phone icon (877) 258-0181

Category: Soap Box

Soapbox: All aboard for the recession express?

  |   By  |  0 Comments

Last Friday’s $50/ounce drop in the Dollar gold price was a nasty surprise; it seemed to come from nowhere. In fact, it was a blunt reminder of the power that the US central bank, the Federal Reserve, can indirectly exercise over the gold price.

It was a packed week but most of the big news events were widely anticipated. On Wednesday, the Fed put up its benchmark interest rate by 0.25% to a range of 4.5%-4.75% – as generally expected. On Thursday, the US Bureau of Labor published data showing that the economy added 517,000 jobs in January, double that recorded in December. This wrong-footed most economists, who had expected around 185,000 new job openings. The US unemployment rate fell to 3.4%, the lowest since 1969. Job openings also rose in January, to 11 million, and unemployment claims are at their lowest in nine months.

These figures proved a series of grenades in financial markets. They have blown off-course the route the Fed seemed to be following, an amble towards peak interest rates of some 5% by the end of 2023.

Some economists conclude that slower wage growth and lower unemployment is providing a “utopian scenario” in which consumer demand stays strong while inflation is quashed. But it’s just as likely that, amid the deep uncertainty that policymakers have as to what’s going on in the US economy, that they will make a misstep and land themselves with a dystopian scenario.

The temptation

The January jobs report suggests that the US economy is still firing on all cylinders despite the Fed making money and credit more expensive than for years. One of the tasks the Fed has is to bring about stable prices; to that end it has raised interest rates eight times since March 2022 in the fight against inflation that reached a four decade high of more than 9%; rates are now their highest since October 2007. Higher rates generally mean a stronger Dollar and a weaker gold price in Dollar terms; on Friday, the Dollar rose by almost 2%, while gold plunged. ‘Stable prices’ mean that inflation is tamed; the US consumer price index (CPI) in December was an annualized 6.5%, its lowest in a year but still way ahead of the Fed’s target of 2%.

The gold price reacted so badly to the jobs report not because gold needs greater unemployment, but because of a fear that the Fed will push interest rates higher than expected, making the Dollar even stronger, and leaving gold (which pays no interest) relatively unattractive. The temptation for the Fed is that it misinterprets the data, concludes that the economy is motoring and that inflation remains a threat, so hikes rates even higher. Fed policymakers seem split on this, some pushing for higher rates (to finally extinguish inflation) and some for an easing of rate increases (for fear of putting the economy into a serious recession with all the associated miseries). For some commentators it’s ‘high noon’ for central bankers – halt interest rate rises too late and deepen this year’s economic slowdown, or too soon, leaving inflation alive if not exactly kicking.

Stagflation for some

If the US path to monetary stability is unclear at least the Fed has a clear choice. The same isn’t true in the UK or the Eurozone.

The International Monetary Fund (IMF) came in for a tornado of criticism from some British politicians last week for its gloomy assessment of the British economy, which it said would shrink by 0.6% this year, placing the UK below both the G7 group of richer nations and, humiliatingly, Russia. The IMF said the UK economy would grow by 0.9% in 2024 but the Bank of England (BoE) forecast for that year a further decline, of 0.25%. The Eurozone’s gross domestic product (GDP), which managed a 0.1% increase in the final quarter of 2023, would grow 0.7% this year and 1.6% in 2024 said the IMF. Last week, the BoE pushed interest rates to 4%, a 14 year high, while the European Central Bank (ECB) also put rates up, to 2%. Raising interest rates in the face of a slowing economy is unusual, to say the least.

Forecasts for how economies will perform often turn out to be wrong; the further ahead they look, the more likely they will go astray. At this point the most any crystal-ball gazer (i.e. all economists) who cares about their reputation would be likely to say is that all the IMF forecasts are well within a margin of error.

The rocks ahead for the UK are huge. Public sector workers – teachers, health workers, fire personnel – are being joined by many others in strike action to demand wage increases that keep step with inflation. Trades unions lack the muscle they once had, but their strikes still cost at least £1.7 billion in eight months last year, according to the consultancy the Centre for Economics European gas storage levels and Business Research (CEBR). There are no signs that the government is prepared to budge on its (sub-inflation) wage offers. For Eurozone members the big fear early in 2022 – that energy costs would soar as a result of the Russia/Ukraine war – has so far not materialised, thanks to a mild winter so far. Energy costs are lower than expected, easing the cost-of-living fear.

Yet none of these three are out of the woods. The growth forecasts from the IMF are chimerical. It takes months for higher interest rates to filter through to the ‘real’ economy, so the Fed could easily overstep the mark and squeeze interest rates so tightly that a recession will result in late 2023. The US also has the matter of its troublesome debt ceiling (of $31.4 trillion) to negotiate before June. As for Britain, the strikes are a troubling nuisance but one can sympathise with workers whose living standards have fallen far behind inflation. The Eurozone may have escaped high energy bills this year, but next may be another matter.

And then there’s Ukraine, an apparently bottomless pit into which money is being poured by the West, which now just a couple of steps away from a direct military confrontation with Russia. Tanks are headed for Ukraine. What next – fighter jets? Such a fight would not only be devastating in human terms; it would be ruinous of paper currencies. One can see from the example of Lebanon – which has just devalued its currency, the Lebanese Pound, by 90% – what social and political catastrophe can do to a fiat currency, and what human heartache results. Which is why our motto is Gold is security: Glint its key.

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.

Soapbox: Turning the supertanker

  |   By  |  0 Comments

How do you turn a super-tanker? Starting early is a good idea.

Two super-tankers dominate the global economy – China and the US. If the economy of either catches cold, the rest of the world sneezes. The US is not yet out of the ‘recession woods’ while China looks to be in some difficulty. A combination of its shrinking and aging population, faltering external demand (as the world economy slows), and weakening domestic consumption tend to suggest China’s growth this year will be sluggish at best.

If we can credit the Chinese premier, Li Keqiang, China is going to try to make waves by changing the course of its super-tanker; the Chinese consumer is going to be prioritised. “Boosting consumption is a key step to expand domestic demand. We need to restore the structural role of consumption in the economy”, said Li at the weekend. This decision to make domestic consumption a key driving force of its economy could have global repercussions. Chinese consumers have not been big spenders by comparison with other nations. While consumer spending regularly accounts for around 70% of US gross domestic product (GDP), in China such spending made up just 38% of GDP in 2021.

This is not just a ‘China re-opens post-Covid’ story. If Li and his communist party associates are true to their word, China is about to embark on an entirely fresh route. Prices of key commodities – such as base metals, the essential ingredients for a host of consumer goods – have already climbed much higher on the re-opening of China’s economy. If consumerism is becoming the new CCP-led policy, price for basic commodities and finished products will rise even higher.

Yet the policy Li announced may run aground – the super-tanker may be too difficult to steer along a different course. After all, President Xi Jinping, the then new leader of the Chinese Communist Party (CCP), unveiled in 2013 a 60-point reform plan aimed at a similar target, that of easing the State’s grip on the economy in favour of encouraging consumer-led growth. Those promises ran into the sand.

Savers rather than spenders

The Chinese consumer “is the single most important thing in the world economy… The next 40 years of global growth might be about the Chinese consumer. It is very unlikely that any other country could step in to drive global consumption” said Jim O’Neill, a former Goldman Sachs chief economist in 2019 – before Covid-19 hit.

