Category: Soap Box

The 19th century philosopher Friedrich Nietzsche pinpointed the real damage done by telling lies. He said: “I’m not upset that you lied to me, I’m upset that from now on I can’t believe you”. Once uncovered, the liar is marked as untrustworthy for ever more.

We’re all familiar with (and no doubt have used) the “little white lie” that is supposedly harmless and occasionally useful for greasing the wheel of social interaction. The assumption is that by such tiny deceits no harm is done.

But telling the truth is what holds our societies together.

In Britain, we are in the middle of a scandal that threatens to topple the Prime Minister – did he lie to Parliament about what he knew of a drinks party on 20th May 2020 at No. 10 Downing Street, which was held during the first national ‘lockdown’ of the country, to prevent the spread of Covid-19? His former senior adviser Dominic Cummings, whom Johnson sacked and who may therefore be suspected of vindictiveness, says Johnson lied to Parliament, and that he breached the lockdown rules; Johnson should resign. For Cummings, “chaos will continue until he [Johnson] is removed”.

In the context of a serious financial crisis, with inflation now at its highest since 1982 (on both sides of the Atlantic) this might seem a puny storm in a teacup. As the threat from Covid recedes (and the English government prepares to lift the last remaining Covid-19 restrictions on social interaction) then people may dismiss this rule-breaking as unimportant.

Yet one of the Prime Minister’s former allies, the senior MP David Davis, sees the rule-breaking as symptomatic of a wider political failure. Speaking in Parliament on Wednesday this week he said to Johnson: “in the name of God, go”.

Johnson has appointed a senior civil servant to investigate who knew what about a series of parties that allegedly happened in Downing Street and elsewhere in government offices, when the general public were barred from socialising – or even attending unwell and dying members of their family – because of the rules on lockdown.

Just as President Donald Trump became synonymous with scant regard for the truth, so Boris Johnson has notched up an impressive series of apparently misleading claims made in Parliament, all captured on a video by Peter Stefanovic. Johnson’s biggest appeal for his Conservative Party is that he has the knack of winning elections. But he is also dogged by scandal (another characteristic he shares with Trump), and may be running out of lives.

Notoriously, Britain has no written constitution. British political life – the rules governing behaviour – are supervised by the “Bible” of parliamentary procedure, drawn up originally in 1844 by the constitutional theorist and Clerk of the House of Commons, Erskine May. While not law, Erskine May’s conventions have long been accepted regarding the law, privileges, proceedings and usage of Parliament. Paragraph 11.40 of his rules stipulates that “ministers who knowingly mislead Parliament will be expected to offer their resignation to the Prime Minister”. That’s why John Profumo, then the UK’s (married) minister of defence, resigned in 1963 after it emerged he had lied to Parliament about an affair he’d had with a woman. The Times called the episode “a great tragedy for the probity of public life in Britain”. Ultimately the Profumo affair brought down the Conservative government; Profumo spent his post-political life doing charitable work. He paid the price not for having an affair but for lying to Parliament. In Britain, such lying used to be regarded as a fatal offence. The decline in standards from 1963 to 2022 is notable and alarming. Do politicians and the people they appoint even recognise the truth today?

Declining trust

Governments want and need the trust of their electorates; electorates need to have confidence in their governments, need to feel certain that their interests – that they are safe from crime, protected from invasion, that their money is safe – are looked after by the people and parties in power. Rule-makers must be seen to obey the rules they make; otherwise they will be judged as liars, untrustworthy. If we lose confidence in their honesty or their competence they will not, should not, survive long in power. They will be told “in the name of God, go”.

But what if incompetence, or dishonesty, is becoming embedded? One does not have to be a QAnon supporter to doubt the wisdom and technical ability of governments on both sides of the Atlantic, to ponder how democracies can retain our support, to worry that the current toxicity of politics, with its ubiquitous lying, is spreading, virus-like.

“We really have a collapse of trust in democracies”, according to Richard Edelman, whose Edelman communications group has just published its latest annual Trust Barometer, which this year surveyed more than 36,000 people in 28 countries, in November 2021. “It all goes back to – ‘do you have a sense of economic confidence?'” he added. The biggest losers of public trust over the last year according to this survey were institutions in Germany, down 7 points to 46, Australia at 53 (-6), the Netherlands at 57 (-6), South Korea at 42 (-5) and the United States at 43 (-5).

By contrast, public trust in institutions in authoritarian China stood at 83%, up 11 points, 76% in the United Arab Emirates (+9) and 66% (+5)in Thailand (a “flawed democracy” says the Economist Intelligence Unit). The trillions of dollars of stimulus spent by the world’s richest nations to support their economies through the pandemic have failed to instil a lasting sense of confidence, the survey suggested.

In Japan, only 15% of people believed they and their families would be better off in five years’ time, with most other democracies ranging around 20-40% on the same question. But in China nearly two-thirds were optimistic about their economic fortunes. Edelman says higher public trust levels in China are linked not just to economic perceptions but also to a greater sense of predictability about Chinese policy, not least on the pandemic.

Concerns about “fake news” are at all-time highs, with three-quarters of respondents globally worried about it being “used as a weapon”.

Our finances depend on truth

One of the big lies – or misapprehensions if you wish to be kind – of our political leaders in the past 12 months is that inflation is “transitory”. The chair of the US Federal Reserve, Jerome Powell, insisted that inflation was transitory through most of 2021, only saying on 30 November (when it was clear that there was nothing transitory about it) “it’s probably a good time to retire that word”.

In August last year, the Bank of England predicted that the consumer price index inflation (CPI) would reach 4% in late 2021/early 2022 but that it was transitory. Christine Lagarde, President of the European Central Bank, has resorted to the word “temporary”. Yet in the US, the UK, and the Eurozone, inflation has steadily and persistently climbed in 2021, to an annualised 7%, 5.4%, and around 5% respectively.

Either the people running our central banks are guilty of lying to us about inflation, perhaps to avoid causing distress, or they simply do not understand what is causing it. From the price of the durum wheat that is used to make pasta, to the prices of natural gas and crude oil, prices are still moving higher; in the UK, tax rates will shortly go up; wage demands will inevitably rise as people struggle to pay their bills. “It’s across the board, from house prices to wages in certain sectors, energy prices, prices of food, prices of goods”, according to Jim O’Neill, the former Goldman Sachs chief economist and commercial secretary to the UK Treasury. He adds: “it’s the first time we’ve seen a number of factors that drove 1960s and 1970s inflation, all occurring at the same time”.

Central bankers (and the governments behind them) are facing an extremely difficult year. Inflation is threatening to get out of control and probably already has when it comes to house prices; the median cost of buying versus the median wage is approaching ten times earnings, a level not reached since the late 19th-century, when about two million people lived as servants in other people’s houses. The divide between the haves and have-nots is vast and growing bigger; no wonder younger people are turning to cryptocurrencies in the hope of getting rich quick.

