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Category: Soap Box

Soapbox: What price home?

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In Richard III William Shakespeare has the almost-defeated Richard declaim “A horse, a horse! My kingdom for a horse!” If the play were written today Richard might well cry “My kingdom for a house!”

House prices more or less everywhere have rocketed under the pandemic. The suggestion that annualised inflation is currently running at less than 5% in the US and will only hit 3% (only!) in the UK this year seems considerably mistaken, at least for anyone trying to buy a home. The US National Association of Realtors said last week that the median price for sales of existing homes was up almost 24% year-on-year, reaching $350,000 for the first time. In the UK, house prices are rising by more than 13% a year.

 

Fifty years ago, according to US Federal Reserve Economic Data, it would have cost you about $24,000 to buy a mid-point house in America. The price of gold that year was $35 an ounce, so you would have needed around 686 ounces to buy that house. By the first quarter of 2021 that same house fetched $347,500, and with the gold price hovering around $1,780 an ounce you would need about 195 ounces to buy it. So that same house has gone up in price more than 14 times, while gold has risen by more than 50 times.

Meanwhile since 1970, the purchasing power of the US Dollar has continued to drop, thanks to an inflation rate averaging 3.87% a year, meaning a cumulative price increase of almost 600% compared to 50 years ago. To buy that $24,000 house in today’s Dollars you would need around $168,000; today’s Dollar buys you just 14.41% of what it would have done in 1970.

In hindsight – and who has that? – it clearly would have made sense to have stashed away gold in 1970 to buy a house, for your offspring if not for yourself, today. No-one can tell if the next 50 years will see a similar rise in the gold price. And the housing market boom may in any case have a bust. Much of the exuberance in the housing market is due to the Federal Reserve spending $40 billion a month on buying agency mortgage-backed securities. There’s been plenty of talk about how this needs to be ‘tapered off’; but taking away that support from the market could well trigger a bust, the impacts of which would ripple through the economy.

The previous boom in house prices ended very badly in 2008, when the over-leveraged sub-prime mortgage market hit the buffers; US homes lost an average of almost $100,000 at the peak of the 2007-09 recession, and slower economic growth cost the US economy around $650 billion.

Generational divide

In 2020, the national house price-to-income ratio in the US hit 4.4, the highest level since 2006. In the UK, the least affordable place to live is Westminster, where the house price/earnings ratio is a staggering 25.5 ; the average is 13.38. In Moscow it’s more than 21. Across the planet it’s become very expensive for new buyers to step onto the housing ladder.

The global Covid pandemic has wrought many changes to all our lives. One of the more easily-overlooked is how it has introduced a new social divide – between those who own their own home and those who can only dream of that. Far from being Covid being a “great leveller” some think that “it seems likely that institutional responses to this crisis, [Covid] including fiscal ones, will be shaped in such a way that inequalities may be further sharpened, as was the case after the 2008 crisis”.

“I’m not happy about house price increases because real estate is the surest indicator, the most compelling leading indicator for… a crash”, said Adam Posen, president of the Peterson Institute for International Economics.

History threatens to repeat

Essentially the 2008 financial collapse, which started in the US, was caused by too many people taking on loans they couldn’t afford, and mortgage lenders relaxing their credit checks. Money was cheap – the then chairman of the Federal Reserve, Alan Greenspan, had cut interest rates in 2001 to 1% in order to buoy-up the economy following the explosion of the dotcom bubble.

But the problem started years before that – in the late 1990s, the Federal National Mortgage Association, or Fannie Mae, started to make home loans accessible to borrowers with a lower credit score. Fannie Mae wanted everyone to attain the American dream of home ownership, regardless of credit.

Borrowing costs are again cheap today. Governments have piled on debt and eased credit costs. Their collective debt has surpassed $277 trillion, which is 365% of global gross domestic product. The World Bank says that every percentage point beyond government debt above 77% of GDP cuts 0.017 percentage points from annual growth. That translates into about 5% lower global growth than might have been expected had debt been restrained to a maximum 77% of GDP.

