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Soapbox: Stagflation is on its way

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Soapbox Stagflation Image

This shouldn’t be happening. A year ago the only division between economists was about the shape of the post-coronavirus economic recovery. Would it be like a Nike swoosh, or perhaps V-shaped, U-shaped or even W-shaped; but it wasn’t meant to be L-shaped. The global economy wasn’t meant to move from dead-stop to high-priced stagnation.

But it’s starting to look like stagflation – price rises combined with little or no economic growth – is on its way. That’s a nightmare for governments, central bankers, and the man/woman in the street. Sure, the US economy recovered in the third quarter of 2021, expanding by a record 33.8%, but that was not enough to offset earlier losses. The US went into recession in March 2020, ending 128 months of expansion, the longest in U.S. history. The Federal Reserve expects GDP growth to rise by 7% in 2021, slowing to 3.2% in 2022 and 2.4% in 2023. It also expects the core inflation rate to be 3% this year, dropping to 2.1% in 2022 and 2023 – against a target rate of 2%. The core inflation rate strips out some of the most inflation-prone goods, such as food. The US consumer price index – the government’s preferred measure – was an annualised 5.4% in September. But its annualised producer price index rose 8.3% in August, the biggest increase since records started being kept, in November 2010. That came following a 7.8% move higher in July, which also set a record.

These higher wholesale prices will feed through to higher consumer prices. The US National Federation of Independent Business’s latest monthly survey shows the proportion of small businesses preparing to raise prices in the next three months at its highest in more than four decades. It has only once been higher, during the oil crisis of 1979.

Growth is slowing globally, according to the International Monetary Fund (IMF). It now expects world GDP growth to be 5.9% this year, marginally lower than its July estimate. In Germany, Europe’s biggest economy, annualised inflation in September was 4.1%, the highest since December 1993, with heating oil going up by an astonishing 76.5%. The UK economy actually shrank in July according to official statistics.

It may be time to dig out the “misery index”, the creation of the US economist Arthur Okun. He invented it to give President Lyndon Johnson an easily digestible snapshot of the US economy. Okun added together the unemployment rate and the annual inflation rate and came up with an index. During the 1969-74 Nixon administration (1969-74), the misery index highest point was 13.61. It hit 19.9 during the Gerald Ford presidency of 1974-77. During Jimmy Carter’s presidency (1977-1981), it hit 21.98, and was at least partly responsible for his defeat in the 1980 election.

Since Okun created it, the misery index has been modified several times, the latest formulation by the esteemed economist Steve Hanke. Hanke’s modified index is the sum of unemployment, inflation, and bank‐lending rates, minus the percentage change in real GDP per capita. Higher readings on the first three elements are “bad” and make people more miserable. These “bads” are offset by a “good” (real GDP per capita growth), which is subtracted from the sum of the bads. The higher the score, the more the misery. Hanke’s index also includes many more countries, not just the US.

Hanke’s annual misery index for 2020 has Venezuela at its top, the most miserable country. No surprise there; inflation is about 2,500% and Venezuela cut six zeros from its currency, the Bolivar, at the start of October. Venezuelans have lost all faith in their fiat currency and prefer holding US Dollars, but they are required to use the Bolivar for everyday transactions. While the Bolivar loses 2,500% of its value each year, the US Dollar is losing only some 5%.

The UK ranks number 87 on the 2020 index, with a reading of 22.5, while the US comes in at 109, with a reading of 16.7. But if we stick with Okun’s orthodox index, we see that the misery index for the US has risen to almost 11%. High, but not yet President Carter levels. But it’s definitely travelling in the wrong direction.

Stones in our shoes

Kristalina Georgieva, the Bulgarian who this week narrowly avoided being fired from her job as head of the International Monetary Fund (IMF) after allegations that she tampered with data while chief executive of the World Bank, to flatter China’s economic record, says recovering from the Covid-19 pandemic is “like walking with stones in our shoes”. It feels more like walking in clogs containing boulders.

