available to face adverse circumstances is fundamental to our balance. It helps us to go through more turbulent moments, allows us to be mentally comfortable to face adversity or face the difficulties that arise in a more positive way and, even in a more dynamic way, to have the ability to be able to take advantage of opportunities that may arise.Saving is not a necessity. It’s an attitude that can make a difference! Also read: Saving or investing: what should I do? Passionate about sports and economics, he was a professional football player, having played in clubs such as SL Benfica, Estoril, among others. He reconciled his sports career with his academic one, finishing his degree in Economics at the Faculty of Economics of Universidade Nova de Lisboa (NOVA SBE). He remains connected to his two professional passions, working as a Financial Advisor and collaborating as a sports analyst at CNN Portugal. He was resident commentator on JE’s Jogo Económico program and Chairman of the Supervisory Board of the Portuguese Footgolf Federation. (FPFG). He regularly participates in events on Financial Literacy.