China’s anti-Covid-19 policies of the past three years encouraged saving rather than spending – many Chinese spent much of 2020 and 2021 locked away at home. Chinese households currently are sitting on “the biggest pool of new savings in history” according to the Financial Times, growing last year by the equivalent of some $2.6 trillion (a record), with the total now well above $15 trillion.

But the free-spending Chinese consumer has been a long time coming. Getting them to spend rather than save will not be a swift matter. Chinese people have been ‘encouraged’ to be savers rather than spenders by strict capital controls, which keep much of its vast household wealth within its borders. If consumption is going to get a boost, does this mean capital controls will be loosened? That would be a key step towards full international acceptance of China’s currency. Full convertibility of its currency seems a distant prospect right now – but if China really wants to challenge the Dollar, convertibility will be necessary.

The CCP has two obvious ambitions. The first is to remain in power, which translates into continued control over China’s population. The second is to achieve economic hegemony – dominance – in global affairs, and thus assert what it feels is its true destiny.

President Xi is often seen by Western observers as a dogmatic totalitarian head of state, but he may actually be capable of great flexibility. His pragmatic side was shown in the state’s response to the street-level protests against the continued Covid lockdowns – they quickly fizzled out when the zero-Covid policy was dropped, a volte-face that surprised the world.

But despite China’s size, its currency, the Yuan/Renminbi, is a pint-sized competitor on the international stage. China is the world’s biggest trader but its currency accounts for less than 2% of international settlements. That currency only constitutes about 2.25% of international reserves. The fact remains that the Yuan/Renminbi is not loved enough to become an international currency, even though the Chinese authorities have gradually, since 2004, embraced the offshore Renminbi, widely seen as the first step towards full liberalization of China’s capital account and exchange rates.

No hegemony without political change

In China the currency is a political tool, not merely a monetary device. That’s evident from China’s development of its own Central Bank Digital Currency (CBDC). The ultimate end for China is that the US Dollar is replaced by the Yuan/Renminbi. China certainly wills that end, but as yet it’s not willing the means to that end. The US has an open economy, enabling the free movement of money in and out of the country. China’s economy is closed; it imposes capital controls and money cannot move freely in and out of the country.

Moreover the rule of law is shaky in China. The CCP has shown itself willing and able to target individual entrepreneurs and their companies if they are considered to represent threats to the communist authorities. The 1993 Company Law requires all companies based in China, both foreign and domestic, to allow the establishment of units to “carry out the activities of the party” and to provide “necessary conditions” for these units to function. Many companies have ‘sleeping’ CCP officials in their boardrooms.

Sorting out the direction China is moving in is extremely difficult. So far President Xi’s ambition to topple the Dollar seems to be via backdoor routes, such as via the Renminbi Liquidity Arrangement (RMBLA), which aims to provide liquidity support and can be used by participating central banks during future periods of market volatility. Under this, each participating central bank contributes a minimum of Renminbi 15 billion or US dollar equivalent, creating a reserve pool. The arrangement initially includes the central banks of Chile, China, Indonesia, Malaysia, the Hong Kong Monetary Authority, the Monetary Authority of Singapore. By acting the role of a central bank ‘leader’ China hopes it will come to be recognised as that leader, in a de facto way.

How does the Chinese consumer fit into this evolving picture? If the CCP can convince the world that the Chinese economy is becoming more like that of the West – a ‘quiet rise’ – then maybe the Party will not have to take measures it doesn’t want to, such as doing away with capital controls. Even that is unlikely to convince the world’s central banks to convert more of their reserves to Yuan/Renminbi; for them, trust is the most valuable asset. China has yet to prove itself worthy of trust. The ‘quiet rise’ may be more successful at undermining the Dollar than a direct confrontation – and the Chinese consumer is going to be encouraged to play its part by spending more.

Soapbox: Back from the dead

  |   By  |  0 Comments

There’s never a dull moment in the cryptocurrency world. Hardly a week goes by without a cryptocurrency, broker or trading platform’s sensational crash or the saga of a multi-million fraud. The latest toppled tumbling domino in the cryptosphere is Genesis, whose fall leaves some 100,000 creditors high and dry.

Last year was dismal for crypto fans – the overall market saw $2 trillion wiped out (taking its overall market value to $1 trillion) and popular tokens lost considerable value, Bitcoin more than 60%. According to one survey, the percentage of Americans who think putting money into digital currencies is “highly risky” rose 15% in 2022, year-on-year, to 60%.

One US citizen who saw the light was Peter Thiel, the billionaire co-founder of PayPal. Despite saying last year “we’re at the end of the fiat money regime” and forecasting that Bitcoin’s price (then around $44,000) could increase by a factor of 100, Thiel’s venture capital firm, Founders Fund, which made its first investment in Bitcoin in 2014, sold almost all its stake in cryptocurrency by the end of March 2022. That wasn’t exactly a ringing endorsement of the ‘currency’ bit of cryptocurrency. Thiel got out before the crash; Bitcoin’s price rose from under $100 in 2013 to an all-time high of more than $65,000 by November 2021. Many others did not; that $2 trillion loss was shouldered by someone.

Sam was not alone

Sam Bankman-Fried, co-founder of the cryptocurrency exchange FTX, which collapsed last November owing creditors more than $3 billion, has come to personify all the things about cryptocurrency that some resent and distrust. His dishevelled appearance, his cavalier attitude, his apparently weak grasp on the truth, all confirm for many what they regard as the innate nature of cryptocurrency – it’s a scam run by flaky people.

Yet last year’s crypto rot didn’t start with FTX. Several crypto companies – Celsius, Voyager Digital and Three Arrows Capital – all went into bankruptcy before FTX. The LUNA digital token, once a top 10 cryptocurrency by market capitalization, lost virtually all its value in just one week in early 2022, and the collapse of the network behind it cost investors more than $60 billion.

One of the biggest problems for the cryptocurrency sector is the volume of cross-lending at its heart. Genesis collapsed owing more than $3 billion; Genesis is the biggest unsecured creditor of FTX. When FTX fell apart Genesis was living on borrowed time; it halted customer withdrawals, and it owes some $3.6 billion to its top 50 creditors.

Once upon a time to be a bankrupt was to be covered in shame. No longer. The founders of Three Arrows Capital, the crypto hedge fund that collapsed last year after being blown up by margin calls, are up and running again. Zombie-like, they are aiming to raise $25 million (by the end of February) to start a new crypto exchange to be called GTX. The pitchbook for GTX brazenly tells potential investors that its purpose is to get holders of claims against FTX to transfer those claims to GTX “and receive immediate credit in a [newly created] token called USDG”. Critics of cryptocurrencies sometimes accuse them of being Ponzi schemes; actually the crypto world is more like a financial Alice in Wonderland.

Hope springs eternal

The hopes of Satoshi Nakamoto (whoever that may be), the supposed creator of Bitcoin, that his model for electronic cash (cryptocurrency) would avoid the “inherent weaknesses of the trust based” version has clearly gone awry. Bankman-Fried’s biggest ‘crime’ is that he has chipped a bit more off that social pillar called trust. Trust is as necessary (at some level) for cryptocurrencies as for fiat money or indeed any means of exchange.