The IMF, like most economists, is superb at telling us what we already know. It did it again this week. In the words of the Financial Times, the IMF said: “The global economy is entering a phase of inflationary risk… it called on central banks to be ‘very, very vigilant’ and take early action to tighten monetary policy should price pressures prove persistent”. One wonders what planet the IMF’s experts are living on. Maybe their tax-free Washington D.C. lifestyles have caused a collective brain-spasm. In the UK real wage rises are about 4% higher than a year ago – but those lucky to get a wage rise will not be better off, because inflation will outstrip most wage rises. Once that sets in, then we can expect workers to demand more increases – and wage-price spiral will be with us. The only thing preventing this from happening already, the key difference with the 1970s, is that workers today are far less likely to be able to flex union muscles than in the 1970s.

Crude oil has topped $80 a barrel, global food prices are a third more expensive than a year ago, container costs on the sought-after route Shanghai-Rotterdam have gone up by 570% from a year ago… the list of huge price jumps goes on and on. Inflation is “transitory”, some leading central bankers tell us, as they resist putting up interest rates – normally the first choice in fending off excessive inflation.

But not all central bankers see inflation as temporary. Poland’s central bank unexpectedly raised its benchmark interest rate by 0.5% on 6 October after inflation hit 5.8% in September, the highest in 20 years. New Zealand’s central bank has raised its main interest rate for the first time in seven years. So too have the central banks of Brazil, Hungary, Romania and Russia, in all of which inflation is moving much faster than officially expected. The 300% rise in the benchmark price of natural gas so far this year in Europe – with winter’s cold just around the corner – has been a nasty shock.

Not looking for work

If the US economy is to get back onto a firm growth foundation then people need to work. So far they are reluctant. In September, the figure for non-farm payrolls – the closely-watched US monthly data that gives a clue about the overall state of the economy – went up by a miserable 194,000, far below expectations of 500,000. This followed an equally disappointing jobs report in August – the estimate had been that more than 700,000 new hires would happen in August, but the actual result was only 235,000. The labour force participation rate – a measure of the share of Americans who are employed or are looking for work – fell in September, to 61.6%. There are jobs; many jobs and sectors are even paying higher wages; average hourly earnings in the US rose by 0.6% in September. But people aren’t flocking back to work. In fact a record 4.3 million Americans quit their jobs in August; employers had 10.4 million unfilled positions at the end of August, down from a record of 11.1 million a month earlier. It was the first decline in job openings since December 2020 but still marked the second-highest figure ever recorded. The British Chambers of Commerce said that 80% of companies struggled to find workers in September. The economy has ‘stagflation is on its way’ stamped across it in florescent red letters.

Why are millions of Americans staying away from jobs? Plenty of explanations are offered – such as people needing to do childcare, or people are still nervous about Covid-19 infections. Maybe there’s a simpler reason – on the whole people may feel they aren’t paid enough.

Source: Center for Economic and Policy Research

We think prices are going up

In September, a survey of 1,300 households by the New York Federal Reserve found that the expectation for where inflation was headed was the highest for the past three years. They collectively think that food prices will rise by 7.9% over the next year; rents are expected to increase by 10% over the next 12 months and the price of medical care is expected to rise by 9.7%.

At some point it will become apparent even to Jerome Powell, chair of the US Federal Reserve, Janet Yellen, the US Treasury Secretary, Andrew Bailey, governor of the Bank of England (BoE), and Christine Lagarde, president of the European Central Bank (ECB), that the inflation they currently see as being a passing puff of hot air is more like a 1915 chlorine gas attack.

But the tools they have to combat stagflation are contradictory. To fight inflation, central bankers resort to putting up interest rates, making credit (mortgages, loans) more expensive and forcing people to cut their spending. It’s worth remarking how they kid themselves that increasing the money supply isn’t inflationary, but when they need to curtail inflation the only tool they have is to cut or stifle the money supply.

And what do they do to avoid economic stagnation? They pump money – either borrowed or freshly made money – into the economy.

Bob Prince, co-chief investment officer at Bridgewater Associates, the world’s biggest hedge fund put the dilemma well: “If there is inflation, the Fed is in a box because the tightening won’t really do much to reduce inflation unless they do a lot of it, because it is supply driven. And if they do a lot of it, it drives financial markets down, which they probably don’t want to do… Deciding between the lesser of two evils, what do you choose? I think most likely you choose inflation because you can’t do much about it anyway”.