The only tool available to central banks to combat inflation is higher interest rates. Yet given that so much of the current inflation is a result of the explosive money supply which they have meekly acquiesced to in the last two years, it’s not clear that higher interest rates will quell the pent-up inflation. Meanwhile the purchasing power of fiat money will be eroded still further – perhaps by 7% this year in the UK.

The biggest lie of all is not about drinks parties during lockdown, but that our fiat money is in good hands. Glint – the payment system that allows its clients to use gold as money – was created to give everyone an alternative to fiat currencies. We believe it gives us all a chance to start being more honest about money and value. Nietzsche was right. We need some form of money that will not be subjected to the lies of governments, not least to shore up our confidence in democratic values.

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. Yet last year’s decline of about 4% in the Dollar price of gold – the first decline after two stonkingly good years – still beats the 7% decline in purchasing power of fiat Dollars.

The blockchain analysts at Chainalysis have done a valuable service by publishing a preview of their latest Crypto Crime report. It provides a timely reminder that cryptocurrency fraud is alive, well, and growing. Caveat emptor – buyer beware!

Cryptocurrency scams, ransomware and theft in 2021 went up by 79% in Dollar terms: a record $14 billion went into crime-linked crypto wallets last year. But given the anonymity this ‘black’ market understandably craves, how do we know that is the true figure? Might it not be $15 billion, or $10 billion?

Nevertheless $14 billion sounds (and is) a lot. But the report hastens to provide a supposedly comforting context: in 2021 the overall crypto market expanded by 550%, with almost $16 trillion of cryptocurrencies traded, so the report also suggests that “crime is becoming a smaller and smaller part of the cryptocurrency ecosystem.”

In one year the cryptocurrency world has expanded five times; this has proved rich resource for thefts and scams such as “rugpulls”, where scammers persuade investors to put money into a new token before disappearing. Perhaps the best/worst example in 2021 of a rug pull was the creation in November of a cryptocurrency called Squid Coin, inspired by the popular South Korean Netflix series Squid Game. The coin’s value spiralled by 83,000% over a few days, thanks partly to wide media coverage. Then the coin’s developers quickly cashed out their coins and made off with an estimated $3.38 million stolen from – how should one describe them? The gullible? The greedy? The people who wanted to make an easy fast buck? FOMO ruthless!

Cryptocurrencies rise but so does fraud. Crypto crime goes up, but relatively slowly (maybe). Three cheers?

What is ‘DeFi’?

DeFi stands for ‘Decentralised Finance’. This contrasts with ‘centralised finance’, where money is held by banks and corporations and other third parties – each one taking a tiny fee on transactions. DeFi is “the next step in the revolution in disruptive financial technology that began 11 years ago with bitcoin.”

DeFi promises to utterly transform the ways we think about and handle monetary value. It’s sometimes referred to as ‘Lego money’ because with DeFi you can join together decentralised apps (dAPPs), which run on a blockchain computer system and operate autonomously, to construct one’s financial life without any centralised agency standing in the middle; dAPPs spell doom for all kinds of middlemen entities. But as most of the computer code used by dAPPS is open source, the scope for criminal hackers is concomitantly widened.

With DeFi, algorithms supposedly handle all transactions; there is no human interaction between parties. This removal of human intermediaries and/or interference is one of DeFi’s main claims to superiority: no human = no human-type flaws such as mistakes or corruption.

DeFi takes control over transactions away from third parties (such as banks) but it does not provide anonymity. Your transactions may not have your name, but they are traceable by the entities that have access to the DeFi computer protocol. These entities might be governments, law enforcement, or other entities that exist to protect people’s financial interests. Sometimes, as reported to be the case in India last December, big companies ask employees to disclose their investments in cryptocurrencies, or risk punishment.

Functionally, DeFi protocols are venues for trading or lending crypto tokens and their derivatives. DeFi protocols are designed without any requirement that users reveal their identities – there’s no ‘know your customer’ (KYC) processes. This anonymity is a double-edged sword; no-one knows what you are doing with your money – but nor do you know what is being done with your money. This is what has encouraged the rise of cryptocurrencies – and also the fraud associated with them.

More than $92 billion of funds are currently locked into DeFi markets; some claim the figure last October was more than $195 billion. , . That $92 billion is a big chunk of change but is tiny compared to the global assets under management, which one source puts at more than $111 trillion now, rising to an expected $145 trillion by 2025.

Goldman Sachs now claims that the cryptocurrency Bitcoin currently has a 20% share of the “store of value” market; Bitcoin in other words can maintain its worth over time with no depreciation.

Astonishing, if true. But is it really true? Not according to Matt Stoller, who blogs about monopolies. He says: “Cryptocurrencies are a social movement based on the belief that markings in a ledger on the internet have intrinsic value. The organisers of these ledgers call these markings Bitcoin, or Dogecoin, or offer other names based on the specific ledger. That’s really all a cryptocurrency is. There’s no magic. It’s not money, though it has money-like properties. It’s not anything except a set of markings. Sure, the technology behind the ledgers and how to create more of these markings is kind of neat. But crypto is a movement based on energetic storytellers who spin fables about the utopian future to come.”

The energetic storytellers (one thinks of Elon Musk for example) might seem to undermine DeFi’s claim to be beyond any individual’s control; so-called ‘whales’, those who hold large amounts of cryptocurrency, “regularly more than $1 million” can by a single social media message have undue influence on cryptocurrency valuations. The whole crypto market is very tightly held, very illiquid, very opaque. How else to explain that Bitcoin between mid-April and mid-July 2020 fell by more than 50% only to double in the subsequent three months? Or to understand how Shiba Inu, another cryptocurrency, built on the Ethereum blockchain, which launched in August 2020 and cost $0.000000000073 per token at the start of 2021 (with a circulating supply of 1 quadrillion tokens) were changing hands at $0.00003305 by the start of this year, meaning Shiba Inu delivered a year-to-date return of 45,273,873%. Suppose you had invested $100 into Shib Inu on 1 January 2021, and held onto that stake throughout the entire year, you’d now be sitting on a a valuation of $45,273,973. Which defies common sense, but which also explains a lot about how cryptocurrencies have captured the imaginations of new and younger investors. Once upon a time cryptocurrencies were touted as challengers to authority, government control over money; they have morphed into get rich quick schemes, and through that temptation have also become honeypots put out by criminals.

Regulating the unregulated

DeFi’s proponents are proud of the fact that they elude much regulatory oversight. Given the terrible job done by regulatory authorities before and during the Great Financial Crash of 2008, one sympathises with the view that regulatory authorities have historically fallen down on the job.

And yet throwing aside the need for regulation of all aspects of the DeFi world would be to throw the baby out with the bathwater. One commentator says that “trying to regulate DeFi is a bit like trying to parent a super-powered 14-year-old who can fly, teleport, and turn invisible at will.” But no-one in their right mind would suggest not trying to parent such a 14 year-old. According to Hunter Horsley, CEO of index fund manager Bitwise Asset Management, “Regulatory uncertainty has been a risk in investors’ minds when it comes to DeFi…regulatory clarity is ultimately what would allow DeFi to get much larger.”

