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Category: Soap Box

Soapbox: It’s the economy, stupid

Joseph Robinette Biden was elected the 46th President of the US a year ago, winning a record number (more than 81 million) of votes. Now 78, he's spen...

11 November 2021

Gary Mead

Joseph Robinette Biden was elected the 46th President of the US a year ago, winning a record number (more than 81 million) of votes. Now 78, he’s spent his lifetime in politics, and was first elected to the US Senate from Delaware at the age of 29 in 1972. He has experienced personal pain; in December 1972 his first wife and year-old daughter were killed in an auto accident. He recovered from two brain aneurysms in 1988. His eldest son, Beau died of a brain tumour in 2015. His other son, Hunter, has long struggled with addictions and in 2014 joined the board of a Ukrainian company despite suspicions that it was connected to money laundering.

Biden spent eight years as Barack Obama’s vice-president. He gained the Presidency on what seemed like a tidal wave of loathing for Donald Trump but nevertheless was a very close vote – the nationwide popular vote was 51.3% to Donald Trump’s 46.9%.

Since he entered the White House in January this year Biden has scarcely had time to take a breath. Dealing with Covid, facing a China flexing its muscles, trying to achieve a bi-partisan consensus for his big spending plans, turning a blind eye to a soaring US national debt (more than $29 trillion by the time you read this), inflation threatening to get beyond control, Russia fighting a proxy war through Belarus, mid-term elections coming in 2022, trying to bring together a deeply fragmented nation, exiting Afghanistan…the problems stretch into the far distance. And his approval rating is slipping.

 

Gold under Biden

In the past 12 months, the gold price has slipped from $1,882.70 per ounce (£1,420.19) to $1,824.90 (£1,350.80), or about 4% in Dollar terms and 5% in Pound Sterling. For those who pin their faith on gold being a hedge against inflation, this is an alarming surprise. Annualised US consumer price inflation (CPI) jumped to 6.2% in October, bigger than consensus forecasts compiled by Bloomberg and the highest since 1981, when it hit 8.9%. The CPI went up by 5.4% in September. Your Dollar is currently losing around 6% of its purchasing power a year; it’s surely better to hold something that – so far this year – has lost 2% less?

Or maybe you should try your hand with a cryptocurrency? Maybe you feel you have missed Bitcoin’s boat; but new cryptocurrencies come along all the time. They hold out ‘get-rich-quick’ temptations; but they also can contain ‘get-poor-faster’ traps, as we saw recently with the Squid Game token scam. It all depends on what your goal is – is it yield or security? If it’s yield, gold’s not for you – it has no yield. But if it’s security, then a quick look at any historical gold price chart spells long-term security, despite ups and downs.

As the shocking October US inflation level was building, Janet Yellen, US Treasury Secretary, told CNN’s viewers on 24 October that “I don’t think we’re about to lose control of inflation”. Inflation is transitory, all due to supply-side bottlenecks, it’ll get better… these (or similar) words of comfort from Jerome Powell, the US Federal Reserve’s chairman, and Janet Yellen, are falling on stony ground. By this time next year all 435 seats in the US Congress’s House of Representatives and 34 out of the 100 seats in the Senate will be up for grabs. Donald Trump may be making noises off-stage but he will still be two years away from challenging for the White House and so will be less of a bogey-man at the ballot boxes. US voters are likely to remind the Democratic Party “it’s the economy, stupid” and flock to the Republicans.

 

Devil and the deep blue sea

The conventional economic action to be taken when confronting inflation is to raise interest rates. Make money and credit more difficult to come by, more expensive, and people will have less to spend, so demand will drop and prices stabilise.

Yet this obvious manoeuvre seems impossible for Powell & Yellen. The US economy was disappointing in the third quarter of 2021, just 2%, the slowest since the end of the 2020 recession. Consumer spending, which accounts for 69% of the $23.2 trillion economy, grew by just 1.6% after rising by 12% in the second quarter. The Fed has a dual mandate – price stability and “full” employment. The trouble is, while US employment has certainly recovered from its collapse in 2020, it’s still far from being “full”, however that’s defined. There are still five million fewer jobs in the US than prior to the Covid-19 pandemic. The rate at which Americans have been quitting their job is the highest it’s been in the history of the data; half of all US firms say they are unable to fill their positions.

Powell and Yellen are caught between the devil and the deep blue sea. The surge in demand, which has been fuelled by the combination of monetary and fiscal stimulus from the White House, is running into not just supply-chain logjams but a shortage of raw materials, energy, inventories, housing and workers. The Fed has signalled that it will taper its asset purchases but it’s too nervous about putting up interest rates in case that chokes off economic growth.

Yet as research from the US-based investment management firm Bridgewater Associates says: “Ongoing stimulative financial conditions have further lowered debt service costs, and incomes have also benefited as economies have reopened. In short, households are wealthy, flush with cash, and ready to spend—setting the stage for a lasting, self-reinforcing surge in demand… the gap between demand and supply is now large enough that high inflation is likely to be reasonably sustained, particularly because extremely easy policy is encouraging further demand rather than constricting it”.

Workshop of the world

In China, the world’s workshop, the producer price index (wholesale prices) rose to a record 10.7% in September – prices in mining and coal went up by almost 75%. Coal may be the bad boy of climate change activists – but it’s going to be burned by China, India, and elsewhere for years ahead.

Unlike President Biden, China’s President Xi Jinping has no need to worry about upcoming mid-term elections, although he might be a little nervous about a challenger lurking among the corridors of the Forbidden City. Nor need he worry too much about someone whispering in his ears “it’s the economy, stupid”.

This week Xi has supervised the annual plenum of China’s central committee, where he has consolidated his place as one of the country’s so-called ‘transformational leaders’, alongside Mao Zedong (said to have unified China) and Deng Xiaoping (said to have made China rich). Chinese media effusively refer to President Xi as “a man of determination and action, a man of profound thoughts and feelings, a man who inherited a legacy but dares to innovate, a man who has forward-looking vision and is committed to working tirelessly”.

David Winston, a Republican pollster, told the Los Angeles Times this week: “Expectations were high after [Biden’s] election… people expected COVID to be over; it isn’t. Voters thought they were electing normalcy, but that’s not what they’re getting… Biden’s problem isn’t just that several things have gone wrong; it’s that nothing seems to be going right”.

Next week it’s believed that the two Presidents, Biden and Xi, will hold a virtual meeting; likely to discuss their new working relationship. On Wednesday this week, they committed to work together to slow global warming. It’s probable that there will be other matters on the agenda too, all one can tell at this stage is that Biden is in trouble on many fronts, and Xi is riding high – bolstered, no doubt, by his country’s steady accumulation of gold and its readiness to roll out a national digital currency, showing how China is aware of the importance of both the old and the new. And maybe even linking them up.

Glint always tries to demonstrate balance between gold, crypto and fiat currencies when it comes to purchasing power. 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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