That’s why stagflation is the stuff of nightmare. If all you have to fight is inflation, you know what to do – increase interest rates, tighten the money supply. If you face an economic slowdown and deflation, you also know what to do – make money cheaper. But when you face both at the same time, when stagflation is on its way, which one is the bigger enemy?

Full disclosure: we want you to buy gold and use gold as money in your everyday life. Why? Not just because our business needs that, but because we are convinced of several things: that the amount of sovereign and corporate debt in the world is a huge systemic risk; that various geo-political risks are becoming more intense; that the US Dollar’s international reserve status is waning and a period of deep uncertainty looms; that the threats to personal liberty are increasing; and that fiat money systems are inherently unstable. 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. But if you use Glint and like what it provides, tell your friends and family that there is a simple alternative to holding cash that is losing value, wherever you are.

Soapbox: The trillion dollar trick

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trillion dollar trick image

Of all the crackpot ideas that have been dreamed up, fiat currency – paper money which is valued only because governments say so – has to be one of the daftest.

The creation of a trillion-dollar platinum coin is, however, a strong contender for the title.

What follows is a tangled but incredibly important tale, one which tells you all you really need to know as to why gold – and perhaps cryptocurrencies or indeed any asset that is outside government control – are so important.
At its heart is the almost $29 trillion dollar (£21 trillion) US national debt, which is now nudging a legally fixed debt “ceiling”. The deeply divided US political class is engaged in an unseemly wrangle over this ceiling. Legally, the US is barred from running up any more debt without Congressional approval, hence the political headache.

It’s often mistakenly claimed (including by Janet Yellen in a column she published in the Wall Street Journal on 19 September ) that the US has never defaulted on its debt. But in 1934 the US defaulted on its 4th Liberty Bond, repaying the bond holders not in the gold it had pledged but in devalued paper dollars.

We have been here before, quite recently; in 2011 and 2013, Congress agreed to raise the debt ceiling at the 12th hour. That’s why many are rolling their eyes in boredom this time around.

But it might be different this time. American politicians are intent on exploring what The Economist calls “the true depths of partisan nihilism”. Out of this noxious brew might emerge the biggest sleight-of-hand ever perpetrated by a government, a trillion-dollar trick which pulls away fiat money’s cloak of respectability. A game of chicken is being played out in the US Congress and – not to over-dramatise – the financial stability of the world could be at stake. It’s a bit like the boy who cried ‘wolf!’ Eventually, when least expected, a wolf actually turns up.

Source: Visual Capitalist

The mind-boggling US debt

Why should this even be a topic for debate? Out of the group of wealthy countries in the Organisation for Economic Co-operation and Development (OECD) only Denmark and Poland have a hard legal limit on debt.

Other OECD countries like Japan, Canada, the UK, France, and Germany get along just fine without debt ceilings. They just pass laws setting up their tax and spending policies, and issue debt to make up the difference.

The US debt ceiling dates from 1917, when it was set at what now seems the absurdly small amount of $11.5 billion (£8.5 billion). Since 1945 the Congress and the President have raised that ceiling almost 100 times. Occasionally legislators, when they can’t agree as to what the new limit should be, suspend the debt limit – they’ve done that 7 times since February 2013. The most recent suspension began in August 2019 and ended August 2021. The debt limit is currently some $28.5 trillion (£21 trillion). The US Congress needs to agree to raise this limit – or default will happen. In the current Congress, the Democratic Party wants to raise the ceiling but the Republicans are saying they will block that.

This impasse is worrying some of the adults in the room. “Failing to raise the debt ceiling would be disastrous. It would result in severe negative consequences that experts are not capable of predicting in advance”, says the (non-partisan) Committee for a Responsible Federal Budget”, A default, or even the perceived threat of one, “could have serious negative economic implications. An actual default would roil global financial markets and create chaos, since both domestic and international markets depend on the relative economic and political stability of US debt instruments and the US economy“.

