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Category: Bullion Bulletin

Bullion Bulletin: No free lunches

We all love free money, right? A survey of 1,500 voters in the US recently published by Newsweek found that 63% supported the idea of new sti...

20 November 2022

Gary Mead

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We all love free money, right? A survey of 1,500 voters in the US recently published by Newsweek found that 63% supported the idea of new stimulus money being distributed, to combat inflation. Just 18% disagreed. But there’s usually a catch; rarely is there a free lunch.

The sample in this poll was admittedly a tiny proportion of US citizenry – but if it’s at all representative it reveals a remarkable ignorance of basic economics, as well as a disturbing trend.

The economic ignorance first.

Americans are flush with cash. According to Bloomberg, American households in late 2019 had about $1 trillion in currency and accounts. By early 2022 that was $4.7 trillion. The federal government put almost $1.5 trillion directly into Americans’ pockets over the course of 2020 and 2021 in the form of stimulus checks and supplementary unemployment benefits, with other aid programs indirectly delivering even more. This giveaway was huge, in the region of $5 trillion during the pandemic – following the $3 trillion after the 2008 financial crisis, while the Federal Reserve pushed interest rates to zero, making credit cheap. All that fiat-fired wealth arriving in American’s bank accounts; to some it must have felt like paradise.

All this extra cash went into different things – the stock market, houses, consumer durables such as automobiles – precisely as supply of those things either halted or slowed, or was in any case limited. Unsurprisingly some of the free money went into savings – in 2020 (the height of the pandemic) the US personal savings rate was 17%, the highest since 1944. As the US economy has started to slow that savings rate has dropped to just above 3%, the lowest it’s been since just before the Great Recession. US consumers are still spending freely, around $17.6 trillion annually in September.

But inflation has followed, as night follows day. Inflation very easy to understand – it’s too much money hunting too few goods. The world produced less of everything (from palm oil to microchips) during the pandemic, yet people still needed goods and services and had the money to buy them, even though they were in short supply. All that happened was that prices went up as the demand remained the same as usual.

The worrying trend is less easy to explain. Having experienced what the state can do in financial or health crises, Americans perhaps are increasingly looking to Washington D.C. for financial support, as the Newsweek poll hints.

Take student loans. No one disputes that the student loan scheme in the US is an expensive mess, but President Joe Biden’s plan to forgive student loans of up to $20,000, though well-intentioned, is a worrying straw in the wind. The Congressional Budget Office (CBO) calculates the total student loan debt to be $1.6 trillion among 43 million borrowers. Biden’s plan would eliminate around $430 billion of that, says the CBO. Loan payments have been on pause since March 2020 as part of the Covid-19 relief schemes. Whether the loan forgiveness finally sees the light of day seems to be in the hands of the courts for now.

Generosity from the state isn’t just for the US. In the UK, there are more than 50 different benefits available from the state. In the latest “mini-Budget” the finance minister, Jeremy Hunt, said that benefit payments and state-funded pensions would next April rise by the rate of inflation in September, which was 10.1%. With UK inflation racing at above an annualized 11% this gesture by the government will no doubt be welcomed by millions but given that the British economy will shrink next year, the question is – where will the necessary extra money come from? The ‘free’ money will be delivered at perhaps the worst time for the economy since the 1970s; interest payments on the UK’s debt will have been more than £120 billion this year, 4.8% of gross domestic product (GDP), more than double last year’s payment.

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