Yet although trust seems to have fled the cryptocurrency world the leading digital tokens have recovered some of 2022’s lost ground. Bitcoin has risen more than 30% year-to-date, briefly climbing above $23,000. In one week this month $40 billion went into Bitcoin. Cryptocurrencies keep mushrooming, with almost 22,000 different ones now being available.

It’s clear that the cryptocurrency world is in the midst of a bifurcation. It is splitting into two; the leading tokens such as Bitcoin and Ethereum will survive like cockroaches because they serve a purpose, whereas all the others will disappear like froth on a glass of beer, because they do not serve a purpose. The purpose of Bitcoin (apart from those who see it merely as a get-rich-quick scheme) is to provide a home for those who don’t want to be part of a financial system which in 2007/2008 demonstrated little regard for trust or public welfare.

There is no point in getting angry about the likes of FTX or GTX; the technology which makes cryptocurrencies possible cannot be disinvented, and the fundamental prompt for people shifting to cryptocurrencies – distrust of government control over money – is perfectly understandable. More alarming for society however is not the occasional fraud/incompetence wrought by private cryptocurrencies, but the relentless march of governments to co-opt the cryptocurrency technology, and roll out Central Bank Digital Currencies (CBDCs).

Gold provides the kind of defence against government control over money that cryptocurrencies attempt – plus the advantage (with Glint) that gold can now be used as money. Gold has its own ‘whales’ – buyers and sellers who take huge positions, mostly the central banks – but, unlike the majority of cryptocurrencies the international gold market is so big and so liquid that it is difficult to have a price-distorting effect, and large-scale positions generally cannot be kept a secret; the information leaks out. The workings of the gold market are often difficult to interpret – but they are not completely opaque, like those of crypto. Gold is security; Glint its key. And investors in gold are unlikely to see their holding disappear overnight.

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.

Soapbox: The Debt Ceiling Charade

   |   By  |  0 Comments

It’s that time again – ‘squabbling over the US debt ceiling’ time. If it slipped our notice then Janet Yellen, the US Treasury Secretary, is there to remind us. On 19 January, the US will surpass its current borrowing limit of $31.4 trillion according to Yellen. The US debt ceiling is the legislative limit on the amount of national debt that the US Treasury can run up. The debt ceiling was created in 1917 to help finance spending on the First World War. It’s a way in which the government can borrow money to cover the fiscal gap – the gap between the amount the government takes in tax revenues and what it spends. Today, raising the debt limit has become an excuse for a brawl between the Democrat and Republican parties in Congress. A reprieve can be gained but this year it’s likely to last no longer than the end of May. Between now and then we can expect a Democrat vs Republican squabble over what to fight for and what can be sacrificed. If the ceiling looks like being breached the US government grinds to a halt and global financial stability will be threatened.

$31.5 trillion and rising

Wow! $31.5 trillion! That’s the current size of the US federal debt. Putting it another way, it’s more than $94,000 per US citizen. Or, another way, it’s the same as the combined economies of China, Germany, Japan and the UK, according to the US Peterson Foundation. The foundation helpfully adds that if every US household paid $1,000 a month it would take more than 19 years to eliminate the debt. Interest payments on this debt cost more than $1 billion a day.

America is running on fumes – the only significant question is how long before the engine stutters and packs up. Certainly, not all debt is bad, either individually or nationally. Taking on debt to buy a home, to get education, to grow a business, can all be sensible decisions and can help grow the national economy. But borrowing to buy assets that lose value over time, such as a car, is not such a great idea, unless you can get a no or very low interest rate.

Getting over the debt ceiling crisis has become a regular feature of US politics in recent years. Usually some kind of deal is cooked up but this year may be different, now that the Republican Party has a narrow majority in the House of Representatives. Eric Winograd, chief US economist at the asset management company AllianceBernstein told Reuters on 11 January that in his view “this is going to be the most contentious debt ceiling debate in memory”. Last time Congress sailed close to the wind over raising the debt ceiling was in 2011; Standard & Poor’s downgraded the US credit rating for the first time, and financial markets started to panic. So this year may be no charade after all.

Murky manoeuvres

US politics being what it is – very murky – will the Republican Party be able to maintain its current stiff stance about debt ceiling negotiations this year? The House Speaker, the Republican Party member Kevin McCarthy, has reportedly told President Biden that the price for a deal is the imposition of a spending cap on the government. But according to his press spokespeople Biden “will not be doing any negotiation over the debt ceiling… there’s going to be no negotiation over it”. A small number of die-hard conservative Republicans opposed McCarthy’s attempt to become Speaker; notoriously it took the largest number of voting rounds since 1856 to squeeze him in. The New Yorker says the “good news for Democrats is that the Republican leadership is this weak – except that weak Republican leadership is what paved the way for [Donald] Trump in the first place”. It’s in everyone’s interest – in America’s interest – that the debt ceiling debate should be settled, and fast. In 2011 it wasn’t only the financial markets that took a beating from the debt ceiling fiasco – consumer confidence also dropped as did confidence in all US politicians. No negotiations, says the President. He may have to eat those words.

Different this time?

The world has changed as a result of Russia’s war in Ukraine. It’s not simply that the US in 2022 directed a vast sum to support Ukraine, more than $52 billion according to the Kiel Institute for the World Economy. The war is nearly a year old and shows no signs of ending; worryingly Ukraine’s defence minister, Oleksii Reznikov, claimed recently that Ukraine is now a de facto member of the NATO alliance, a red rag to President Putin. This kind of stealthily obtaining something that has been denied is not an attractive feature, even if (with the delivery of tanks from the UK, a NATO member) it may be true.

The war has also hastened the almost imperceptible creep of countries to reduce their exposure to Dollar-denominated debt. China’s holdings of US Treasury bonds fell by $100 billion, almost 10%, in the first half of 2022. China’s decision to lower the amount of US debt it owns is probably related to the US decision to weaponize its currency, by freezing the Dollar assets of Russia’s central bank.

Russia can’t use the Dollar; China doesn’t want to rely on the Dollar; both stepped up their purchases of gold last year. So the US may indeed carry on issuing ever-greater amounts of debt; but will it have as many eager buyers as in the past?

Soapbox: The slow death of the petrodollar

  |   By  |  0 Comments

An action always has consequences – and the stranger the action the greater the chance of the consequences being unintended.

The ultimate death of the Dollar as the international reserve currency was sealed when the first Russian shell landed in Ukraine almost a year ago. This is a slow-speed revolution, but a revolution it is. Since at least 2014 there has been serious talk of the demise of the petrodollar and its replacement by the petroyuan, but the war in Ukraine has given fresh impetus to the Dollar’s declining status and the rise of China’s currency. The Dollar/Yuan tussle – President Xi Jinping would never emulate the crassness of President Putin and openly declare a war on the West – will be the defining event for fiat money over the next few years, perhaps even more significant than the evolution of Central Bank Digital Currencies (CBDCs).

Weaponising the Dollar via the lengthy list of sanctions imposed on Russia means that countries not directly involved in the conflict have become warier about Dollar-based trade and holding Dollar reserves. That’s not just China; it’s also Saudi Arabia, the country with the second-biggest oil reserves and an increasingly shaky ally of the US. Joe Biden during his campaign to win the Presidency pledged to treat Saudi Arabia as a “pariah” thanks to state involvement with the murder of Jamal Khashoggi and an intelligence report that seemed to implicate the state of Saudi Arabia in the 9/11 attack on the World Trade Centre. Nevertheless he visited Saudi Arabia in July 2022, shook hands with ‘MBS’ (Mohammed bin Salman, the de facto leader of Saudi Arabia), but failed to achieve his aim of getting a boost in Saudi oil production.