Just before the end of 2020, Singapore’s financial regulator suspended a digital currency exchange, Bitget; the exchange had advertised a digital token, Army Coin, as a way of providing lifetime financial support for fans (known as the BTS Army) of the South Korean music band BTS. According to the Financial Times this coin fluctuated “up to 78 times its value in a day, rising back and forth between $1,000 and $78,000 within minutes.” But given this is probably a token with a tiny profile it’s perhaps understandable that it can be so volatile. Bitcoin, the best-known cryptocurrency, has lost more than 39% of its value since hitting a record high of almost $69,000 on 10 November last year.

DeFi cannot be uncreated. With no single party in charge, it’s nearly impossible for someone to change the rules that govern it. Likewise, even if a government manages to prevent a bunch of computers from supporting cryptocurrencies, these digital assets can continue functioning because other computers on the network retain a full record of transactions and can carry on running the show. When China put a halt to cryptocurrency ‘mining’ last year, the ‘miners’ just upped sticks, moved to other countries, and continued business. Not for nothing did Barron’s christen DeFi the ‘wild West’ of cryptocurrency last October.

Officialdom moves in

In June 2021 El Salvador captured headlines by announcing that Bitcoin would be accepted as legal tender. So far it has spent more than $70 million of its official reserves on acquiring 1,391 Bitcoins, which are currently worth $60 million.

Gaining much less media attention was the fact that more than 20 state legislatures in the US updated their banking statutes to accommodate cryptocurrency transactions. The city of Miami last year introduced the ‘MiamiCoin’, which the mayor, Francis Suarez, claims has already earned more than $21 million for the city. Maybe. But the biggest problem for cryptocurrencies is their ambition to become adopted en masse and replace fiat currency. So far that hasn’t happened and some argue that this is “part of the reason why the currency-of-the-future story of bitcoin’s value has given way to the digital-gold story. The latter just needs the price to go up to appear true.”

Central banks will not relinquish their control over what is regarded as legal tender, but they are going to embrace the DeFi world, albeit according to different timetables. While the world awaits a long-promised report from the US about how it plans to work with digital currencies, China will use the imminent Beijing Winter Olympics to roll-out to foreigners its own digital currency, the e-yuan. If DeFi gains more than its current toe-hold, banks and corporations will find ways to get into the system; if not to control how you access your money, then at least how to make money from the system. Not that every country is set to introduce a digital version of its fiat currency; in the UK the chair of the House of Lords Economic Affairs Committee said this week that “the concept seems to present a lot of risk for very little reward.”

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.

Cryptocurrencies may be a new class of financial asset; or they may be a new, grand Ponzi scheme. Their intended mission – to take control over money out of the hands of government and place it in the hands of the people who use it – has hit problems that are inherent to all human enterprises; corruption creeps in. Caveat emptor!

From Elizabeth Holmes’s Theranos to fake Dollar bills, misinformation surrounds us and is destroying trust. Elizabeth Holmes has just been found guilty in San Francisco of conspiracy to defraud investors. Across the US there are thought to be about $100 million worth of counterfeit bills in circulation at any one time. Misinformation undermines confidence; according to the US-based Pew Research Center “economic pessimism feeds dissatisfaction with the way democracy is working and weakens commitment to democratic values… for many, democracy is not delivering”. What we thought was the case turns out not to be the case.

Lying can get you very far indeed, as long as the lies remain undiscovered. For Elizabeth Holmes, the misinformation she spread about her company, Theranos won her an accolade from Forbes, which named her the youngest and wealthiest self-made female billionaire in 2015. Theranos claimed to have invented a device that could diagnose a wide range of diseases from a small amount of blood. By 2010 Holmes had raised more than $92 million in venture capital, had assembled “the most illustrious board in US corporate history” according to one profile and hoodwinked much of corporate America. That same year The Wall Street Journal published an article detailing how Theranos’s blood testing device gave inaccurate results. Theranos began to crumble, but Holmes kept on repeating her lies – almost as if she believed them herself.

Matt Levine, a Bloomberg contributor, says that “in a generally rising market where lots of fortunes are being made quickly, rushing to back popular projects without a lot of due diligence seems to work, and if you back enough of them you’ll be fine even if a few are frauds. The ones that work make you rich; the ones that are frauds give you an entertaining story”. Most of us would probably prefer to avoid being subjected to fraud than having an entertaining tale.

If someone encourages you to invest in a company or asset which they know is worthless, or knowingly passes you a fake $100 bill, the only difference is one of degree. The mens rea – the mental state of knowing that a crime is being committed – is the same in both instances.

The past two years have been one of the most turbulent periods in recent times. A violently disputed American Presidential election, a global viral pandemic, totalitarian superpowers clamping down on dissident opinion, surging equity markets combined with inflation at levels unseen for 40 years, an unprecedented amount of newly created fiat money flooding the global financial system, extreme volatility in many commodity markets – all against the backdrop sense that misinformation is everywhere, and reliable objective guides are no-where.

What is the new normal?

Investors in Theranos got burned because they failed to do due diligence, or the diligence they conducted wasn’t thorough enough.

But what about the person who is passed the fake $100 bill or £20 note? Must we do due diligence on every banknote? That would be an unreasonable expectation.

Yet the inflation rate – or to put it more accurately, the cost of living – in the UK is now officially above and annualised 5% and in the US above 6%.

Unofficially the rates are thought to be much higher. We should be doing more due diligence on the banknotes we use. If full due diligence was carried out on the value of our paper currencies, then it would have to conclude that our Dollars this year will have 6% less purchasing power and our Pounds 5% less. That’s not misinformation.

In November 1967, the Labour government in the UK of Harold Wilson, the then British Prime Minister, devalued the Pound by just over 14%. Wilson addressed the British public via TV and told them – misinformed them – that it did not mean the “pound in your pocket” was worth less. Except that Wilson’s enormous lie was soon discovered by consumers who found that the pound ‘in your pocket’ had indeed lost its purchasing power.

Harold Wilson tried to get away with a big lie, whereas the current US and UK administrations apparently prefer to pretend that there isn’t a problem.

Interest rates will rise this year

The last time inflation was this high, during 1977-82, interest rates fluctuated between 10% and 20%. Today the federal funds rate ranges from zero to 0.25%. This cannot and should not last.

But although the US Federal Reserve chairman Jerome Powell has finally accepted that his view that inflation was “transitory” – a piece of misinformation that stemmed from a mens rea that remains opaque – his options are limited, both economically and politically.

Economically, the risks are two-fold. Push up interest rates too far, too fast, and the wobbly economic recovery will crash and burn. Yet leaving them too low for too long will mean that credit and cheap money are given additional stamina. Politically the Federal Reserve does its best to assert its impartiality, yet it is ultimately an instrument of government policy; Powell will be only too aware that President Biden will face testing mid-term elections in November this year. Out of control inflation and/or an economic recession will ensure Biden’s Democrat Party gets a trashing.

