Posts by: Gary Mead

The driving inspiration of the concept of cryptocurrency has always been that money is too important to be left in the hands of central bankers and their masters.

The paper by Satoshi Nakamoto, taken to be crypto’s founding document, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ proposes a “system for electronic transactions without relying on trust”. Nakamoto’s thesis made its appearance at the height of the 2007-08 financial crash, when banks were collapsing and costly taxpayer bailouts of them were being imposed by governments. Nakamoto’s lack of confidence in central banks and governments’ handling of money is shared by Glint.

Distrust of government lies at the heart of the more than 20,000 cryptocurrencies that the UK’s Financial Conduct Authority (FCA) calculates have been developed. The world of cryptocurrency seems to be constantly changing; the regulation of its operations is continually shifting. New cryptocurrencies appear as old ones die; scandals have erupted, investors and users have lost huge sums of fiat money. But Bitcoin, the original crypto, survives, and will survive as long as individuals distrust the issuers of fiat currency and yearn for some way of achieving stability in their assets. Not that Bitcoin has proved to be very stable, as this chart shows.

According to Bloomberg, Augustin Carstens, head of the Bank for International Settlements (BIS), has “settled” the argument that crypto is an alternative to fiat currency. It isn’t, says Carstens. “Only the legal, historical infrastructure behind central banks can give great credibility” to money; crypto is a financial activity that can really only exist “under certain conditions”, said Carstens. Mind you, he warmly endorsed Central Bank Digital Currencies (CBDCs); they can “aid efficiency” he thought.

The stifling of private cryptocurrencies by the imposition of state-backed CBDCs is the ambition of many central bankers; the executive director of the Reserve Bank of India (RBI) told CNBC-TV18 that India’s digital Rupee will be an alternative to cryptocurrencies. The RBI’s deputy governor claims that the digital rupee should be able to do anything cryptocurrency can do but without the associated risks of crypto. Sir Jon Cunliffe, deputy governor for financial stability at the Bank of England (BoE), said at a recent parliamentary hearing: “Nobody would use [crypto tokens] as money—well, some people would, but they are probably outside criminal law as well as financial regulation”. He favours a UK CBDC, a so-called ‘Britcoin’ but as many have said this idea would have serious unintended consequences, not least to do with anonymity. CBDCs have many flaws but the world seems in a headlong charge to introduce them.

Cryptocurrencies are associated with criminal activity, with scandals, with huge losses. Yet the highest profile ones – Bitcoin especially – refuse to die. That is testimony to people’s distrust of fiat currencies.

Cryptocurrency confusion

The International Monetary Fund (IMF) discussed in early February a paper on ‘Elements of Effective Policies for Crypto Assets’ which concluded that “efforts to put in place effective policies for crypto assets have become a key policy priority for authorities, amid the failure of various exchanges and other actors within the crypto ecosystem, as well as the collapse of certain crypto assets. Doing nothing is untenable as crypto assets may continue to evolve despite the current downturn”. Financial institutions fret about how to contain the crypto assault on their authority.

Regulators in the US, the UK, and elsewhere are struggling to deal with or define cryptocurrencies in a harmonized fashion; are they a form of legal tender? Are they securities (as the US Securities and Exchange Commission, SEC says)? Are they commodities (as the Commodities Futures Trading Commission or CFTC has ruled)? Their status differs not just within but between countries. In some jurisdictions, retail investors are welcomed – Hong Kong is now trying to rival Singapore as a digital assets hub – even though research from the BIS found last November that around 75% of retail investors have lost money. Only in the Central African Republic and El Salvador is Bitcoin legal tender. El Salvador has been buying Bitcoins since September 2021; as the value of Bitcoin has fallen, it may have notched up a paper loss of 50% on those purchases. El Salvador’s experience demonstrates one key thing about cryptocurrencies – the ‘currency’ tag isn’t true; nothing so unstable will be universally trusted as a form of money.

The divided world

Cryptocurrency is being used, albeit in small amounts, in the Russia-Ukraine war. Chainalysis, a US software company that specialises in cryptocurrency data, recently published a report asserting that since the start of the conflict Ukraine has received cryptocurrency donations worth nearly $70 million, while pro-Russia organizations have received donations of almost $5.4 million. Other sources suggest that “more than $200 million of crypto” has gone to pro-Ukrainian causes, with more than $80 million sent directly to the Ukrainian government.