The Saudi-US relationship for the past four decades has been rooted in the petrodollar. There’s nothing mysterious about the term petrodollar; it’s simply the term for what has become the global practice of paying for oil in US Dollars. As the US started to worry about its diminishing oil production capacity, President F.D. Roosevelt met the then Saudi king, Abdul Aziz, in 1943, and declared that Saudi oil was vital to US security. In exchange, the US agreed to build military bases and supply the Saudi army with training and equipment.

In 1974, following an oil embargo by the Arab state members of OPEC (the Organisation of Petroleum Exporting Countries) the petrodollar system was consolidated by a deal between the US and Saudi Arabia which formally agreed to price and trade oil in US Dollars, and to recycle the Dollars by buying US government debt – Treasury bonds.

This symbiotic relationship is now on its last legs – the Dollar’s dominance of the global oil trade is dying, and in turn the status of the Dollar as the international reserve currency is increasingly in doubt. This will have as serious repercussions for the world’s future stability as Russia’s invasion of Ukraine. Could petroyuans replace petrodollars?

Recycling drying up

Pricing crude oil in Dollars meant that many oil producers started to earn more money from crude oil exports than they could efficiently invest in their own economies. The Dollar became the currency of international trade and finance; petrodollars were recycled into many different investments, including US Treasury bonds, as well as European trophy investments such as soccer clubs, glitzy London property, art works and so on. By 1977 Saudi Arabia had accumulated around 20% of all US Treasuries held abroad, and the US was importing a third of its oil demand. High energy prices in 2022 (a by-product of Russia’s invasion) meant that OPEC countries last year probably earned in excess of $900 billion, almost twice the annual average since 2000. While some of these unexpected profits followed the traditional path and were recycled into US assets (Saudi Arabia’s sovereign wealth fund, the Public Investment Fund or PIF, picked up shares in Alphabet, Zoom and Microsoft among others) the need to protect themselves against Washington’s ire (and possible sanctions one day) means that their energy profits are increasingly finding homes other than US government debt.

China’s ambition

President Xi increased the pressure on the petrodollar late last year, when he addressed a meeting of Arab Gulf state leaders – significantly hosted by Crown Prince Mohammed bin Salman of Saudi Arabia in Saudi Arabia – and told them China would “make full use of the Shanghai Petroleum and National Gas Exchange as a platform to carry out Yuan settlement of oil and gas trade”. Yet the Chinese request to pay for its energy imports from Arab states in its own currency appears to have been given the thumbs-down, for now at least.

President Xi’s baptism of the petroyuan, which some scholars have called “the most significant challenge yet to the indefinite prolongation of dollar dominance in international oil and gas transactions – and thus, by extension, to the dollar’s global primacy” was thus only partially successful. Yet, as one commentator has pointed out, although China doesn’t have the same level of global trust, rule of law or reserve currency liquidity of the US, “the Chinese have offered up something of a financial safety-net by making the renminbi [yuan] convertible to gold on the Shanghai and Hong Kong gold exchanges… If the petroyuan takes off, it would feed the fire of de-dollarisation”. A gold-backed petroyuan would allow China simultaneously to retain control of its capital account and boost the currency’s internationalisation, as well as enabling China to bypass the Dollar-dominated SWIFT (Society for Worldwide Interbank Financial Telecommunication) global payments system, which (as shown by Russia’s ejection from SWIFT) is unreliable if a country invokes Washington’s anger. China has its own version of SWIFT, the CIPS (Cross-Border Interbank Payment System) and Russia has joined it to trade its crude oil.

Hedging bets

Before last year’s Winter Olympics, Russia and China declared a “no limits” friendship. While China has been careful to keep its distance from Russia’s war on Ukraine, the two share the ambition of humbling the Dollar. Russia’s energy giant signed an agreement with China late last year to settle payments for its gas exports in Yuan and Roubles instead of US Dollars. China wants the same kind of commitment from Saudi Arabia but is as yet frustrated by Saudi Arabia’s reluctance to ditch its relations with the US.

Twenty years ago the share of international reserve assets taken by the Dollar was 71%; today it’s 59%. By contrast, around a third of central banks said in mid-2021 they planned to increase their allocations to China’s Yuan over the following 12-24 months; 70% said they intended to do so over the “long term”. Saudi Arabia is flirting with the petroyuan but is reluctant to overtly abandon the US and the petrodollar; for now it is hedging its bets in the greatest gamble of the 21st century.

Soapbox: One Certainty For 2023

   |   By  |  0 Comments

Watch out for the ‘R’ word this year – R for Recession.

Kristalina Georgieva, managing director of the International Monetary Fund (IMF) reckons a third of the global economy will be in recession this year and that 2023 will be tougher than last year. There’s no escape – China, the European Union and the US are all slowing simultaneously.

Who is to blame? Leading candidate is China’s President Xi Jinping. Poor President Xi – he can’t get it right. China’s zero-Covid policy, promoted by President Xi from very early in the pandemic, meant that lockdowns sprang up countrywide during 2020-22, disrupting global supply chains and exacerbating inflation everywhere; it could hardly be otherwise given that China is responsible for almost 20% of global gross domestic product (GDP). As workers were forced to stay at home, supply of goods fell – and their prices rose.

And now, after that zero-Covid policy was hastily abandoned towards the end of last year , the Covid virus and variants thereof are ripping through China and disrupting supply chains as companies experience labour shortages.

According to Georgieva “for the next couple of months, it would be tough for China, and the impact on Chinese growth would be negative, the impact on the region will be negative, the impact on global growth will be negative,” she said. Rather than pushing global growth, China is likely to be a drag on it. “This has never happened before”, said Georgieva.

Permacrisis

That was last year’s word of the year, according to the Collins English dictionary. 2022 was exhausting, almost from the word go. Yet despite widespread predictions of a US recession thanks to higher interest rates, the much-predicted 2022 recession has been pushed back into this year – if indeed it happens; not everyone agrees with the IMF’s boss.

The relentless raising of US interest rates may not have caused a recession (conventionally defined as two consecutive quarters of decline in economic activity) but for investors in stocks, bonds, and cryptocurrencies 2022 the higher rates was highly damaging.

Last year long-term US government bonds suffered their biggest drop since 1788. For bonds and equities, it was the worst performance since 1932. At its lowest point in 2022, the S&P 500 index had shed $11 trillion in market capitalisation: similar to the entire annual economic output of Germany, Japan and Canada combined. Tech stocks alone lost an amount equivalent to the output of France or the UK.


For cryptocurrencies, 2022 ended on an especially sour note. Research published in late December by the prestigious National Bureau of Economic Research (NBER) in the US found that the ‘wash trading’ on each unregulated crypto exchange “averaged over 70% of the reported volume”.

Wash trading is a form of market manipulation, in which a trader or traders buy and sell the same security simultaneously, giving a misleading impression of activity. It’s illegal and certainly immoral. The NBER paper found that “trillions of dollars annually” are washed. This may just confirm suspicions but in any case, is unlikely to deter crypto evangelists. It may also help stimulate a ‘non-prediction’ for 2023 by TS Lombard, the forecasting consultancy, which “humbled by the silliness of real life” suggests that a new cryptocurrency called LOLcoin “will emerge and quickly gain popularity, prompting many people to invest their life savings in it.”