Right now, the US government is only able to pay its bills through what it calls “extraordinary measures”, a wonderful euphemism which means shifting funds around among different government departments. Janet Yellen, the US Treasury Secretary, wrote to Nancy Pelosi, the Speaker of the House of Representatives, in July, about the debt ceiling. She said that defaulting on the debt “would cause irreparable harm to the US economy and the livelihoods of all Americans”. She added that no-one can really tell how long the “extraordinary measures” might last. The Congressional Budget Office (CBO) says the government might run out of cash this month or next. Yellen has recently said the money will start to run out on 18 October.

A very big coin

But – hey presto! The Treasury has a ‘get out of jail free’ card to hand. It has the legally enshrined right to mint platinum coins of any size and denomination. It could easily print one with a face value of $1tn, deposit it at the Federal Reserve, and thus immediately add $1tn to the Treasury’s bank account, giving it breathing room to avoid the debt ceiling fight.

It is perhaps appropriate that the land which gave us Mickey Mouse should have the kind of legal loophole which could turn this trillion-dollar trick. There is a Twitter hashtag – #mintthecoin – which has been around since at least 2013. One such coin probably wouldn’t be enough though, given the speed at which the US is racking up debt. Here’s a proposal – why not mint a platinum coin with a face value of $30 trillion? If you are going big, then go really big.

According to one academic paper on the super-coin: “one could easily imagine the Treasury Secretary deciding to mint and deposit a $1 trillion platinum coin at the Fed on a rainy Friday afternoon after the markets had already closed, with no prior announcement, and then conducting a public education and PR blitz over the weekend until the issue had been discussed to exhaustion by Monday morning… The President and Treasury Secretary [would be able] to declare victory in terms of averting the debt ceiling crisis before anyone even had a chance to complain about the particular methods employed to achieve that victory… from a constitutional perspective it is a scalpel compared to the sledgehammer of the President and Treasury Secretary explicitly breaching the debt ceiling. Indeed, Treasury Secretaries have historically employed similar creative accounting manoeuvres precisely in order to avoid breaching the debt ceiling… [it] can be seen as merely the latest iteration in a long tradition of fiscal financing gimmicks”.

Does this matter?

Is this trillion-dollar trick being taken seriously in the US? Surprisingly, yes.

The list of the great and the good backing the trillion-dollar coin trick ranges from Nobel Prize laureate Paul Krugman through Congress Democratic Party members Rashida Tlaib and Jerry Nadler to the former director of the US Mint, Philip Diehl.

According to Diehl: “The Mint strikes the coin, ships it to the Fed, books $1 trillion, and transfers $1 trillion to the treasury’s general fund where it is available to finance government operations just like with proceeds of bond sales or additional tax revenues. The same applies for a quarter dollar.

Once the debt limit is raised, the Fed ships the coin back to the Mint, the accounting treatment is reversed, and the coin is melted. The coin would never be “issued” or circulated and bonds would not be needed to back the coin”.

There are some options other than the trillion-dollar trick. President Biden could invoke the 14th Amendment, which states in part “the validity of the public debt of the United States, authorised by law… shall not be questioned” and simply declare the debt ceiling unconstitutional. Or a new class of bond could be created to fund the government while it cannot issue Treasury bonds. Janet Yellen has said she backs the abolition of the debt ceiling, which seems a rational position.

It is unthinkable that the Democrats and Republicans will not cobble together some deal to push the debt ceiling down the road, even though the net effect of that will simply be the deferral of the US Dollar’s time of reckoning. It would be logical to abandon the debt ceiling rather than face this regular recurring nightmare of a Washington snarl-up and weeks of wasted time. But that would also mean the fiscal profligacy of this mighty nation would be freed to run completely wild.

Whatever happens, if the debt ceiling is raised, abandoned, or a trillion-dollar trick is perpetrated, the US debt is on track to reach more than $32 trillion (£23 trillion) by this date in four years’ time. By which time the US will be headed for a fresh presidential election and, no doubt, another debt ceiling crunch.