Intriguingly Russia and Iran have reportedly started discussing the launch of a new cryptocurrency that would be backed by gold and which would be used in their bilateral trade. The Russian news agency Vedomosti quoted Alexander Brazhnikov, executive director of the Russian Association of the Crypto Industry and Blockchain, as saying the token would be developed as a stablecoin, backed by gold reserves. In July 2020, President Vladimir Putin signed a regulation on digital financial asset transactions which legalized cryptocurrency transactions but prohibited their use as payments for goods and services. Russia has been building its gold reserves; a gold-backed stablecoin would serve the dual purpose of avoiding use of Dollars and demonstrating Russia doesn’t need ‘Western dominated’ payments’ systems.

Cryptocurrency market activity in Russia has been big, around $500 billion as of 2021. Russians have embraced crypto not so much because they relish innovation as because many Russians have recent experience of their savings being devastated – first during soaring inflation in the 1990s and again when the Rouble collapsed following international sanctions after it annexed Crimea in 2014. Such financial disasters also help explain the huge appetite Russian consumers have developed for gold.

The European Union (EU) last October implemented a ban on all crypto services to Russia, but the very nature of cryptocurrencies’ anonymity means they remain a powerful method of eluding government sanctions. Iran has been under US sanctions for almost 40 years; in August 2022, the country made its first cryptocurrency payment (worth $10 million) to import vehicles. The US lags behind when it comes to crypto regulation; it has a fragmented regime with different government agencies vying for supreme authority over digital assets. But whatever universal regulatory regime finally evolves – and that probably means the imposition of CBDCs with the hope they will drive private cryptocurrencies out of existence – cryptocurrencies are here to stay. They may not be any use as a form of money, but they can facilitate payments if the parties involved wish to keep a low profile.

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.

In Shakespeare’s tragedy Macbeth, Macbeth ponders in Act Three his murder of King Duncan. Macbeth has seen a vision of the bloody dagger that he used in the murder and is filled with gloom. Lady Macbeth instructs her husband to cheer up and says “what’s done is done”. To which he responds “We have scorch’d [slashed] the snake, not kill’d it”. Macbeth means the job is only half-done; others remain alive who will challenge his effort to become King.

Central banks today risk of succumbing to a different tragedy – they may have only “scorch’d” their snake, inflation, and not killed it.

The inflation snake spooked US investors last week, with the S&P 500 index losing almost 3% during the week and the Nasdaq Composite, a tech-heavy index, dropping more than 3%. The falls were prompted by data showing the US personal consumption expenditure (PCE) price index went up in January by an annualized 4.7% , sizeably bigger than average forecasts of a 4.3% rise. The reason equity investors reacted so negatively to the unexpected rise in the PCE (which is the US government’s preferred inflation measure, and which strips out food and energy on the basis that those two categories can have wild price swings) is that given the apparent ‘stickiness’ of inflation more interest rate rises are expected, meaning further tightening (making more expensive) of credit, in turn limiting investment. Inflation is proving slipperier than a rattlesnake; let’s hope its bite is not as bad as a black mamba’s. President Joe Biden said the latest PCE figures showed “we have made progress on inflation, but we have more work to do”.

How much work?

America’s central bank, the Federal Reserve, like many other central banks, has the task of trying to maintain stable prices. It did a very poor job of that in 2021-22, with Jerome Powell (the Fed’s chairman) reiterating that inflation was “transitory”, a view given frequent backing by the US Treasury Secretary, Janet Yellen. The UK’s central bank and the European Central Bank were no better in their forecasts about inflation. Core inflation in the Eurozone for this February is expected to remain at an annualized 5.3%, the highest on record. The Eurozone’s sticky core inflation (which excludes food and fuel) is expected to endure throughout 2023. Some economies of the Eurozone, notably Germany’s, are delivering such poor results that the whole zone’s Gross Domestic Product (GDP) for 2022 could well be revised down in March. As in the UK, the Eurozone may already be at the start of its own bout of stagflation. Consumer confidence in Germany is now at a very low level. Sentiment among European consumers more generally has improved, according to the European Commission; in February, it reached the dizzy height of minus 19, its highest since the Ukraine war started but below its long-term average. ‘Confidence’ is perhaps the wrong word here; ‘less desperate’ might be better.

