A former Conservative Party British Prime Minister, Theresa May, took a lot of flak in 2017 for telling a nurse who complained on TV that her salary had not risen since 2009 that “there isn’t a magic money tree that we can shake that suddenly provides for everything that people want”.
Five years later, that assertion is about to be tested like never before.
Sky-high energy bills are about to arrive for British consumers, and the clamour for the state to help out and cover some (if not all) of the 80% rise in gas and electricity prices are coming fast and furious. The repercussions of zooming energy prices are starting to make themselves felt across all parts of the British (and European) economy. Britain’s 48,000 corner shops, places to buy milk at midnight, have an association representing 70% of them, the Association of Convenience Stores or ACS. ACS has asked the Chancellor for a £575 million “assistance package” or risk losing many of these small stores. As energy prices soar, many small businesses will go under and households will struggle; with inflation yet to peak at up to 20%, a severe recession is inevitable. Government will come up with various ‘support’ packages such as a cut in VAT or direct payments, at a time when tax revenues will plunge. Helicopter money – money dropped from above – is about to return to the UK.
Britain only has a few more days before it learns who its new Prime Minister will be. The previous one, Boris Johnson, supposedly stepped down in July although he has stayed in post as a ‘caretaker. Despite promising that major policy changes should await his successor, Johnson has recently said that whoever succeeds him will announce “another huge package of financial support… to help people through the crisis”. This seems to tie his successor’s hands – or risk angering the electorate. According to one commentator, neither of the two front-runners to replace Johnson has “the first idea of what to do about the UK’s deep-seated economic problems”.
With inflation likely to be around 13% by the end of this year, and energy prices forcing half of UK households into fuel poverty , there’s no doubt that many families are finding their disposable income is shrinking. Johnson’s competitors to become his successor are promising tax cuts or more money give-aways, either of which is just a different form of helicopter money.
No free lunch
The first welfare state was Germany, where Chancellor Otto von Bismarck in the 1880s introduced social benefit schemes designed to weld together the different classes of the fledgling German state. His motives were not philanthropic but political – he wanted to pull the rug from under the Social Democrat Party, which he regarded as dangerously revolutionary.
Almost 150 years later, we have morphed from welfare being a piece of generosity by a grateful state to it being seen as a right. The European version of the welfare state has apparently crossed the Atlantic. In 1996, then-Senator Joe Biden said “the culture of welfare must be replaced with the culture of work”, he said on the floor of the Senate…The culture of dependence must be replaced with the culture of self-sufficiency and personal responsibility”. We have moved from a culture in which the infirm, the unemployable, the poor, the elderly, are left to struggle – and our society is all the better for that humanising change. But as our population ages, or ‘black swan’ events such as wars disrupt our economies, our ability to fund that welfare comes into question. Triage will increasingly need to be employed; can we cover the cost of this? Can we afford that? What will have to be sacrificed if we want that?
In January this year, the Institute for Fiscal Studies, which specialises in UK public policy, said that welfare payments must rise “by twice as much as planned this year if the poorest households in Britain are to be supported through the cost of living crisis”. That would have cost an extra £3 billion/year. Since then energy prices have shot up and inflation has far exceeded estimates.
In the US, the state spent an additional $1.9 trillion on social support payments, the ‘American Rescue Plan’ Act of 2021. That put total US federal, state and city spending in 2021 at almost $10 trillion, or around half of national gross domestic product. As Larry Summers, former US Treasury Secretary, warned in February 2021, “there is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability”.
The Congressional Budget Office estimated that the US federal government ran a deficit of $212 billion in July 2022, $90 billion less than July 2021. The country’s national debt is fast approaching $31 trillion and 124% of gross domestic product (GDP), against some 57% just two decades ago.
All must have prizes
The demands increasingly placed on the state sound rather like the Dodo in Alice in Wonderland, who after a race announces that “everybody has won, and all must have prizes”.
But in the context of lingering high inflation and an increasing likelihood of a global recession, it’s questionable as to whether states will be able to afford their growing welfare bills. Fewer and smaller prizes will be available in future.
At their Jackson Hole junket last weekend central bankers seemed united in a determination to stamp out inflation whatever the cost. The battle is not just to kill rising prices but to defend their own reputation. Isabel Schnabel, a board member of the European Central Bank, said “regaining and preserving trust requires us to bring inflation back to target quickly… [the] longer inflation stays high, the greater the risk that the public will lose confidence in our determination and ability to preserve purchasing power”. Another Jackson Hole guest, Agustin Carstens, head of the Bank for International Settlements (BiS) issued a grim warning: “The global economy seems to be on the cusp of a historic change as many of the aggregate supply tailwinds that have kept a lid on inflation look set to turn into headwinds”.
There has been one prize winner however – the US Dollar, which is now stronger than it has been in 20 years, thanks to rising US interest rates and the generalised sense that central banks will fight inflation to the death. The Dollar looks like a giant on clay legs. The US owes the world a net $18 trillion, or 73% of its GDP. For now, the Dollar is the cleanest shirt in a bundle of grubby washing. Since the 15th century, points out one commentator, “the last five global empires have issued the world’s reserve currency… for 94 years on average. The dollar has held reserve status for more than 100 years, so its reign is already older than most… the dollar share of foreign exchange reserves is currently at 59% – the lowest since 1995”.
The Dollar’s strength has helped depress the gold price, which in Dollar terms has slid almost 5% since the start of the year, although the weakness of the Pound Sterling means that in Pound Sterling terms the gold price has risen by 10% since the start of 2022. As the world inches closer towards stagflation, the importance of gold not just as a means of saving but, thanks to Glint, as real, everyday money, will become increasingly apparent. While fiat currency can be created galore, gold cannot. When voters feel financially squeezed, the temptation for governments is not to address long-term and difficult problems such as how to increase productivity, but to quell disquiet by creating more paper money. With inflation approaching 20%/year, fiat money in the UK is annually losing around 20% of its purchasing power.
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.
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