Soapbox: Trust – a precious commodity

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Trust Hands Image

The US Congress says that the motto “in God we trust” must appear on all America’s banknotes and coins. Trust is a precious commodity. Sadly there is precious little of it in today’s US. Cracks are even starting to appear within the senior ranks of the President’s Democratic Party; distrust is spreading. Maybe all political life is like this.

The Democratic Senator, Elizabeth Warren, who briefly was considered the front-runner for nomination as the party’s presidential candidate in 2020, has denounced the chair of the US Federal Reserve, Jerome Powell, as a “dangerous man”. Warren’s words are a bit like breaking wind in front of the Queen; just not done.

Powell is ‘dangerous’ in Warren’s opinion not because of his supremely relaxed view of where inflation may be headed – he is sticking to the mantra that the high inflation level is ‘transitory’ – but because his actions are making it too easy for big banks to take on big risks.

Maybe President Biden will succeed in getting his nominee for the Office of the Comptroller of the Currency (OCC) accepted by Congress. The OCC is an obscure but hugely powerful independent bureau within the US Treasury which regulates and supervises all domestic and foreign banks operating in the US. She is the Kazakh-born, Saule Omarova, a Cornell academic who specializes in the regulation of financial institutions.

Omarova published a paper this year titled The People’s Ledger: How to Democratize Money and Finance the Economy. This ‘People’s Ledger’ is partly an expansion of the Central Bank Digital Currency (CBDC) debate: “The Article’s goal is not to repackage familiar prescriptions but to expand the boundaries – and to sharpen the focus – of the currently fragmented public debate on what “democratizing finance” means in today’s complex world. Doing so is especially urgent in light of the ongoing digitization of finance, which includes rapid proliferation of privately-issued digital money and privately-run digital payments systems. Notwithstanding their rhetoric of democratization, these technologies threaten to undermine the fundamental balance of the sovereign public’s and private actors’ relative powers and roles in the financial system”. Omarova’s ambition is to end banking as we know it, and centralise it under the authority of the Fed, and in the process kill off cryptocurrencies.

Warren meanwhile, used the Archegos Capital debacle from April this year as a stick to beat Powell with, although it’s far from clear that, as the law stood, Powell could have done anything to prevent that costly collapse.

Warren, who made her name as a professor of bankruptcy law and came more forcefully to public prominence during the 2008 financial crash, is one of the leading figures on the left wing of the Democratic Party. She came up with the idea for and established the Consumer Financial Protection Bureau under President Barack Obama.

She told a Senate banking committee that she will oppose Powell’s re-nomination (his term at the Fed ends in February 2022), adding that “I came to Washington after the 2008 crash to make sure that nothing like that would ever happen again. Your record gives me grave concern”. I am sure that Omarova would sympathise with that.

That the American public – the world even – can have trust in the Fed, America’s central bank and its chair and governors is critical. Fiat money, the Dollars and Cents created by the Fed, is entirely built on trust. The erosion of trust in fiat money is one major explanation of the explosion of cryptocurrencies; people are seeking a form of investment and/or money that they can trust not to lose value.

Fed resignations

That’s why the resignation this week of two senior Fed officials, Robert Kaplan and Eric Rosengren, respectively the presidents of the Dallas and Boston branches of the Fed, is not just embarrassing but highly damaging to trust. They owned and traded shares in companies and real estate investment trusts last year, when the Fed gave enormous boosts to all kinds of markets by making money and the borrowing of money cheap.

The definition of insider trading is the trading of a stock to one’s own advantage through having access to confidential information. Even if Kaplan and Rosengren are not thought to be guilty of insider trading, they certainly benefitted from the strong general rise in stock prices – the S&P 500 gained more than 16% last year, while the Nasdaq composite soared by more than 43%. Powell said that the appearance of a conflict of interest is “obviously unacceptable”. According to Daniel Taylor, a professor at the Wharton School, the business school of the University of Pennsylvania, “most Americans today believe the stock market is rigged, and they’re right”.

President Biden is believed to trust Jerome Powell, but many in his party don’t. Jerome Powell, a Republican, has already gained the Treasury Secretary, Janet Yellen’s backing for another stint as chair of the Fed. Will Biden stick to his guns, or knuckle under to the more “progressive” members of his party? In saying she doesn’t trust Jerome Powell, Warren knew that she has the backing of many influential members of the Democratic Party.

