The debt magic

Governments everywhere are burdened with debts - debts so huge they cannot possibly repay them. Because there is no restraint on fiat money creation, and demands from voters are apparently infinite, they have borrowed from capital markets - the private sector mostly but also other governments - with careless abandon. Today, the world owes almost four times more than it produces. In May this year world debt stood at $315 trillion, says the IIF (Institute of International Finance), the biggest, fastest and most widespread increase in debt since the Second World War. Interest payments on public debt totaled $847 billion last year, and accounted for 10% or more of government revenues for 38% developing countries. Money spent on debt interest is money lost to investment; without investment, economic growth stagnates. It doesn't take an economics doctorate to know that this is unsustainable. This is at least as big a threat to human society as the (hotly debated) issue of climate change, plans for the amelioration of which will add enormously to the debt burden.

The US debt is now well on the way to $36 trillion (£27.55 trillion). The UK's is rather less, almost £3 trillion (almost $4 trillion). While the national debt is a worry for the UK Labour government, the contenders for the White House seem untroubled by the almost $900 billion the country annually spends in interest payments. The UK spent £102 billion (around $133 billion) on interest payments on its debt last year, about 8% of total government spending. Indeed, what Kamala Harris and Donald Trump have so far promised the US electorate would simply increase the national debt, Harris's plans by $3.5 trillion and Trump's by $7.5 trillion according to the Committee for a Responsible Federal Budget. The US Dollar is the world's main reserve currency; it's an invaluable umbrella because it implies the government will have no trouble repaying its debts. That's partly why the shrinking place of the Dollar as the world's main reserve currency is worrying.

Debt dodging

In the UK the new Chancellor, Rachel Reeves, has come up with the bright idea of redefining debt so she can borrow more to fund her upcoming Budget's mantra of "invest, invest, invest". Her idea is to exclude the Bank of England's (BoE) losses on its quantitative easing (QE) program, in the years following Great Financial Crash of 2008. This involved buying government bonds and created 'new' money to the tune of £875 billion ($1.144 trillion). It's now trying to reverse this, selling government debt back into the market. The Treasury Committee of the House of Commons said in February this year this was a "leap in the dark" as the potential consequences were not really understood. The Committee estimated that potential losses could total £130 billion ($170 billion); other sources suggest the cost could be much higher, some £200 billion ($254 billion, or almost 8% of gross domestic product (GDP). The Treasury had to transfer £45 billion last year to the BoE to cover losses on its QE program.

So, exclude the BoE's losses on QE - losses which were incurred largely at the behest of a previous Labour administration - and bingo! the overall debt burden reduces at the stroke of a pen. Reeves might then have enough fiscal room to carry on with and/or expand public spending without rattling the capital markets too much. As important, she has committed to reducing national debt without increasing obvious taxes (such as income tax) without squeezing government spending. Magic. Even the head of the pro-government think tank the Institute for Fiscal Studies (IFS) has called this "fiscal fiddling". Placing one large chunk of 'national debt' outside what's considered to be really national debt will fool only those who want to be fooled. But such sleight of hand might appeal to all those other governments around the world who did their own QE; Japan has been using QE for years for example. Governments love to create 'new' money; it pleases their voters.

There's no doubt that the UK economy is currently in the doldrums and urgently needs investment to start growing again. But such magic as Reeves is likely to adopt, like all magic, is only clever deception. Glint was created so that people have an alternative to magic. When such clever tricks start to unravel - as they surely will - fiat currencies will be the loser, devalued and further debauched. Gold will still be here.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.