Where to turn?

2022 was an awful year for investors in most assets, including property. In the US new mortgage applications in Q3 of 2022 were down 47% year-on-year ; in the UK house prices fell by 2.3% month-on-month last November, the biggest drop since 2008. In Sweden home values have drop by 15% from their peak early in 2022 ; German house prices were forecast by Deutsche Bank at the start of December to drop by up to 25%

So where could you have turned to, to protect your wealth?

Perhaps look to central banks, which accumulated more gold than at any time in the past 55 years. It’s almost as if central banks were laying in stores for an expected coming storm. Some analysts see the bigger central bank gold-buying as delivering a pointed message – they don’t want to be too exposed to the US Dollar. Russia’s central bank had more than $150 billion of US Treasuries in 2012; today it’s around $2 billion, while its gold holdings have risen to more than 1,350 tonnes.

And while most other asset classes nose-dived last year, gold held onto, and even managed to increase, gains achieved in earlier years. In US Dollar terms the gold price in early January 2022 was $1,795.19 an ounce; on 1 January this year it was $1,823.70, a modest gain of almost 1.6%. In Pound Sterling terms the gain over the same period was even more marked, at 14.5%. This was a remarkable achievement, given that the US Federal Reserve pushed interest rates to their highest level for 15 years, to a range of 4.25%-4.5%, strengthening the Dollar. A stronger Dollar usually tends to depress gold prices; so the question is, what might the gold price have been if the Dollar had not been so strong? That counter-factual is obviously impossible to answer.

When might the Fed end its rate hikes? Not this year if it’s true to its word from last December; it will continue to raise rates to around 5%-5.25%. The earliest we can currently expect rates to fall is in 2024.

Inflation still plagues the sleep of those in charge of economic policy in the US, even though the consumer price index (CPI) has now dropped to 7.1%, compared to 10.7% in the UK. It’s still a very long way from the ‘target’ of 2%, however – and policymakers are determined to stamp inflation out, which is why they will continue to push up interest rates until a recession threatens.

Inflation is blamed on different things; Covid, supply chain disruptions, the Russian invasion of Ukraine are regularly trotted out but the underlying reason – the massive increase in the money supply in the worst days of Covid – is as equally regularly forgotten. Between 2018 and the start of 2022 the M2 measure of money supply (which includes fiat currency, savings deposits and shares in retail mutual funds) rose from almost $14 trillion to above $21 trillion, where it remains today. The last recession, February to April 2020, saw US unemployment exceed 14%; more than 24 million Americans lost their jobs. It’s different now – the US jobs market remains very strong with average hourly earnings up by around 5% year-on-year. The US economy is still running very warm if not hot; the risk for 2023 is that the Fed will continue to tighten money supply beyond what’s necessary and put the country’s economy into recession – when it will start to lower interest rates and might even feel the need to provide more ‘stimulus’ money to voters in what will be a Presidential election year. In the UK the signs of recession are gathering fast; shop closures hit their highest in five years in 2022, around 47 a day.

It’s going to be another bumpy year.

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.

Soapbox: Farewell 2022

  |   By  |  0 Comments

Will anyone look back on 2022 with fondness?

The past 12 months have seen inflation get its teeth into many countries, from Argentina’s annualized 90% to almost 270% in Zimbabwe. Those of us living in the US, the Eurozone or the UK should think ourselves lucky we are only battling 7.1%, 10.1%, or 10.7% respectively. Hurrah! My cash is ‘only’ going to be worth 10% less next year – it might have been wiped out altogether!

Central bankers last year were wedded to inflation being ‘transitory’ even though it was obvious that flooding their economies with cash during COVID would inevitably lead to inflation. This year, they have belatedly started to push up interest rates, to try to drain as much of this extra cash out of the economy as possible – which has led to higher mortgage costs for people everywhere and is producing further distortions in the market.

2022 didn’t start well and proceeded to get worse. Russia attacked neighbouring Ukraine on 24 February but its hopes of quick victory were thwarted. In Ukraine, inflation is now 26.5% and the International Monetary Fund (IMF) expects the country’s economy to shrink by around a third this year. It has been a human disaster and economic catastrophe not just for Russia and Ukraine but for the world. This war, which shows no sign of ending, pushed up international prices for grains, gas and crude oil and has provided central bankers with a handy prop to divert our attention from their vast Quantitative Easing post 2008 and the immense volume of monetary stimulus during COVID – ‘it’s all the fault of Russia’s invasion of Ukraine’ has become the inflation-mantra, which of course isn’t correct. As the year limps out we have more COVID worries. China’s removal of its zero-COVID policy might next year result in an explosion of cases and, sadly, deaths. If the first casualty of war is truth, then the worst wounds are inflicted on trust.

Edelman Trust Barometer 2022

In January this year, we quoted the 19th century philosopher Friedrich Nietzsche who once said: “I’m not upset that you lied to me, I’m upset that from now on I can’t believe you”. Distrust in governments, in media, in money, in the future, has grown this year. Not a gift that anyone longs for.

Year of the Dollar

2022 has been the Dollar’s year.

The Dollar price of gold ended January around $1,798/ounce. It started climbing once more in February and towards the end of that month was above $1,906, before reaching the year’s peak of more than $2,043 on 7 March. People turned to gold as a defensive asset as we headed into the unknown – would Russia deploy nuclear weapons in Ukraine? The gold price calmed somewhat by the end of March, to just above $1,925/ounce.

As indications that inflation in the US was getting a grip and that the Federal Reserve would be forced reluctantly to raise interest rates, by the end of April the gold price shifted lower, to around$1,897/ounce. This coincided with increasingly hawkish comments by the Fed and the start of its rate rise policy – the Fed had held the federal funds rate at around zero in the first quarter of 2022 and was buying billions of Dollars of bonds every month, all despite 40-year highs of inflation. On 17 March, it raised the fed funds rate by 0.25% and signalled that more was to come. It was the start of a tremendous bull run for the US Dollar; investors everywhere sniffed that Jerome Powell, chairman of the Federal Reserve, had pivoted from regarding inflation as a passing problem to seeing it as a threat. From around zero at the start of this year interest rates in the US are now 4.25%-4.50%; the Dollar strengthened, and reached a 20-year peak against other major currencies, to the detriment of the Dollar gold price. Overall in 2022 the Dollar price of gold by the start of December had fallen by more than 3% – but had risen by more than 8% against the Pound Sterling, by almost 6% against the Euro, and by more than 16% against the Japanese Yen.

Cryptocurrencies have also suffered from the decision of the Fed to tighten monetary policy; first the stablecoin (pegged to the Dollar) Luna collapsed in May, scams and fraud continued to plague crypto (investors lost $3.5 billion this year according to one source ) and the bankruptcy of the FTX exchange soured many investors; Bitcoin has dropped by more than 60% this year. The Dollar became the “king of the castle” said one commentator.

What does ‘normal’ look like?

