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Category: Soap Box

Soapbox: Loss & Damage

This is a momentous week for all of us, on several fronts. The US is clearly deeply divided, if the mid-term elections are any guide. Inflation was on...

8 November 2022

Gary Mead

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This is a momentous week for all of us, on several fronts. The US is clearly deeply divided, if the mid-term elections are any guide. Inflation was on most voters’ minds; we discover what the US inflation rate was in October later this week. In Egypt, the North/South divide is being starkly demonstrated, as countries in the latter camp agitate for the former camp’s countries to shell out for damaging greenhouse gas emissions. In Ukraine, the nine-month war that Russia started shows no signs of ending but the West is perhaps tiring of bearing the costs.

Pew Research conducted a survey on voters’ intentions mid-October. It found that almost 80% of those questioned said the economy was “very important” in their voting decision; 82% said economic conditions “are poor”. Discussion of the possibility of a new civil war is no longer restricted to wackos or dodgy Twitterers. The polarization of American society, with Donald Trump hovering in the background, is a serious worry. US inflation is probably cooling, but at a glacial pace. The consumer price index (CPI) in September was 8.2%; the consensus for October is that the CPI will be 7.9%. Any higher will send shivers through stock markets and alarm the Federal Reserve, the US central bank. Unofficial (and vigorously debated) sources put the inflation rate at twice the official rate. Though the Fed is raising interest rates (now in the range of 3.75% to 4%) some critics say this is insufficient to stifle inflation at twice that level; yet the Fed itself in its latest financial stability report warned of damage to “the debt service capacity of households and businesses and lead to an increase in delinquencies, bankruptcies, and other forms of financial distress”.

Loss & damage grows on all fronts, and the demand for government payouts gets bigger.

Hot air is damaging

The US mid-term elections released a lot of hot air – probably they contributed to global warming. That topic is subject of the ‘Conference of the Parties’ or COP, in Egypt, the 27th – the previous 26 having disappointed many. This one is likely to disappoint too, despite some powerful rhetoric by the Secretary-General of the UN, Antonio Guterres. He kicked off the meeting by telling delegates that the world is on a “highway to climate hell with our foot on the accelerator”.

The phrase dominating the 12 days of cocktail receptions at Sharm el-Sheikh, the home of COP27, is “loss and damage”. Developing countries have been lobbying for reparations by industrialized nations for alleged losses and damage caused to them since COP meetings started. The cost of such reparations would run to billions, and quite possibly trillions of Dollars. Given that developed countries committed to raising $100 billion in climate finance a year by 2020 but failed, the chance of industrialized countries agreeing to the reparations is slim.

In a remarkable and unusual display of frankness, the former UK Prime Minister Boris Johnson, who inexplicably has joined the hordes at Sharm el-Sheikh, has already said that the UK simply does not “have the financial resources” to pay such reparations. Johnson may have read the interview with the current Prime Minister, Rishi Sunak, in The Times newspaper on 5 November. Sunak warned readers that “no government can fix every problem. Life is not that simple”. What Sunak meant was that the government does not have enough tax income to solve every social problem. Given the relatively low importance that climate change had for US voters in the mid-term elections, it must be thought that at the moment American voters won’t back climate reparations either.

No blank check

The Republican Party in the US were united in opposing President Joe Biden’s $1.9 trillion pandemic-relief plan and his $437 billion climate-focused package. They are hardly likely to favour handing over multi-billions of Dollars for any ‘loss & damage’ assertions made in Egypt, especially during a time when recession threatens a reduction in tax revenues. The US fiscal deficit in 2022 is 50% lower year-on-year – but it’s still $1.375 trillion. And in 2023, the US federal debt limit – that perennial sore – will once again set Washington D.C. alight. The White House will certainly push for the ceiling on the debt limit – currently slightly below $31.4 trillion – to be raised. The US debt is now fast approaching $31.3 trillion.

Funding priorities for governments will become particularly difficult in 2023. Inflation may be slowing but it is likely to remain above the long-term average of 3.8%/year in the US and 5.1% in the UK. A recession in the UK is now forecast by the Bank of England while Bloomberg economists say there is a 100% chance that the US economy will also hit a downturn next year. At the same time demands for spending are going to remain intense. The Russo-Ukraine war will continue in 2023: Russia appears to have the capacity to shrug off sanctions and US politicians are starting to ask questions about how much appetite America has to continue its proxy war with Russia, which for the past year has cost it an estimated $110 million per day in arms and other aid deliveries. Kevin McCarthy, minority leader in the House of Representatives, has said that more aid for Ukraine may not be passed by Congress if the Republicans gain control of the lower chamber. He said: “I think people are going to be sitting in a recession and they’re not going to write a blank cheque to Ukraine”. Especially if they increasingly realise that seizing sanctioned Russian oligarch’s superyachts is costing US taxpayers money; absurdly enough maintaining one such yacht, the Amadea, impounded in June, costs them $10 million a year. The fragile unity among Western nations against Russia could be weakening; reports in US media say the administration has privately suggested to Ukraine that it should consider opening negotiations with Russia.

Climate threat

There certainly is a threat from the climate, and it’s not just about changed weather. It is also a threat to the stability of the world’s financial system. While it is no longer questioned that the world’s climate is warming, payment to countries for supposed ‘loss & damage’ will take trillions of Dollars, estimated to be between $1 and $1.8 trillion by 2050; where will the money come from?

It is tempting to think that the extra cash needed can just be printed. After all, we have become accustomed to thinking that governments can turn on the money spigot at will. Japan has just done it again, with a package equivalent to $490 billion with the aim of stimulating the economy and help households with rising costs – including handouts of Yen 100,000 ($682) to help with costs associated with pregnancy and raising children.

But increasing the money supply – which will tempt governments and lobbyists to think they can spend their way out of the central problem raised in Egypt – will lead inexorably to more inflation, more depreciation of fiat currencies, and more erosion of fiat money’s purchasing power. The lesson of how we deal with Covid-19 – that creating more paper money and giving it out creates as many problems as it solves – has already been forgotten.

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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