Where does this leave gold? Fortunately, although we are living through an era of rampant misinformation, there are some hard facts when it comes to gold. Gold ended 2021 down by around 3½% against 2020, but this needs some context – the price had two wonderful previous years, going up by more than 24% in 2020 and almost 19% in 2019. In 2018, it lost slightly more than 1%, again preceded by two successive years of rises, by some 12½% in 2017 and more than 8.6% in 2016. Is there a pattern here? Gold’s price responds as much to the relative strength of the Dollar as anything else. Higher US interest rates will strengthen the Dollar against other currencies, and the price of gold is likely to fall in US Dollar terms.

But the big unknowns of 2021 – geopolitically and macro-economically – remain intact. Gold price forecasts have nudged higher since we last noted them, with more forecasts of around $2,000 an ounce, even from commentators who see gold as “the ultimate analogue asset in an age where all the value is digital”. Is that also misinformation? Who can tell?

Forecasts are easy; accuracy is not. 2021 was a year in which a new type of investor came into being – the Millennial with disposable cash and an appetite for risk. No wonder cryptocurrencies blossomed. As a speculative asset, crypto proved itself in 2021, despite sometimes intense volatility, almost zero barriers to entry, and recurring scams; new cryptocurrencies mushroomed.

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.

What goes around comes around; today’s high-fashion is tomorrow’s expiring fad. Once upon a time the world’s music industry was swept by a digital revolution – CDs and then streaming became fashionable. Vinyl was for the birds – except that fashion has again moved on. In the UK more than 5 million vinyl records were sold in 2021, the 14th consecutive year of growth for the format and the highest sales for 30 years.

Gold may be ‘analogue’, it might be seen by some as antiquated, but one thing it isn’t is a johnny-come-lately. It’s been valued for thousands of years, through many political and economic upheavals. As new gold reserves become more difficult to find and mine supply becomes tighter, gold is likely to remain a prized asset against the unexpected.

It takes an unusually robust personality to forgo “perhaps tens of millions of dollars” and describe that as “character building”. But Ron Wayne is an unusually robust person.

He co-founded Apple with Steve Jobs and Steve Wozniak in 1976 but left in its earliest days; today Apple’s market capitalisation is almost £3 trillion. He sold back to Jobs his 10% stake in Apple for a pittance. At 87, Wayne has since pursued a career as an author and historian. He remains a vigorously powerful voice on behalf of sound money, as expressed in his latest and soon-to-be published book which, he tells me from his home in Ohio, will be titled Counterfeit Trust – the nature of money. His website tells us that this book is “vital to the personal security of each and every one of us”.

We are facing a potential massive problem, according to Wayne. At its centre is fiat money, the paper currency issued and sanctioned by governments and which has “given them more power than ever realised by ruling authority in the history of the world”, he says. He anticipates that eventually the roof will cave in, that the fiat money system will collapse, but as to when that might happen he says “my crystal ball blew a fuse last week. It could happen twenty years from now – or ten years – or two – or a week from next Tuesday. For example, some years ago the Republicans pulled a very dangerous (purely political) stunt by threatening to obstruct the raising of America’s debt ceiling. If they’d actually done so, the US would have defaulted on all of its debts!” Which are currently in excess of $29 trillion.

If that had happened, says Wayne, “the Dollar would have fallen like a rock, and since our dollar is the world’s reserve currency, such an event might well have triggered a worldwide fiat currency collapse. Yet even though they’d failed to follow through with their threat – just the threat alone cost the United States its triple-A credit rating, and the people of the United States tens of billions of dollars in increased interest payments”. The US Congress has just voted to raise the national debt limit by £2.5 trillion and extend it into 2023.

Inevitably, we quickly get onto the topic of inflation, now at an official 6.8% in the US (but more than twice that according to unofficial sources ) and threatening to get out of hand everywhere. In the UK, the Bank of England has just doubled rates, from 0.10% to 0.25%, as inflation in Britain has exceeded 5%. It’s now widely expected that the US Federal Reserve, America’s central bank, will raise currently rock-bottom interest rates three times in 2022.
As a child, Wayne lived through the Second World War and the extremely high inflation which struck the US in 1946, more than 18%. It’s little wonder that he is therefore attuned to the dangers of inflation, which he argues are intrinsic to a paper money system – governments find it too easy to print more cash and issue more debt if they are under pressure from domestic demands or foreign ventures. How else did the US fund its Afghanistan expedition, which cost an estimated $6 trillion? It was all financed through debt.

Wayne asserts that “it doesn’t matter whether the political system is a dictatorship, a kingdom or a republic – in any society which is economically based on hard currency (silver and gold), the administrators of that society must pay for anything they want to do (or have to do) with gold and silver coins… once the ruling authority can get its buying power out of a printing press, the whole civil authority equation turns upside down and inside out. That authority becomes no longer a mere user of money, but becomes the ‘creator’ of money – and as such, they no longer need the public. They can go to the printing press any time they want, for all the buying power they want, to do anything they want”.

The power this control over the printing press (plus control over what is officially sanctioned as money) becomes, argues Wayne, “politically irresistible”. This can easily lead to flooding “society with unlimited issues of worthless script”. Grasping this point, says Wayne, “drove Adam Smith… to the conclusion, that any society which adopts a fiat money system, will inevitably experience run-away inflation, monetary failure, economic failure, and probably political failure with it… every fiat currency, by its nature, is doomed to inflate itself out of existence”. The consequences of this could be character destroying, not just character building.

It’s a bit like dropping a hapless lobster in a saucepan and gradually turning up the heat. “It’s one of the unfortunate aspects of inflation – it moves in tiny incremental steps at the beginning and at the end it’s monumental”.

Wayne doesn’t see cryptocurrencies as offering a solution. Bitcoin “is entirely ethereal, based on the internet. Silver and gold as money you can’t play tricks with – it’s either there or it’s not.” If electricity goes down, then what happens to all transactions carried out via the internet?

Wayne remembers very clearly, like an epiphany, when he discovered his interest in sound money. “I was about 11 years old, and I heard my parents talking about a successful family friend. Then one day he went to his bank and it was just a hole in the ground. This bothered me, to hear of a guy who played by the rules and yet still got swatted. It was about 10 years later, I had been pondering this, when I suddenly understood what was going on. I developed an understanding of what was happening, why it was happening and I started ‘clocking’ things”.

It will take a few centuries to pay off the US national debt of $29 trillion, I suggest to Wayne. His reply is immediate – “it won’t be paid down, it will be abandoned, as all such debts are. Because the whole world is running on money that is the purest essence of debt. It’s all debt”.

The world’s paper money system is running on empty. Wayne favours gold but prefers silver. His reasoning is that the gold/silver ratio is currently around 80:1 – it takes about 80 ounces of silver to buy one of gold. When the purchasing power of gold “goes through the roof”, the buying power of silver will rise even further.