Central banks want to hit a “Goldilocks” spot – the place where their economies are not running too hot (leaving inflation remaining high) nor too cold (slipping towards a recession). They ‘target’ inflation, aiming to maintain it around 2%/year. That’s easier said than done. The index of wholesale costs in the US – the measure of producer prices – rose by 0.7% in January, higher than expected and the most since June 2022. Sweden’s core inflation in January rose to an annualized 8.7%, against expectations of 8.2%. These are just straws in the wind so far; could they become a blizzard?

It’s a little late

Some experienced financial commentators are already predicting that inflation will burst higher this year. The snake has been “scorch’d” but not killed, they argue. The reason for this they claim is that money supply has exploded since 2008, with governments dealing with the 2008 financial shock by Quantitative Easing (QE) and with the Covid-19 pandemic by handing out trillions in ‘support’ packages. The Bank of England’s (BoE) potential loss from its QE programme might be as much as £200 billion, which (of course) the poor old taxpayer will have to pay. According to some the US money supply has risen by 40% since 2000. There is, continues this argument, a significant time-lag between the ‘new’ money entering the system and the impact it has on prices, with too much money chasing a limited supply of goods. It takes time for all the new money to get spent, and prices will concomitantly take time to rise.

In this inflationary bout so far we have seen central banks raise their base interest rates very gently. The fact that we have become accustomed to very low or almost zero interest rates has duped us into thinking that the cost of borrowing is forever going to be low. Despite the ‘shock, horror’ headlines that follow each small rate increase, even as inflation has risen to multi-decade highs, rates in the US, the UK and the Eurozone have been negative, i.e. lower than inflation. Central bankers don’t really fear the snake, it seems.

When inflation in the US went above 14% in 1980, the then chairman of the Federal Reserve, Paul Volcker, pushed the Federal Funds rate (America’s base rate) to a peak of 20% in June 1981. Volcker was determined to kill the snake. He did – but the inflation took until the second half of the 1980s to drop to 3.5%, and at a cost of creating the 1980-82 recession in which the unemployment rate went up to more than 10%, against the current unemployment rate of 3.4%.

Giving our central bankers the benefit of the doubt, one might say the reasons why current inflation ‘snake’ exists are not fully understood. But being less generous one might say that pinning the blame on the 2008 great financial crisis, or Covid-19, or the Ukraine war and its subsequent energy price spikes – all of which are regularly trotted out – is grotesquely misleading.

It’s the way that policymakers handled the 2008 crisis and handled the Covid-19 pandemic, trying to paper over cracks, paying people to stay at home, keeping zombie firms in business, bailing out collapsed banks – all of which required trillions of ‘new’ money to be created – which created this snake. The energy price spikes following Russia’s invasion of Ukraine were, to some extent, self-induced, as the West imposed sanctions (necessary, no doubt) on the Russian aggressor. All that can be said with any certainty is that, so far, policymakers still prefer to pretend that the snake can be killed without spilling blood; so far they have been under the delusion that inflation can be quashed without causing pain.

Eighty years ago the US, the UK, and several European states’ governments-in-exile were allies in a war against Nazi fascism. Little has changed. Today they are again allies in a (proxy) war against another authoritarian regime, Russia, who launched its invasion of neighbouring Ukraine a year ago.

Both wars reverberate geographically and politically but there is a significant difference between them. The first war ended with an apparent unanimity to rebuild. The United Nations was meant to act, in part, as the world’s police force and prevent future wars. It seems we never learn – the League of Nations was founded in 1920 with precisely the same mission. The League failed; the UN has failed. UK Prime Minister Rishi Sunak said the “treaties and agreements of the post-Cold War era have failed Ukraine”. International agreements started failing much earlier than 1989.

The significant difference with this latest war is that once it’s over the world will find it very difficult to sort out its financial system, never mind revert to the status quo ante bellum. The Dollar’s hitherto unassailable position as the world’s international currency, established by the 1944 Bretton Woods agreement, has in all likelihood, been fatally damaged; the only question is – what will replace it? Barring a nuclear conflagration, some kind of international financial system will preside at the end of this war. None of know however what shape it will take. But the range of possible fiat currency replacements for the Dollar is limited right now. That creates the illusion that the Dollar remains unassailable, but it’s a giant standing on clay legs.