As this year has proceeded it’s become clearer that a return to a pre-Covid world isn’t going to happen – too many previous certainties have been smashed. We have a war raging; inflation is easing but only very slowly and it’s now being openly talked of that the previous 2% annual ‘target’ of many developed country central banks might be loosened to 4%, say; the US remains a deeply divided country; China’s intentions are as difficult as ever to comprehend; people are reluctant to return to a conventional working pattern; it’s uncertain that Europe’s unity on sanctions against Russia can last through the winter; in the UK, strikes are hitting daily life across many sectors; emerging market countries are struggling with massive overseas debts; defending Ukraine against Russia will cost (unfunded) trillions, adding to debt piles that rival Everest… the list goes on – no wonder the word ‘polycrisis’ has been dusted down. One of the Covid pandemic’s buzz phrases was ‘the new normal’ – currently life is very abnormal.

2022 has been a year of disorder, of expectations up-ended; 2023 doesn’t look much more promising. If we consider economics alone, perhaps the best can that can said is that advanced economies borrowing in their own currency can use this unexpected inflation to reduce the real value of some nominal long-term fixed-rate debt.

Yet as the economist Nouriel Roubini says, “you cannot fool all of the people all of the time. Once the inflation genie gets out of the bottle – which is what will happen when central banks abandon the fight in the face of the looming economic and financial crash – nominal and real borrowing costs will surge. The mother of all stagflationary debt crises can be postponed, not avoided”. One can only hope that Roubini – and I – are wrong, and that Powell and his fellow central bankers can conjure a unicorn from the gloom – i.e. bring about a ‘soft landing’ and don’t create stagflation next year.

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.

Soapbox: Fooling the public

   |   By  |  0 Comments

The British government has just perpetrated one of its biggest confidence tricks ever – it has reversed one of the important improvements made after the Great Financial Crash of 2008, and managed to persuade most mainstream media to categorise this as a ‘reform’. It’s an astonishing move, chucking aside the precautionary principle which was so often invoked during the Covid-19 panic. The risk of public harm was not tolerated during Covid – but it can be it seems when it comes to finances.

On 9 December, Jeremy Hunt, the UK’s finance minister, unveiled a package of changes to the rules governing Britain’s financial sector in Edinburgh, Scotland’s capital city – hence this package has been dubbed the “Edinburgh Reforms”.

British government spin-doctors went into overdrive, describing Hunt’s plans as involving “over 30 regulatory reforms to unlock investment and turbocharge growth in towns and cities across the UK” and describing the ‘reforms’ as “agile and proportionate”, repealing “burdensome pieces of retained EU [European Union] law”.

Part of these “reforms” is a decision to end so-called ‘ring-fencing’, described by the Bank of England (BoE) as a key part of the Government’s package of banking reforms designed to increase the stability of the UK financial system and prevent the costs of failing banks falling on taxpayers”.

After 2008’s financial disaster, British banks with a three-year average of more than £25 billion of deposits were eventually required (this legislation was not implemented until 1 January 2019) to separate their retail activities from their riskier investment and international banking business.

The 2008 Crash happened for a number of interrelated reasons, but the biggest underlying cause arguably was that governments and banks ignored barely hidden risks. The immediate cause was the collapse of the sub-prime mortgage derivatives market in the US, but thanks to international banks sniffing easy profits from dealing in collateralized debt obligations (CDOs), derivatives based on these mortgages that were re-packaged and sold and most global banks were exposed to the risk of defaults on these mortgages.

When holders of these sub-prime mortgages started to default, banks everywhere were exposed to unexpected vast debts. On 9 August 2007, the French bank BNP Paribas closed three investment vehicles that put money into US sub-prime mortgage assets using short-term borrowed money. In September 2007, the British bank Northern Rock wobbled and was forced to seek support from the Bank of England. The UK’s first bank run – depositors seeking to withdraw their cash as soon as possible for fear the money would run out – in more than 100 years started.

Taxpayer-funded bank bailouts in the US and Europe cost hundreds of billions of Dollars; some estimates suggest that the Federal Reserve provided around $15 trillion in loan guarantees to US and foreign banks; economies shrank, governments fell, and an era of low interest rates and easy money started. The ripples from 2008 are still with us. The vast sums of fiat cash summoned up by governments to bail-out banks, a vast increase in money supply, laid the ground for the current inflation.

Risk re-enters

Sir John Vickers, who as chairman of the UK’s Independent Commission on Banking recommended the ring-fencing in order to prevent banks taking big risks that might once again drag retail customers down with them, said in June 2018 that UK banks were not resilient enough to withstand a fresh crisis.

By ending ring-fencing the government will permit banks to use money deposited by retail clients – you or I in other words – to fund whatever they like, to gamble – to indulge in what bankers like to call ‘innovation’. It’s not that derivatives of sub-prime mortgages will again turn sour and threaten global financial stability – the next crisis will emerge as if from nowhere. As Vickers said, the “very fact you can’t predict the direction, size, anything about the next shock is why you’ve got to make sure you don’t have a fragile system when it does hit”. We have no idea where the next crisis will come from; all we know is that there will be a next crisis.

British Banks don’t like ring-fencing because complying with the rules puts them at a disadvantage relative to their peers who aren’t subject to them; foreign banks don’t like ring-fencing because it discourages them from expanding into the UK. The financial sector has by and large put out the flags and cheered Hunt’s ‘reforms’. It’s ‘back to the races’.

Cryptocurrencies

One possible big risk to consumers’ finances has flagged itself for months now – cryptocurrencies. Recent events have shown that they can be quicksand. The bankruptcy of the FTX exchange, in which as many as one million creditors have lost their money thanks to alleged fraud, symbolises the dangers that can be involved in cryptocurrencies. But FTX wasn’t the sole cryptocurrency problem in 2022. The collapse of the ‘stablecoin’ Luna, the collapse of hedge funds, brokers and venture capital funds associated with digital currencies, have all highlighted the risk of cryptocurrencies this year.

The leading digital token, Bitcoin, peaked at more than $68,000 a year ago and now is around $17,000. The crypto market was once valued at $3 trillion but now its market capitalisation is less than $900 billion, a drop of more than 60% in the past year.

Cryptocurrencies transcend national jurisdictions – that’s one of their advantages; you can be anywhere and buy or sell one or more of the 9,314 active tokens, and about 300 million people do so. That makes regulation of them extremely difficult. Very few countries accept them as legal tender, El Salvador being one of them; it has lost some $65 million from Bitcoin’s collapsed value.

Understandably there are growing calls for tighter regulatory control over cryptocurrencies. In the US, the former head of the Federal Deposit Insurance Corporation (FDIC), Sheila Bair, has called for regulators “to get on with it because more and more people are getting hurt”. New laws are not required she said; just combine forces and use the “authorities” the various agencies already have. The boss of the Commodity Futures Trading Commission (CFTC) has called for the US Congress to hurry up with new regulations for crypto;

Janet Yellen, the US Treasury Secretary, has added her voice to the ‘regulate cryptocurrency’ attitude. In the UK, the Treasury is preparing new legislation to cover cryptocurrency; the Financial Conduct Authority’s (FCA) head has said that 85% of the crypto companies that applied to join the regulator’s crypto register did not pass the FCA’s anti-money laundering tests. Mairead McGuinness, financial services commissioner for the European Union, has said that some “who were involved in crypto, from the very outset, were doing it because they didn’t want to be part of the regulated, managed system”. That’s precisely correct – the whole cryptocurrency movement started with the explicit ambition of eluding control by any government. Trying to regulate it not only threatens that libertarian aspiration – it is also likely to be impossible, or may drive cryptocurrency trading into places where oversight is impossible, or possible only by drastic measures.