It’s hard to disagree with Wayne, not just because he is such a pleasant person to talk to but because he argues from such empirically sound positions. His logic cannot be faulted. It’s an uncomfortable future that he envisages, but one that certainly will build character. I can think of no better preparation for our uncertain future than to read Counterfeit Trust. Gold will probably end 2021 having lost 6% of its value year-on-year, but fiat currencies will have lost about the same thanks to inflation – and unlike gold they didn’t go up in their purchasing power by some 24% the previous year, and by almost 19% in 2019.

Glint’s Editor, Gary Mead, interviewed Ron Wayne in December 2021, at a time when inflation, low interest rates and rising national debt were driving people to look at alternative currencies like gold, silver and crypto, to save and spend their wealth. 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.

Enter the big guns. The International Monetary Fund (IMF) has told the Bank of England (BoE) that it should put up interest rates (which have been at 0.1% since 19 March 2020 ) to choke off inflation which, the IMF says, will rise to 5.5% early in 2022. The IMF looks to be behind the curve as usual.

For inflation in the UK has already reached 5.1%, in November. The IMF also forecast that inflation will only return to the BoE’s inflation target of 2% two years after that. If we look at the retail price index (RPI), which the UK government ditched in 2011 in favour of the consumer price index (CPI) because the RPI allegedly over-stated inflation, then inflation is running at more than 7%, the highest (on this measure) for more than 30 years.

So UK consumers face another two years – at least – of their purchasing power being even more eroded than the official target would imply. The Pound in your pocket will buy 5% less than it would have done at the start of 2021. Buying a house became more expensive; in the UK, average house prices slowed in October according to the Office for National Statistics, but it still rose by 10.2%.

The BoE’s quantitative easing programme means that by the time the programme winds up, at the end of December, it will have bought government and other bonds to the tune of £895 billion. The BoE said this QE was to signal that it would keep inflation on its 2% per year target ; so it’s clearly been a dismal failure. Not that anyone at the Bank will have the honesty to admit that. The Monetary Policy Committee of the Bank is in charge of the QE programme but trying to decipher what it thinks QE is doing has been compared to trying to understand the Enigma machine, the German military cipher machine of the Second World War.

Brits should count their blessings. Their living standards are falling but not as severely as in the US, where inflation in November rose 6.8% from a year ago, the biggest 12-month move since 1982.Your Dollar will by the end of this year buy you almost 7% less than at the start of 2021. Even if the rise in food and energy bills are stripped out, the US consumer price index in November still rose by 4.9%, the biggest rise in 30 years.

Inflation has returned, everywhere; the official figures show it’s now 8.8% in Estonia, in Belgium it’s more than 5%, in Germany it’s above 5% as it is in Norway, in Russia 8.4%, 10.3% in Ukraine, 35.7% in Iran… the list goes on. Let’s not even talk about Argentina, Turkey, Venezuela. In the Eurozone, inflation has reached a record 4.9%. More than three-quarters of countries analysed by Pew Research had higher inflation in the third quarter of 2021 than in the same period in 2019. Official figures are dry, abstract – they don’t capture the pain and anxiety caused by being in a job where wages fail to keep pace with ever-increasing costs of living.

The inflation targets central bankers set for themselves have been blown apart. Their political masters want them to ‘do something’ and fast, otherwise voters will soon drift to another party which will promise them salvation – no matter how flimsy that promise might be. In the UK, Prime Minister Boris Johnson’s approval rating is the worst it has ever been ; the same is true for US President Joe Biden. Biden faces important mid-term elections in 2022; if his Party is then trounced (as it currently looks like being) his Presidency will be consigned to the waste bin marked “lame duck”. Johnson, after a slew of embarrassments, is facing growing rebellion from within his own Party, never mind voter disenchantment.

Are central banks fresh out of ideas? Do they really know, for example, what is causing the current outburst of higher prices? Before you can treat a disease, you need to have a reasonable idea of what is causing it. The consensus among them is that the current inflation wave is ‘transitory’, the definition of which has morphed from being a few weeks, to a few months, to simply ‘not forever’.

Transitory turns durable

The trouble for Biden, Johnson and other political leaders who depend on electorates is that this year’s inflation will soon be next year’s.

In the US, the official inflation figure in any case disguises much higher price rises for particular goods. The energy index, the government’s measure of the prices Americans pay for gasoline, heating and other energy – has soared 33.3% over the past year. Meat, poultry, fish and eggs are all nearly 13% more expensive than this time last year. Farmland prices in the US have soared this year. The average value of an acre of farmland in Iowa has gone up by almost 30% in 2021, according to Iowa State University’s (ISU) annual survey. That has little to do with supply-chain bottlenecks.

The real significance of inflation is not in the prices of things going up – but lies in the fact that the purchasing power of your money is going down. In the UK, spring will see energy bills zoom higher for millions, as the prevailing price cap has been based on wholesale energy prices between August 2021 and January 2022, and these prices have risen by an astonishing 250% in recent months.

Central bankers have very few weapons to use in these situations. When inflation arrives the assumption is that, to use a cliché, “there is too much money chasing too few goods” (and services). Yet it is more complex this time, thanks to the COVID-19 pandemic and the more or less universal lockdowns imposed to control its spread. COVID-19 limited the supply of goods, as people were forced to stay home, not go out to work, not transport goods, not churn out the plastic gizmos that fill Christmas stockings.

Those lockdowns created all kinds of supply-chain bottlenecks, pushing up the cost of containers, pushing up the prices of goods those containers carry, yo-yoing international crude oil supply and demand, throwing employment figures into turmoil, creating a field day for economic forecasters and driving the hunt for a return, for yield – which is one reason why cryptocurrencies have soared, along with equity markets.

And now Omicron, the latest Covid ‘variant’, has thrown a spanner in the works and made tackling inflation more problematic. The World Health Organization (WHO) scarily said towards the end of November that half a million people in continental Europe could die by March unless more urgent action is taken. In Britain, health experts are forecasting a Covid contagion tsunami by Christmas; hospitality venues are facing mass cancellations of celebratory dinners; workers are going down like ninepins; and no government support packages are available this time round. In November the German health minister, Jens Spahn, said that “more or less everyone in Germany will be vaccinated, cured or dead” by the end of the winter given the current rate of the virus’ spread. Across Europe countries have variously re-imposed lockdowns, curfews, mask or vaccine mandates – all of which will impede economic recovery. In the US, Apple is making mask-wearing a requirement for customers visiting its stores. Maybe these strictures are necessary; but they make it more difficult for central bankers to start raising interest rates, simply because they weaken already fragile economies.

A delicate balance

What will the US Federal Reserve do to combat inflation? Jerome Powell, chair of the Fed, has reiterated for much of this year that his view is that inflation is ‘transitory’. He and Janet Yellen, US Treasury Secretary, have brushed aside suggestions that inflation might linger for longer. That is now contradicted by the evidence – US wholesale prices went up by nearly 10% in the 12 months to November; this increase will undoubtedly feed into retail prices in the months ahead. The eyes of the world have been on Powell this week; the faster winding-down of the Fed’s QE bond-buying programme, cutting its purchase by $30 billion a month so that this ‘stimulus’ ends by April was widely expected.