Speculative investors have once again returned to the US housing market. Robert Kaplan, president of the Dallas branch of the Federal Reserve, said last week: “What we’re seeing is more often than not these days, the winning bidder in many of these house auctions sometimes is not a family. It’s a post office box in Delaware, which is an investor who’s never seen the house, wants the house furnished and is going to buy it for investment purposes and rent it”. Big corporate investors have cottoned onto the fact that Americans want homes; that renting is the only option for many who can’t amass the necessary deposit; and that real estate is one of the few sectors to benefit from the pandemic’s unusual repercussions, such is the desire for more space and good working-from-home facilities.

One must hope that Jerome Powell, the chairman of the US Federal Reserve, knows more than we do. He put on the record last week that it is “very, very unlikely” that we will see a return to 1970s-style inflation. “I don’t expect anything like that to happen”, he added. In saying that the recent inflation spike is ‘transitory’ he joins the heads of some of the world’s other leading central bank. Christine Lagarde, president of the European Central Bank (ECB) said last week that there were “no strong signs of a credit-fuelled housing bubble” in the euro area as a whole. She’s not looking at the data we see, obviously.

The pace of house price rises – they went up more than 9% in Germany in the first three months of 2021, year-on-year, the biggest jump since 2000 – are a sure sign of an asset bubble. Powell, Lagarde and the rest may be relaxed about it, but the rest of us can’t afford to be so. When it pops open like an over-ripe tomato will Powell do a Greenspan, and lamely say “I really didn’t get it until very late”? If a house price bubble burst happens and ripples through the wider economy, will central banks yet again borrow trillions to try to prevent yet another downturn? And who will carry on lending to a US government which already owes more than $28 trillion?

Tricky times indeed. Everything is starting to feel a little precarious. That’s why we advocate holding some real, physical gold; a speculative investment, true, which can and does go up and down in value, but with Glint you can at least use gold as money. And unlike the Dollar, it’s purchasing power has only improved in the last 50 years.

 

 

Soapbox: The Slow Death of Cash

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Prepare for government-issued digital currencies. Unless you are Chinese, when you’ll already know what it’s like to live with Central Bank Digital Currencies (CBDCs). National CBDCs are set to replace banknotes and coins everywhere. Your country is going to impose it on you over the next couple of years.

Jerome Powell, chairman of the US Federal Reserve, said in May that America’s central bank will publish a “research paper” this summer on a US CBDC. A digital Dollar would be backed and guaranteed by the Federal Reserve, and stored on a digital ‘wallet’. The Digital Dollar Project is launching five pilot programs over the next 12 months, funded by the consultant Accenture, to test the US CBDC.

According to Christopher Giancarlo, former chairman of the Commodity Futures Trading Commission (CFTC) and co-founder of the Digital Dollar Foundation, “it’s vital that the US asserts leadership [in CBDCs] as it has in previous technological innovations”. His concern – Powell’s concern, President Biden’s concern – is that the US is losing this technological race to China, and that China’s ambition to replace the Dollar with the Renmimbi as the global reserve currency will get a terrific boost as a result.

Why is this happening, and why now?

It’s not really about money, but about the power to define what money is, and is not; it’s also a fight for who ‘owns’ the international reserve currency. And it’s happening now because China has ‘first-mover’ advantage over the US. The French investment bank Natixsis says “there is no secret behind China’s eagerness to internationalise its currency… China is trying [to foster] the cross-border acceptance of its digital currency, profiting from a first mover advantage. This is not only important in the long run but also immediately as it can help China bypass the use of the dollar when and if needed… The fact that the Renmimbi only captures a tiny share of global payments, roughly 2%, adds to the urgency”.

Playing into this CBDC development is that cash everywhere is dying, even in the US. According to Worldpay, the payment processing company, the use of cash for in-store purchases fell to 13% in the UK last year; in Australia, Canada and Sweden the figure was under 10%. Cash is everywhere in decline, even as the amount of cash in circulation on a global scale has increased vastly. In the US, the M2 money supply – which measures cash, deposit accounts and money market securities – last year grew to $18.3 trillion, 23% higher than in 2019. Banks don’t want cash; it costs them more to handle it than it generates revenue; central banks don’t want cash, creating banknotes is expensive; governments don’t want cash because it’s anonymous and makes detection of fraud and criminal activity very difficult. Individuals increasingly don’t want cash because plastic cards and Apps are so much more convenient.