Some commentators suggest that regulators should “let crypto burn”; “these poorly understood tokens should not be legitimated by financial regulators”.

‘Buyer beware’ is a sensible piece of advice but maybe insufficient for crypto investors. The calls for tighter regulation will no doubt result in tougher trading conditions, but those might not be enough to prevent the gullible from getting burned. UK policymakers are pulling in two opposing directions – relaxing safeguards over risky banking while edging towards tougher conditions for supposedly risky investments. The crypto revolution is no doubt flawed, and all too often in the hands of flawed individuals. But banking is little different. One reason why the 2008 crash was so damaging was that contagion spread like bird flu – banks everywhere were up to their elbows in profitable sub-prime mortgage derivatives that suddenly were money-losers. With banks now increasingly offering cryptocurrency services, the risk of a similar contagion is increasing.

There is actually one good way of protecting yourself against the next crisis to hit banks, and also to retain the kind of freedom promised by cryptocurrency. It’s called gold, and more specifically allocated gold with Glint, which is much easier to use as everyday money than any cryptocurrency.

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.

Soapbox: The Devil and the Deep Blue Sea

  |   By  |  0 Comments

The Confederation of British Industry (CBI) came out with a grim forecast this week. A year-long recession will hit the UK in 2023, said its director-general, with gross domestic product (GDP) dropping by 0.4%; the CBI’s previous forecast, in June this year, said the country’s GDP next year would grow by 1%. In the Eurozone a recession is still widely predicted for 2023 but it now appears to be less dire.


As for the US, opinion as to the possibility of a recession is divided. The chief economist of Moody’s Analytics argues that the US will narrowly escape a recession, but S&P Global Ratings expect a “mild” recession, with a GDP decline of less than 1%. A recession, to remind us, is technically defined as two successive quarters of economic decline.

As for so-called ’emerging markets’, they are truly strung out between the devil and the deep blue sea. Bloomberg puts their dilemma thus: “As long as the [US] Federal Reserve keeps raising rates and China is hobbled by Covid, policy makers in poorer nations remain at the mercy of factors beyond their control”. Maybe China is starting to emerge from Covid. But economic growth has hit a wall in many countries, now facing currency collapses, partly as a consequence of higher US interest rates, and cost-of-living crises. The chance of policy errors – putting interest rates up too high and thus inciting a recession or leaving them too low and thus letting inflation run rampant – is heightened for emerging markets, says Bloomberg.

The devil – inflation

The Eurozone saw inflation reach almost 11% in October when averaged across the 19 countries belonging to the bloc. In the Baltic states – Estonia, Latvia and Lithuania, also members of the Eurozone – inflation was above 20%. While attention for much of this year has been on the rising cost of energy prices as a result of the Russia-Ukraine war, food prices have been on a dash too – up by an annualized 12.4% in November in the UK according to the British Retail Consortium, which follows a 16.2% jump in October. In the European Union as a whole the cost of food in October rose by an annualized 17.26%. In the US food price inflation slowed a bit in October, down from an annualized 11.2% in September to 10.9%.

Across Europe, food bank usage is “soaring” as high inflation eats away at disposable incomes; in Germany the Tafel food bank says demand for its aid has risen more than 50% this year.

This burst of inflation, the worst in almost five decades, is starting to make consumers in Europe tighten their belts. Retail sales in the Eurozone dropped by 1.8% in October compared to the previous month. The European Commission said its consumer confidence index rose to minus 23.9, from 27.5 in October. But that’s still well below the long-term average of minus 11. In the US, retail sales in October rose by 1.3% month-on-month, suggesting that “the economy got off to a good start in the fourth quarter”. American consumers carried on spending, taking advantage of discounts from retailers who have inventory gluts and are trying to shift shelf stocks. They have a government-funded cash cushion. US consumers earlier this year were estimated to have $4.7 trillion in cash, up from $1 trillion towards the end of 2019. The cushion is less plump in the European Union or the UK, hence the growing divergence between US central bank policy and those on the other side of the Atlantic.

The deep blue sea

Central banks have the ambition to get inflation down. But they don’t really know what is causing inflation. They point to Russia’s war with Ukraine and argue that has pushed up prices but this is putting the cart before the horse, rather as happened with Covid.

The assertion that Covid caused global economic damage is false; it was the global response to Covid, i.e. a worldwide lockdown that stopped people from going to work, making and delivering things that caused the damage. With Russia and Ukraine it’s not the war itself which has pushed up energy and food prices, it’s the response of the West to the war – the imposition of sanctions, the weaponization of the Dollar – which has driven up energy prices. This is not to take either a pro or anti attitude towards the Covid lockdowns, or the sanctions on Russia; it’s simply to straighten out our thinking.

But we are where we are. Central bankers only know one tool to fight inflation – make consumption more difficult, make credit more expensive, put up interest rates. The fact that higher base rates set by banks pushes up the cost of mortgages and credit card use, and therefore inevitably worsens the cost-of-living ‘crisis’, is an uncomfortable paradox that central bankers tolerate.

So, rates in the US this year have risen from 0.25%-0.50% to 3.75%-4.0%. The rate is likely to rise again mid-December, by at least 0.50%. In the UK, the base interest rate of 3% will likely be pushed higher, even though one of the Bank of England’s (BoE) rate-setters, Swati Dhingra, has said that a higher rate will deepen the expected recession. The European Central Bank (ECB) has increased its deposit rate from minus 0.5% to 1.5% in the past four months and is expected to announce another rise to at least 2% at its next meeting in December.

Yet everywhere central banks shy away from putting rates up above – or even close to – inflation. Perhaps they are preparing the ground for accepting a higher rate of inflation than their 2% ‘target’. The former chief economist of the International Monetary Fund (IMF), Olivier Blanchard, floated the suggestion of doubling that to 4%. Why 4%? Because, he said, a Google search for ‘inflation’ shows that if it is around 3-4% “people simply did not pay attention. Above 3-4%, they did”. Setting an inflation target may be silly, but setting it according to a Google search seems quirky beyond belief.

Not waving but drowning

Amid all the noisy conflict over rampant inflation versus higher rates plus recession it has been forgotten that we have been here before. Interest rates at very low levels – as we have had recently – “fuel speculative manias, drive savers to make risky investments, encourage bad lending and weaken the financial system” says Edward Chancellor in his excellent new book, The Price of Time. Memories of central bankers are distressingly short, and they are often subject to ‘regulatory capture’, a form of corruption that happens when a regulator is co-opted to serve the interests of a particular constituency. Thus the UK is about to reverse a crucial move which was designed to prevent the kind of domino bank collapse of 2008.

Following the 2008 Great Financial Crash UK banks were required to ‘ring-fence’ themselves – separate their retail banking from investment and international banking services. That strict regime was introduced to prevent banks from recklessly gambling with their retail depositors’ money; but it’s now going to be relaxed. “Ring-fencing doesn’t work”, according to Tim Adams, CEO of the Institute of International Finance, (IIF). “It makes a more brittle system, it precludes institutions’ capacity to move capital around to their best uses”. As the boss of one of the world’s most influential bankers’ clubs, Adams is hardly neutral on this issue. The memories of 2007-08 have disappeared like a bad dream. We can all go back to trusting banks to take the greatest of care with our money – not. Surely once bitten, twice shy?

