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Category: Soap Box

Soapbox: The boom goes on

What's the rationale...

25 November 2021

Gary Mead

What’s the rationale for Glint? Several benefits come to mind.

For one thing, it’s an inexpensive and easy way of buying and holding physical, allocated gold, gold that truly belongs to its owner – so it suits those of us looking to diversify our portfolio into something that has over centuries proved to hold its value.

It’s also a payments system, one that that enables its users to spend – and in some markets to send – gold as money. It frees its users from networks of fiat, or paper, currencies. Rather than governments controlling what you can use as money, you can choose to use gold for your everyday transactions. It’s also truly democratic; anyone can hold a Glint debit card and use the Glint App in those regions where we operate.

As the world moves closer to unsustainable debt levels, these advantages of having and being able to use gold as money, no matter how tiny the amount, will certainly become more relevant, more useful. For the “cruel tax” (which is how a paper published in 2001 referred to inflation), is back. This paper surveyed almost 32,000 people around the world, asking them about their views on inflation. The conclusion was that inflation “makes the poor worse off”; the poor “suffer more from inflation than the rich”.

And the higher the inflation goes, the deeper the pain. In the US, annualised inflation is now running above 6%, according to government figures ; independent analysts using the methodology that used to be deployed by the government in 1980 put the rate at 14%. In the UK, the official rate of inflation is now 4.2%. In the Eurozone, it’s now 4.1%, although that conceals the fact that energy prices went up by 23.5%.

In the US, the discount retail store Dollar Tree, which has almost 8,000 branches, has been known for its slogan “Everything’s $1”. Soon it’ll need to change that to “Everything’s £1.25” – it recently said it will have to push up prices for most merchandise to $1.25. When prices go up, they tend never to fall back.

So, depending on what fiat money you hold and use, its purchasing power – which surely is what really counts, what you can actually buy with your money – is currently losing that power by at least 4%-6% a year, or, if you shop at Dollar Tree, by 25%. Rich or poor, everyone who relies on fiat money is being punished. The boom goes on, despite underlying evidence that it’s already bust and is living on credit.

Bloating states

The chart above shows that the US is on track to accumulating a lot more debt. The debt level of all countries has soared as a consequence of the economic recession created by the response of governments to the Covid-19 pandemic. The lockdowns were a blunt instrument; the monetary ‘stimulus’ dished out by governments were an equally blunt device to prevent outright economic depression. As people have gradually come to look upon governments as having a duty to protect them and their incomes no matter what, and the world population ages (by 2050 1 in 6 people will be over 65, up from 1 in 11 in 2019), the pressures on states will become ever-greater. The temptation will be for governments, or perhaps the pressures on them will force this, to borrow more to fund immediate welfare needs or demands. Governments can only raise income by taxation, spending cuts, or taking on more debt. The least politically sensitive way is by bloating the debt level, which may help the boom to go on but at the cost of loading repayments onto future generations. Modern Monetary Theory argues that governments who control their own currency need not worry about debts – unless inflation returns, which it has; it’s interesting how little one hears from MMT proponents these days.

According to the Institute of International Finance (IIF), global debt in the second quarter of this year rose to a new record high of almost $300 trillion – $36 trillion more than prior to the pandemic. Over the last 40 years, total debt has more than tripled to 350% of global gross domestic product (GDP). The number of countries whose total debt is more than 300% of their GDP has gone up in the last 20 years from half a dozen to around 24, including the US.

Several questions pop up about this level of debt. Is debt accumulation now beyond control? What will happen to debt levels when the US pushes up interest rates? The first question is probably unanswerable but the second will become more pressing as we approach the point, perhaps by mid-2022, when the US Fed starts putting up interest rates.

We have had a taste of what might happen this past week. When the news broke that Jerome Powell would be re-appointed as chair of the US Fed, the US Dollar strengthened against other currencies and the gold price slipped by about 4.5%. The market ignored Powell’s previous passive record on evidence that inflation is threatening to get beyond control, and assumed that he might put up interest rates faster, and end America’s quantitative easing faster.

But no matter when it happens, the US will start to put up interest rates sometime next year. The US Dollar will strengthen and that will tend to depress the value of other currencies, not least those of emerging markets. The boom will come to a shuddering halt in the US and all the heavily indebted emerging markets.

The gold price will also take a hit from higher US interest rates, which will make for a stronger US Dollar. Higher interest rates will make credit more expensive, so most assets that have boomed during the recent years of easy money and cheap credit will also be hit – think house prices, cryptocurrencies, stock markets. Powell is acutely conscious that he needs to avoid delivering a blow to the US economy, so he will tread softly. But tread he eventually must and the cost of servicing the US debt – which was more than $562 billion for the 2021 fiscal year – will rise.

Full circle

We come full circle. Why hold gold? Clearly gold is not impervious to shifts in wider markets – its value can go down as well as up. At Glint, we strongly believe that gold is the fairest and most reliable currency – and for us it is currency and is to be used as such. And as the world inexorably moves towards heightened macroeconomic and geopolitical uncertainty it seems to me to make sense to possess gold. We don’t give financial advice. But a glance at a price chart, such as the one below, suggests that gold overall gains in value, despite its ups and downs. Gold is not transitory; it is forever.

 

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