But a rise in US interest rates is not expected before April/May 2022. Powell and President Joe Biden are both reluctant to push up rates too quickly, for fear that would halt the recovery from the Covid damage, even though all the signs are that the economy is on its strongest footing for some time; the unemployment rate has fallen to 4.2% and economic growth this year will be more than 5%.

So we enter one of the most festive periods of the year in a cloud of uncertainty, made even more uncertain by central bankers being fresh out of ideas how to put a halt to the biggest threat to our fiat currencies’ purchasing power for almost 40 years. Act too fast and maybe the economic recovery will grind to a halt; act too slowly and the risk is that inflation will stick around and worsen; stagflation may still be on the cards.

“Our money has no value anymore”.

That’s what a retired bank worker told a New York Times reporter at the end of November. Can you imagine the horror that inspires? The notes in your pocket are suddenly worthless. Unimaginable in your country, you might think – that kind of thing surely only happens in places like Venezuela or Zimbabwe.

Except that this anguished cry came from Turkey, whose capital, Istanbul, which straddles East and West, is one of Europe’s finest cities. It has some of the most important architectural treasures the world possesses. Turkey is the seat of one of civilisation’s leading faiths. It’s a highly-favoured tourist destination; in 2019 almost 52 million tourists visited the country, spending around $42 billion. Turkey joined NATO, the North Atlantic Treaty Organisation in 1952; it long nurtured hopes of being admitted to the European Union. In 2019, the HSBC Expat Explorer report ranked Turkey as the 7th-best country in the world for international workers, ahead of Germany (8th), the US (23rd) and the UK (27th). In principle Turkey has a lot going for it.

For foreigners visiting Turkey, the collapse of its fiat currency, the Lira, means that many bargains are to be had. But it’s terrible news for Turks; the Lira has lost 75% of its value against the US Dollar since 2013, 20% of that in the third week of November this year. Impoverishment for millions is now a reality. The World Bank estimates that more than 1.5 million Turks fell below the poverty line in 2020. Prices have been spiralling – electricity prices in 2019 went up by more than 50%; youth unemployment was about 27%.

While we all might walk around thinking ‘it can never happen here’, that’s what many Turks thought a few years back. None of us are that far from Turkey. In the US, inflation is now running at an annualised 6%; in the UK, the deputy governor of the Bank of England (BoE) sees inflation rising beyond 5% by early 2022; in the European Union, the rate is currently 4.4% (but more than 5% in some member states); in Russia, inflation is now more than 8% a year; in Brazil, inflation is now expected to reach double digits by the end of 2021.

Root of the problem

Turkey’s President, Recep Tayyip Erdoğan, has overseen Turkey’s move to what some have described as a “competitive authoritarian regime”. Erdoğan co-founded with Abdullah Gül the Justice and Development Party (AKP) in 2001. He’s been President since 2014.

In July 2016, he and his administration survived a strange attempted coup, supposedly led by the ‘Council for Peace at Home’ which was alleged to be a clandestine group within the Turkish Armed Forces. The Council, whose leaders have never revealed themselves, are supposed to have taken their name from the Turkish phrase yurtta sulh, cihanda sulh, meaning “peace at home, peace in the world”. This phrase was memorably uttered in 1931 by the founding father of the Turkish Republic and its first President, Kemal Atatürk. Yurtta sulh, cihanda sulh became regarded as a guiding principle of the Turkish state – domestic as well as international peace and security.

There’s not much room for humour in the cafes of Istanbul these days. But even people struggling with inflation officially at 21% (and unofficially at least twice that) can spot the irony in the name – justice and development – of Erdoğan’s AKP Party. The AKP was re-elected in 2018; fresh elections are due to be held in 2023 but it’s looking increasingly likely that Erdoğan will not have a political future that far into the future – although he might be able to use force to cling to power.

Erdoğan is widely regarded within Turkey as being personally responsible for out-of-control inflation. He has a very unorthodox view of interest rates and inflation – while most believe that pushing up interest rates is one means of controlling inflation, Erdoğan has said that in his view high interest rates cause inflation: “Interest is the cause, inflation is the result… If you are saying the opposite, my friend, you don’t understand the issue” he said in September 2018. In November, Turkey’s central bank cut its main interest rate for the third successive month, to 15%. As if to reinforce his view he has regularly sacked central bank officials who oppose interest rate cuts. The main reason for the wave of inflation the world is now experiencing is the terrific boost to the money supply from governments confronting the consequences of locking their economies up for a year, under COVID-19. While it’s not clear that higher interest rates can combat this inflation, cutting interest rates and making money cheap certainly doesn’t help.

Authoritarianism is bad for growth

Sadly Erdoğan is far from being alone. In many corners of the world, from Myanmar to Russia, from Belarus to Lebanon, democracy is being undermined. The US and Russia are sabre-rattling over Ukraine and who dominates Europe; US diplomats will boycott the Winter Olympics in Beijing in February over allegations that China is conducting genocide against its Muslim Uyghur minority; Afghanistan, Syria and Yemen remain open sores; China, apparently irritated at not getting an invitation to President Joe Biden’s ‘Summit for Democracy’ this week, has published a white paper called”“China: Democracy that Works”, a view not shared by the Economist Intelligence Unit’s Democracy Index, which calls China an “authoritarian regime” and ranks it 151 out of 167 countries; the US it refers to as a “flawed democracy”. Around the world there are many examples of how authoritarianism has strengthened its hand, under cover of a global pandemic and the economic turmoil that has resulted.

Leaving aside matters that appeal to sentiment, such as human rights, freedom of expression, rights of association, there’s evidence that democracy brings about economic growth – it makes a difference to what’s in our wallets. In a paper published in the Journal of Political Economy in 2019, Daron Acemoglu, a Turkish-born American economist who has taught at the Massachusetts Institute of Technology since 1993, in collaboration with three others said their research found that “a country that transitions from nondemocracy to democracy achieves about 20% higher GDP [gross domestic product] per capita in the next 25 years than a country that remains a nondemocracy. The effect of democracy does not depend on the initial level of economic development, although we find some evidence that democracy is more conducive to growth in countries with greater levels of secondary education”.

Which seems to bear out Winston Churchill’s comment in 1947: “it has been said that democracy is the worst form of government except for all those other forms that have been tried from time to time”.

For Turks, the Lira can still be used to make purchases but it’s no longer a store of value – understandably, as their currency is on its last legs, they now try to change their Liras into US Dollars, Euros, gold, cryptocurrencies. Turkey’s government in April banned the use of cryptocurrencies in payments for goods or services, although trading continues. Given cryptocurrency’s volatility – Bitcoin lost more than 20% of its value last weekend that too seems an unreliable store of value. Cryptocurrencies were created precisely to act like gold and enable people to be more in control of what they use as currency; it was such a good idea that governments everywhere are thinking how they can hijack the underlying technology and develop their own digital currencies, whilst at the same time stocking up on the precious yellow metal. The world is getting smaller; none of us are far from Turkey.