Some thinkers seem rather more attuned to what is going on in the economy than Blanchard or Adams. Nouriel Roubini said recently that there are “three solutions to the problems of inflation, debasement of currency, political and geopolitical risk and environmental risk”. Among his pieces of advice is to “go into gold and precious metal”. He says that “if central banks are going to blink and wimp out” (start to ease off interest rate rises) “gold is going to rise in value. Gold is going to rise in value also because the enemies of the US are subject to sanctions. China right now is worried they have a trillion dollars of reserves in dollars that they have to move to other things. If it’s euro, yen, it can be seized. The only thing that cannot be seized is gold”. We would also add – thanks to your Glint App and Debit Mastercard®, gold can now be used as everyday money.

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.

Soapbox: Black Friday’s mixed signals

  |   By  |  0 Comments

This year’s Black Friday and Cyber Monday – conventionally the days when consumers chase supposed bargains and spend, spend, spend – has sent some mixed signals this year. Those signals have added to the dilemma facing the Federal Open Market Committee (FOMC) when it next meets on 13-14 December; the FOMC sets US interest rates and it will need to decide if it has pushed rates up high enough, or more is needed to slow spending and help ease inflation of more than 8%. The meeting will be of especial interest as it is also due to give an outlook for the economy.

Forecasts before Black Friday differed. The US National Retail Federation (NRF) predicted that retail ‘holiday spending’ across November and December would grow by 6%-8%. Deloitte, the big accountancy firm, did a survey of 1,200 US consumers and anticipated a 12% rise in spending on the day itself over 2021. The marketing software company Emarsys, also basing its results on a survey of spenders, thought the day’s year-on-year rise would be even higher, at 16%. Given that the past 10 years have averaged an annual increase in spending of 4.9%, and that this year consumers have become spooked by rises in the cost of living, interest rate rises, and low levels of confidence, then anything above that 10-year average ought to be taken as another indication that the Federal Reserve needs to keep putting up interest rates in order to cool the economy. As for Cyber Monday, early reports suggest that spending hit a record $11.2 billion.

As it turned out, spending on Black Friday rose by just 2.3% over last year, setting a fresh record of $9.12 billion from on-line shoppers. In-person shopping rose by 2.9% year-on-year.

Doves & Hawks

As always statistics are open to divergent interpretations. Covid-19 vaccines have reduced the mortality fear this year, but the cost-of-living crisis has hit many households. Poorer households spend a proportionately higher amount, around 82%, of their income on basic needs, against high income households which spend two-thirds of their budget on basic needs. And incomes are failing to keep up with the rising cost of living. The Federal Bank of Dallas says that between mid-2021 and mid-2022 American workers faced the biggest decline in real (i.e. adjusted for inflation) wages in about 25 years. Yet in broad brush terms – which is all that economists have to go on – Americans still feel able to spend.

For the Federal Reserve this is a puzzle. Yet it shouldn’t be. Thanks to President Joe Biden’s astonishing largesse during Covid-19’s worst days, American household wealth surged by $20 trillion since the end of 2019, according to ING bank. Even though Americans are famous spenders, that sort of money takes a long time to get used.

The Federal funds rate in the US – which acts as a benchmark for everything else including business loans, credit card and mortgage rates – is currently 3.75%-4% after spending a year at 0% during the Covid-19 pandemic. The Federal Reserve has raised interest rates by 0.75% on four successive occasions; its chairman, Jerome Powell, has dropped plenty of hints that at December’s meeting it will raise rates again, this time by 0.50%. James Bullard, president of the Federal Reserve Bank of St Louis and a member of the FOMC, gave a very hawkish speech recently, in which he said the rate may have to rise to 5%-7% in order to stifle inflation. Loretta Mester, president of the Cleveland Federal Bank, has echoed Bullard; according to her the Fed is “just beginning to move into restrictive territory”.

There are doves (who don’t favour higher interest rates) on the FOMC, including Esther George, president of the Kansas City Federal Bank. She has said “I have not in my 40 years with the Fed seen a time of this kind of tightening that you didn’t get some painful outcomes”. The Federal Reserve is still walking a tightrope – raise interest rates too far and job losses will result and probably assets such as houses and stocks will drop in value; don’t raise them high enough and perhaps inflation will become ’embedded’.

Stagflation and China

It may seems a remote possibility at the moment, but stagflation still seems to us to be the biggest economic threat, and not just for the US.

Germany’s ministry for economic affairs and climate protection is certainly convinced that Europe’s biggest economy is headed for stagflation, a combination of sluggish economic growth and rising prices.

Rabobank in June this year dubbed the UK ‘stagflation nation’ thanks to what it called “many ‘American’ characteristics: rising inactivity, unemployment falling to as low as 3.8%, a high vacancy rate, recruitment difficulties and elevated pay pressures”. Catching the mood, the Swiss bank UBS joined in, saying in June that the Eurozone was headed towards stagflation.

And the world is not out of the woods as far as Covid-19 is concerned. A report by UNCTAD, the United Nations Conference on Trade and Development, reckons that global trade fell by some $2.5 trillion in 2020, 9% lower than 2019. While much of the world has adjusted to living with Covid-19, thanks to the roll-out of effective vaccines, China still has a policy of zero-Covid, shutting down cities, towns, factories on a single incident of a Covid-19 infection, even if the person is asymptomatic. Lockdowns keep springing up; Foxconn Technology Group, the Taiwanese company that operates Apple’s manufacturing hub at Zhengzhou in China, has lost thousands of workers who are fed up with lockdowns and quarantines, and has offered bonuses of some $1,800/month for workers staying at their job through December and January. The plant is likely to lose 20% of its expected sales in this quarter. Street protests in Beijing and other big cities have now started to call for an end to lockdowns and also for democracy. This will not be tolerated by President Xi Jinping, but such is the extreme level of surveillance in today’s China that the security services will be able to round up protesters at their home, rather than confront them on the streets.

China’s zero-Covid policy has disrupted the global economy. China is the world’s global manufacturer; according to the United Nations Statistics Division China accounted for more than 28% of the world’s manufacturing output in 2019.

Yet its zero-Covid attitude is in one sense understandable. China has 1.4 billion people, about 32 million of which are aged 80 and over. Of that group, only 40% have been given a (reputedly unreliable) Covid vaccine; millions of Chinese are, in other words, vulnerable to a potentially lethal virus.

The longer that China maintains its zero-Covid policy, the longer it will take for the global economy to rediscover its pre-Covid self, and the trickier it will be for the Federal Reserve to make up its mind about the direction of inflation. For although there have been signs that inflation may be easing, it may get a second wind if protests and work stoppages spread in China, upsetting supply chains once more.

On a precautionary basis, let’s suppose forecasts of stagflation (there are plenty of them around) are correct. The chart above suggests that gold is the best-performing asset in stagflationary periods. Between 1973 and 1975, gross domestic product (GDP) in the US declined in real terms, while inflation grew from 7.4% to 10.3%. Simultaneously, gold enjoyed a price growth of 73%, before doubling in value during another stagflationary period in 1979, when inflation peaked at 10.75%. Is inflation in the US dying, or will it persist at a high level into 2023 – when Americans may have finally exhausted their Covid-19 stimulus payments and the economy thus be poised for stagflation. Perhaps we will learn more when the FOMC next meets on 13-14 December.

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.