In 2022 the Democrats, with their slim grasp on government, will face mid-term elections. Biden will be aware that Bill Clinton in 1993-4 and Barack Obama in 2009-10 saw that precious commodity, trust, ebb away from them in their own mid-term contests. President Biden has clearly decided that his best chance of success is to make a much bigger splash.

He proposes more than $5 trillion (£3.71 trillion) in new spending initiatives over the next decade, far more than Clinton or Obama ever offered, to be partially paid for by tax increases on corporations and affluent families. On cultural and social issues, Democrats are pursuing a much bigger agenda under Biden than either Clinton or Obama. Biden is endorsing measures related to an array of liberal priorities, including election reform; police accountability; citizenship for young undocumented immigrants; statehood for Washington, D.C.; LGBTQ rights; and gun control.

This is a big and risky agenda for a president whose approval ratings are less than 50% , who has only a tiny majority in the House of Representatives and a Senate split 50-50, and with an economy that’s yet to get back on track after the Covid-19 pandemic.

Trust in gold

Trust is a precious commodity. But it’s not something we can use as money. The world is emerging from a health crisis and may be entering a financial crisis. The hints of that crisis are coming thick and fast – China’s Evergrande mammoth debt problems, debt ceiling kerfuffles in the US, nervousness in stock markets as the Fed might/might not slow/stop its quantitative easing – there are too many to mention.

Fortunately, there is something one can trust and use as money, of course that is gold, trusted for millennia and as relevant today as it was two thousand years ago. At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power. We strongly believe that gold is the fairest and most reliable currency on the planet, but 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.

Crowdfunding is now live!

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We’re all delighted that our crowdfunding round is now available in both the UK & US – we’ve got off to a flying start already surpassing £1m in the UK & Europe through Seedrs just a few days after the public launch. US investors can visit Republic to join the Glint crowdfunding community.

A reminder of Glint’s mission: we are democratising and digitising real gold to be used as everyday money. Your support is vital in helping our growth as we continue to offer a real alternative to a failing monetary system.

Just in the last few days we’ve had several stark reminders of why a reform of the current financial system is so vital.

In the last week, we’ve seen inflation stats from China, the UK and the US – up 0.9%, 1.5% and 2.6% respectively. The UK will surpass the Bank of England’s 2% target and hit 2.5% later this year whilst in the US it could even hit 6%. This is staggering and has a frankly terrifying impact on the value of our cash and savings.

Last week, the FTSE 100 fell by around 2.5%, losing almost £50bn whilst the Dow Jones saw a 3% drop over 48 hours.

And the cryptocurrency market is collapsing around us. Elon Musk’s tweet suggesting that Tesla would exit the Bitcoin market sent prices plummeting. As prices stabilised and then began to recover, news from China that it was cracking down on crypto and tightening restrictions on financial institutions with services dealing with the digital currencies, sent crypto prices into freefall – the price of Bitcoin dropped a third in less than 24 hours. Some investors will have seen thousands wiped off their portfolios within a matter of minutes.

All the while, gold has been going under the radar. It’s seen its value rise by around 10% in just six weeks and after being maligned for months is suddenly one of the only assets performing well.

Of course, gold’s value can decline, but it has been a store of value for centuries and has proven its long-term reliability. In my view, the current climate makes gold once again the premier hedge against inflation, uncertainty and the erosion of our purchasing power.

Now is the perfect time to invest in gold and invest in Glint to be part of the future of money.

Jason Cozens


Soapbox: Negative interest is no answer

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Governments have thrown just about everything at their economies since the terrible impact of lockdowns eliminated millions of jobs and slashed growth.

Their efforts – trillions in ‘stimulus’ spending, helicopter money, interest rate cuts, ‘furlough’ schemes, holidays on this and that tax – have had some hefty unintended consequences. The pace of developments has been remarkable. One of the macro-economic tools that’s been tried is cutting interest rates, and even making them negative – in other words you would have to pay a bank to deposit your money.