Today, 3 December, is the deadline by which the US was to have raised its debt ceiling. The US has a very poor record when it comes to handling money; if it was an individual or family it would have been evicted years ago.

It has for years always spent more money than it collects in taxes – it has a permanent shortfall, which it covers by borrowing. This debt ceiling farce started in 1917, when the US Congress passed the Second Liberty Bond Act, by which it also established a debt ‘ceiling’ on how much debt the government could run up. But America regularly busts that limit – since 1917, the limit has been raised 102 times. In October 1918, the US launched its Fourth Liberty Bond, with a call date – the date on which the issuer has the right to redeem the bond at par, or a small premium, prior to the state maturity date – of 15 October 1933. The terms of this bond included the statement: “The principal and interest hereof are payable in United States gold coin of the present standard of value”, which was common in both public and private contracts of the time, and was intended to guarantee that bond-holders would not be harmed by a devaluation of the currency.

But when the US Treasury called this fourth bond on 15 April 1934, it defaulted on this term; it refused to redeem the bond in gold; neither did it account for the devaluation of the dollar from $20.67 per troy ounce of gold (the 1918 standard of value) to $35 per ounce. The 21 million or so bond holders therefore lost 139 million troy ounces of gold, or approximately 41% of the bond’s principal, equivalent to $2.866 billion (in 1918 dollars) and $250 billion in 2021 dollars.

The legal basis for the refusal of the US Treasury to redeem in gold was the gold clause resolution dated June 5, 1933. The Supreme Court held this to be unconstitutional under section 4 of the Fourteenth Amendment. But the Treasury got away with this piece of chicanery because President Franklin D. Roosevelt had signed an Executive Order (number 6102) in 1933, which forbade “the hoarding of gold coin, gold bullion, and gold certificates within the continental United States”. So the Supreme Court ruled that the bond-holders’ loss was unquantifiable, and that to repay them in dollars according to the 1918 standard of value would be an “unjustified enrichment”. Not until December 1974 was this ban on holding gold repealed.

The clock ticks loudly

The clock is ticking in the US. Lots of legislation is piling up to be dealt with before the end of 2021. For one thing Congress needs to approve the National Defense Authorization Act, an annual bill to fund the US military. President Joe Biden is also anxious to get his ‘Build Back Better’ Bill, which will plough $1.75 trillion into childhood education, public healthcare and climate policies, passed. Chuck Schumer, the Democratic Senate majority leader, has vowed to get this passed by 25 December.

But perhaps more important (because if it’s not approved it could force a shutdown of many federal services) Congress needs to agree to continue funding the government by raising the debt ceiling. The US national debt is rapidly approaching $29 trillion; that’s around 126% of US gross domestic product (GDP). Some sources put the debt at more than $140 trillion. Janet Yellen, Treasury Secretary, has warned on several occasions that unless Congress agrees to raise the self-imposed debt ceiling the US government risks having what she calls “insufficient remaining resources” after 15 December. Or in less euphemistic language, the government will run out of money to pay wages, bills, and contracts.

That the US government might default would be catastrophic; it would destroy trust in the world’s biggest economy; according to the White House itself, “financial markets would lose faith in the United States, the dollar would weaken, and stocks would fall. The US credit rating would almost certainly be downgraded, and interest rates would broadly rise for many consumer loans, making products like auto loans and mortgages more expensive for families… These and other consequences could trigger a recession and a credit market freeze that could hurt the ability of American companies to operate”. The Bipartisan Policy Center says that “even a short-term default could lead to higher borrowing costs and liquidity concerns for the private sector, increased unemployment, stock market losses, and GDP contraction, further threatening the country’s recovery from the COVID-19 pandemic and recession”.

That’s surely enough to send shivers down the spine of everyone in Congress.

The chair of the US Federal Reserve, Jerome Powell, has often said this year that US inflation is “transitory”; on Tuesday this week he changed his tune and said it “now appears that factors pushing inflation upward will linger well into next year”. With annualised US inflation now above 6%, the US will certainly borrow more, in the certainty that inflation will nibble away at the debt.

We’ve been here before

US journalists are fond of saying that their country has never defaulted on its debts which, as we have seen, is not quite accurate. In 1814, the US Treasury was unable to meet all its obligations, including some interest payments on federal debts at the end of the war with Britain. The US also failed to make timely payments to some small investors in early 1979, and that was seen as a mini-default.

Congress narrowly avoided running the US into a default in August, when it passed a stopgap measure that raised the debt ceiling by $480 billion, to around $28.4 trillion, to enable the country to limp through to December. The Bipartisan Policy Center estimates that the crunch date, i.e. when the US will no longer be able to meet its obligations, in full and on time, will be close to mid-December.

Even the mere threat of a default would produce serious negative ripples in the global economy. And that’s why the whole debate seems somewhat artificial – surely no American legislator would seriously risk the stability of the global economy?

Except that we live in strange times. Leading Republicans have been insisting that Democrats “go it alone” to raise the debt ceiling, by using a complex legislative procedure called reconciliation. In the early 2000s, Republican Congresses routinely used reconciliation to increase the budget deficit. Democrats however are reluctant go down this route, because it’s slow, time-consuming but also because they understandably want to share the guilt around. The most likely outcome is that this can, now the size of a dumpster, will continue to be kicked down the road, and we will be facing this same debt ceiling question in 2022.

Gold for Christmas

That the US Congress is evenly balanced between Republicans and Democrats is clearly a recipe for legislative paralysis. But this speaks to a bigger problem confronting the US – its deep political divisions and the apparently irreconcilable hostility between grass-roots Democrats and Republicans. A year ago the Pew Research Center said of the US “finding common cause… has eluded us”. As inflation has crept back, apparent threats from hostile powers have ratched-up, and new variants of the coronavirus pop out of the woodwork, the healing that many hoped for under the new US President remains elusive. And behind that is an even bigger problem – the sheer scale of US debt. How long can the US carry on piling up this debt? Will buyers of US Treasury bonds, long regarded as one of the safest investments in the global financial markets, continue to buy them ad infinitum? The debt ceiling didn’t even hit $1 trillion until 1982, 30 years ago. The nation isn’t fighting a world war but government is borrowing like it is.

Risks are everywhere. The risk to your hard-earned money is perhaps the least obvious but the most grave. We don’t know where the next major threat to value will come from, but we do know one means of getting protection, one that has proved its resilience throughout history – gold.

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.

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

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

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

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

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

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

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

Bloating states

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

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

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

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

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

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

Full circle

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

By this time next week, we should know who will be the next chair of the world’s leading central bank, the US Federal Reserve. President Joe Biden said this week in response to a reporter’s question: “Yes, as my grandfather would say, with the grace of God and the goodwill of the neighbors, you’re gonna hear that in about four days”. Will he re-appoint Republican Jerome Powell, who was given the job by President Donald Trump, or will he elevate Fed Governor (and Democratic Party supporter) Lael Brainard to the post?