Metaphorical missile

Last June at the St. Petersburg International Economic Forum the Russian President, Vladimir Putin, delivered a metaphorical missile. He said it has become “a very real threat for many countries” to hold their reserves in Dollars and Euros when these currencies “can be confiscated or stolen at the whim of the US if it disapproves of something in a country’s policy”. His words were of course true. Approximately $1.14 trillion in Russian assets are now frozen by the European Union, the UK and the US. Plans are being drawn up to not just freeze but to confiscate these assets and use them to pay for Ukraine’s eventual reconstruction, the cost of which will probably exceed $1 trillion. Freezing is one thing – confiscation is another. Confiscation requires linking the asset’s owner to a crime. Which is one reason perhaps why the US has now concluded that Russia has committed “crimes against humanity”; that will take superhuman efforts to prove and then enforce. Sunak has joined this chorus, saying “we must see justice through the [International Criminal Court] for their sickening war crimes committed, whether in Bucha, Irpin, Mariupol or beyond”. There’s no doubt the Russian army has behaved with the kind of brutality with which it is associated from previous wars, but pledging criminal prosecutions risks creating the determination to win, no matter what.

The US seems set on intensifying and possibly extending the war. President Joe Biden has said the US will support Ukraine “for as long as it takes”; a bi-partisan group of US Representatives has urged Biden to send F-16 fighter jets to Ukraine. The US Secretary of State, Anthony Blinken, has meanwhile said China is giving ‘non-lethal support’ to Russia and is considering providing lethal support, i.e. weapons. A year ago these kinds of words would have seemed like a dangerous escalation. Now the West, although dragging its feet, has pledged to send modern battle tanks, Patriot missiles, and armoured fighting vehicles.

A year on from Russia’s “special military operation” there is no end to the conflict in sight. Ukraine and Russia have doubled-down, making demands that are completely unacceptable to their opponent. The world is slipping closer to an all-out war between Russia and NATO. Prime Minister Sunak said at the weekend it is time to “double down on our military support”. President Macron of France was less inflammatory. In his view while Russia must be defeated it should not be crushed.

Is there a will to rebuild?

No, not yet; both sides are sleepwalking towards disaster while claiming that battlefield victory is possible, even close. It’s apparently been forgotten that Ukraine’s wish to join the European Union (EU) was a major factor in Putin’s decision to invade. Now Ukraine’s membership of the EU and even NATO is openly talked of in the corridors of power in Berlin, Paris and London. Last year, Putin hinted that he is prepared to use nuclear weapons, to frighten away NATO support for Ukraine. Now NATO is providing weapons; it’s fighting Russia at arms’ length.

Historically, the US has been consistently isolationist; it only reluctantly joined two world wars in the 20th century. Isolationism seems to be reasserting itself; a survey by the Pew Research Center published at the end of January found that 26% of US adults thought the US is providing “too much” aid to Ukraine, 19% more than March last year, shortly after the start of the war; of Republicans, 40% said too much support was being given, 31% more than in March 2022. This declining support will partially be related to the financial cost of support for Ukraine; the Committee for a Responsible Federal Budget says that the US Congress approved more than $113 billion of aid and military assistance to Ukraine in 2022, which one source suggests that, for the 26 million US households in the top pay quintile, amounts to almost $3,000 per household, which is “a lot to fight someone else’s war”.

Is it “someone else’s” war? President Zelensky has conducted a highly successful PR campaign among the West to convince it that it’s a war to defend the West; President Putin has frequently declared his hostility to the West. It may not be someone else’s war but it has to be asked if the US and Europe have the financial strength, never mind the will, to fight it. The US is headed towards a probably vicious fight over renewing the ceiling on its debt (now $31.5 trillion); the UK economy is in the grip of stagflation-lite; bankruptcies in the EU are now the highest in at least eight years. Meanwhile the Russian economy has proved itself more resilient than expected.

The shape of the new monetary order that will emerge from this war is unclear as yet. Unlike the original Bretton Woods of 1944, when the US accounted for half of the world’s industrial production and was therefore powerful enough to enforce it, today the US accounts for only around 16% of industrial production. The Dollar is being slowly dethroned and, because trust is one of the Russia/Ukraine war’s casualties, there is no obvious fiat currency alternative.

But there remains one universally trusted form of money – gold. And Russia,(and China) have separately been binging on it. The kind of global fiat currency chaos that may be another casualty of this war will suck many into its whirlpool. Gold is likely to be the only armour.

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.