In February, the Bank of England (BoE) formally told the UK’s high street banks they had six months to prepare for negative rates. The possibility of negative interest rates should send shivers down everyone’s spine. This week we may learn if the BoE intends following through on its warning.

A shift into negative rates will however do little to get the economy moving again. It may produce its own distortions – and market distortions can last much longer than the policy changes that gave rise to them. There’s always a time lag.

For example, few people this time last year would have forecast that household wealth would have soared under the pandemic – yet it has. In March average US household income went up by more than 21%, the largest monthly rise since 1959. UK households that same month put £16.2 billion into their bank accounts, 3.4 times the monthly average for the year to February 2020, prior to the first UK lockdown.

In the UK, we have an extra twist. The UK Chancellor Rishi Sunak announced in July 2020 a temporary stamp duty holiday. Stamp duty is the tax levied by the UK government on residential property – on homes. Sunak cut the rate to zero for all properties sold for less than £500,000 ($693,000) until the end of March. He later extended this until the end of June this year. It’s not clear why the Chancellor chose this policy instrument in the anti-Covid/economic slump fight but its effect has been to create a “red hot” property market according to one UK mortgage adviser.


Governments lack dexterity

Demand for mortgages in the UK has become “red hot” and – the laws of supply and demand being what they are – average UK house prices went up by an astonishing 7.3% in April year-on-year. In the US, house prices rose by 16% in the past 12 months. The price of lumber – the main component in the typical US house – has risen by more than 230% since the start of the Covid-19 pandemic. UK household wealth has risen to record levels, the equivalent of £172,000 ($238,400) per person. In the US, personal incomes went up by 21.1% in March against the previous month – the highest jump since 1946.

US citizens – even those working and living abroad – have received their $1,400 Biden “stimulus check”. Some UK citizens have been paid by the government while their job is put on pause (“furloughed”).

But the hand of government is by definition clumsy. All state instruments are blunt; they’re not built to take account of individual cases. Thus the Legatum Institute, a think-tank in the UK, estimated last November that almost 700,000 people had been pushed into “poverty” in the UK as a result of the Covid-induced economic crisis. Human Rights Watch, the international NGO, said that eight million more US citizens were living in poverty in January this year than six months’ previously.

The gap between the “haves” and the “have nots” has just got bigger; the collective wealth of the more than 600 US billionaires has gone up by 36% during the pandemic. The richest 1% of Americans have added about $4.8 trillion of wealth from the end of March to the end of December 2020.


Continental lessons



We should be wary therefore of any attempt to stimulate growth by making interest rates negative. The money that would supposedly be teased out and put to productive use (into the “real” economy of making things people need to buy) will not necessarily end up there. Those who put their spare cash in banks would find themselves forced to pay for the privilege. Savers in cash are already punished by record low-interest rates; they would suffer even more punishment if rates went negative.

Nor is there any guarantee that the cash would flow into the economy; since the European Central Bank (ECB) introduced a negative deposit rate in 2014 physical cash holdings in Germany have trebled to €43.4 billion ($52 billion, £37 billion). People prefer to hold cash than pay banks, or to risk it by investing it. People have become even more wary of spending on anything but tangible assets in the wake of Covid. In the seven years since then the 19 countries within the Euro area have grown very sluggishly – peaking at 2.6% gross domestic product (GDP) growth in 2017 and as low as 1.3% in 2019 – the year before Covid-19 struck. Their example of negative interest rates does not seem to encourage growth.

Governments right now want to see their populations spending, injecting money into the economy and theoretically driving economic growth. Negative interest rates – which would have a knock-on effect on many financial products and institutions, from tracker funds to banks – are not the answer when economic growth already appears to be rebounding. The “reflation trade” has become a buzz phrase in recent weeks; crafting policy to ensure that inflation does not get out of hand is rapidly becoming the main concern for the US and others.

With interest rates so low, taxes bound to rise, prices soaring – lumber is only one example – protecting what one has is becoming daily more important. The gold price is having one of its periodic dips; but if history is any guide, then gold remains an important part of anyone’s portfolio.