These two are the front-runners; there is hardly a dollar bill between them in terms of their views on monetary policy. Both have recently been ‘interviewed’ by Biden. Powell, ‘Jay’ to his friends, has been on the Fed board since 2012. Brainard has sat on the Fed board since 2014. Her husband is President Biden’s top adviser on Asia. Powell is the bookies’ odds-on favorite. He took the chair in February 2018, replacing Janet Yellen, who is now Biden’s Treasury secretary. Powell’s term as chair expires in February. By previous standards Biden should have made an announcement by now: Powell was nominated by Trump on 2 November 2017; Janet Yellen was nominated by President Barack Obama on 9 October 2013; Ben Bernanke was nominated by President George W. Bush on 25 October 2005 and re-nominated on 25 August 2009.

Whoever it is will be passed a poisoned chalice. They will inherit an inflation rate running at an annualised 6.2%, the highest in a generation, and threatening to become entrenched. Non-official sources, such as Shadow Statistics, which uses the methodology in place in 1980, suggest that inflation is closer to 14%. High inflation is souring American in consumers’ views. For Biden, the choice of Fed chair is not purely economic; he faces critically important mid-term elections in 2022 and he will want someone who might improve his chances at the ballot box. That will mean the person most likely to be able to steer a course towards greater price stability. It could mean ‘better the devil you know’ – Jerome Powell.

In a conventional world – which is not where we are today – such high inflation ought to dictate a rise in interest rates. The US benchmark interest rate, the federal funds rate, was lowered to 0% in March 2020. In its November statement, the Federal Open Market Committee (FOMC), which sets rates, said it intends to keep the benchmark rate at current rock-bottom levels until inflation averages 2% over the long term. The Fed expects inflation to increase by 3.7% this year as the economy recovers, then drop to 2.2% in 2022. That looks a remote possibility right now.

Mary Daly, president of the San Francisco Fed who also sits on the FOMC, is just one influential voice against interest rate increases. She believes that higher rates now would slow the economy just when it will start to motor, in about a year’s time. The US economy is still some 4.2 million jobs short of the total level of payroll employment before the COVID-19 pandemic. Fed officials are keeping a loose monetary policy for fear the nascent economic recovery will hit the buffers.

Inflation is a global problem

The poisoned chalice for Powell, Brainard, Biden or indeed officials from other countries is that what has seemed transitory might become more permanent. If the inflation is down to supply-chain bottlenecks, there’s bad news for the ‘transitory’ adherents: ocean freight rates, what we pay for goods being shipped, may take more than two years to return to ‘normal’ levels according to those in the industry. And almost 60% of British companies are planning to raise their prices to recover rising supply-chain costs and wages, according to a just published, thrice-yearly outlook by Accenture and IHS Markit.

In the UK, the consumer price index (CPI) in October jumped to an annualised 4.2%, against 3.1% the previous month, and the fastest pace since November 2011. That’s more than double the 2% target set by the Bank of England. Moreover that CPI reading feels inaccurate to many people; the UK cost of electricity, gas and other fuels rose by 23%. The average house price in the UK went up in September by an annualised 11.8%, to a record high of £270,000. In the Eurozone, inflation in October rose at the fastest pace for 13 years.

The curse of inflation is not simply that things cost more. Inflation divides societies. Inflation which becomes uncontrolled breeds anarchy. The poisoned chalice spills its contents.

A monetary phenomenon

The US economist Milton Friedman would not be surprised at where we are today. He once said “inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output”. The generous financial supports from governments everywhere during the Covid-19 pandemic are now starting to be felt. In September 2021 money supply growth in the US, i.e. basic M1 currency plus demand deposits, was almost double what it was prior to the pandemic. As economies start to get back on their feet, this money supply explosion has led to some crazy things, such as a stock valuation of would-be electric vehicle maker, Rivian, of $105 billion, zooming past that of Volkswagen, despite Rivian having almost no revenue. Loose money has encouraged greater risk taking and intensified the hunt for yield; it’s also one reason why cryptocurrencies have been so strong. People are generally flush with cash, and they want to spend it, and hope to make a quick buck with it.

Tick the boxes

Yet there are political obstacles to the simple reinstatement of Powell.

For one thing he is, for Democrats and some Republicans, tarnished by having been appointed by Donald Trump. Senator Elizabeth Warren, one of “the nation’s leading progressive voices” according to her website , a forceful Democrat, wants to impose a ‘soak-the-rich’ tax on “fortunes worth over $50 million to generate $2.75 trillion in revenue over ten years – enough to pay for universal child care, student debt relief, and a down payment on a Green New Deal”. Warren called Powell “a dangerous man to head up the Fed” in September and said that she would oppose his re-nomination. She thinks Powell in dangerous because he isn’t tough enough on banking regulation – Warren is still fighting the last war, that of 2008, rather than preparing for the next. Warren’s side of the Democratic Party favours Brainard; she also wants to see tighter bank regulation. But banks and their misdemeanours are not hot button topics right now.

Who will be better?

As gold owners and users, it probably doesn’t matter to us who sits in the Fed chair. Our mild preference should probably be for Brainard, as she is likely to be marginally more dovish when it comes to raising interest rates; she will hold off raising them for as long as possible. Pushing up US interest rates would make the US Dollar relatively stronger and thus damage the gold price.

But Powell, who seems to have the backing of Janet Yellen, has also been remarkably dovish in his handling of monetary policy. In July he told Congress that he didn’t want to raise interest rates “prematurely… One way or the other, we are not going to be going into a period of high inflation for a long period of time, because of course we have tools to address that. But we don’t want to use them in a way that is unnecessary or that interrupts the rebound of the economy”.

Fed officials have already pulled back on one leg of their ultra-easy policy, slowing the large-scale bond purchases they’ve been making for more than a year and a half to keep borrowing costs low and financial markets functioning smoothly. Those same markets are increasingly betting that the next step – rate increases – will kick off by the middle of next year.

Biden has a lot on his plate right now; he will be 79 on 20 November, an age when most people are thinking of pruning flowers rather than pruning a deficit. In December, he has to navigate through an evenly-split Congress, an increase to the limit on the federal debt (now $29 trillion or £15.57 trillion) and also hopes to persuade Congress to approve a $1.75 trillion (£1.30 trillion) spend on expanding the social safety net and climate change issues.

Biden has his own poisoned chalice; should he choose the continuity candidate (Powell) or reward his party faithful and select Brainard? For gold holders and users of gold as an alternative to fiat money it probably makes little difference. What will matter is the moment the Fed starts to push up interest rates. But neither Powell nor Brainard will think about pushing up rates until mid-2022 at the earliest. Which means that crazy stock valuations, higher house prices, more cryptocurrency gains, are likely. Biden probably needs a Fed chair (and will find it easier to get Congressional approval for) a candidate who at least tries to look hawkish; so Powell should be a shoo-in.

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

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

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

Gold under Biden

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

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

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

Devil and the deep blue sea

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

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

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

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

Workshop of the world

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

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

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

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

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

Glint always tries to demonstrate balance between gold, crypto and fiat currencies when it comes to purchasing power. While we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.