Re-defining money

Money is power – and power (enforced if need be by the law) is something the world’s political elite won’t give up without a serious fight. Control over legal tender is intrinsic to government power and authority. Maybe we should be pleased. After all, we want our governments to protect us, and stave off the threat of anarchy, defending individual and property rights. We give them our allegiance – and in return they give us protection. That’s always been the state/citizen deal.

The deal is being undermined however, as central banks and governments rack up huge national debts, which are actually a mortgage against our future. The protective ‘cover’ is getting thinner, as governments have prioritised spending during the pandemic. In the UK, for example, for every £3 the government spent in 2020, it took in £2 in tax revenues. The UK’s debt pile reached £2.17tn at the end of April 2021 or about 98.5% of GDP, the highest ratio since the 99.5% recorded in March 1962.

Under the global pandemic people have switched, with sublime ease, to living more of their lives on-line. This revolution is as profound as the move from the horse to the internal combustion engine. Instead of flying across oceans for meetings, we have discovered Zoom (and other video communication services) – why pay expensive air fares? 5 days a week in the office is for the birds. What we drive (electric is our future, mandated by government policies); what we eat (the irresistible rise of vegetable protein); the recycling movement (waste not, want not, as my parents would say) is growing; the very idea of consumerism is increasingly questioned.

Part of this post-pandemic revolution is an evolving definition of money and how we use it. Money is no longer just banknotes and coins; it is morphing into the digital transfer of ‘value’ between people. The rise of cryptocurrencies is a key element of this revolution, as are CBDCs. Glint too is participating in this revolution, helping to accelerate the redundancy of banknotes, which by 2050 will be like Egypt’s pyramids, colourful tombstones.

So we are in a struggle, between governments that want to retain control over money, and private sector developers of cryptocurrencies who want to displace fiat money. Glint is in the happy position of observing this struggle from a distance; for us, gold is the authentic form of money. Rather than be forced to choose between two unpalatables – a CBDC that will have all manner of privacy issues, and a cryptocurrency that isn’t really a currency – Glint clients know that their gold is truly their own and secure, and spending that gold is easy-peasy.

 

% of cash used in total transactions

DAVIDS VERSUS GOLIATHS

There are many Davids – as of May 2021 there were more than 10,000 cryptocurrencies, all based on blockchain technology. There are thousands of blockchains; no one knows precisely how many. This splintered nature is part of the reason why cryptocurrencies will continue to struggle to be widely accepted as ‘money’. There are many other reasons, of course.

There are fewer Goliaths (central banks, governments), and unlike the Davids, all squabbling for dominance, the Goliaths will club together; they have more to lose.

The first Goliath out of the blocks is China. Bitcoin mining is energy-intensive and has a large carbon ‘footprint’. It’s thought that as much as 65% of global bitcoin mining was until recently done in China. China’s anti-Bitcoin drive is all about who has the right to control; it’s unlikely to be about climate anxiety.

Chinese officials fired a warning shot in May this year against Bitcoin mining. Beijing has now ordered that Bitcoin mining should be halted. About 90% of the country’s Bitcoin mining capacity has now closed down. That’s about a third of Bitcoin’s global network processing power. The People’s Bank of China (PBoC), China’s central bank, has told banks they must “investigate and identify” bank accounts that facilitate cryptocurrency trading and block all such transactions. The US Dollar value of Bitcoin and other cryptocurrencies fell on Monday by around 10%. A paradox of cryptocurrencies is that while they seek to displace fiat currencies their valuations are always quoted in fiat currencies. Indonesia too has banned the use of cryptocurrencies in payments. One has to feel sorry for El Salvador; the Central American country has just said Bitcoin is now legal tender (alongside the US Dollar). Someone should try to keep El Salvador’s President Nayib Bukele in the loop; CBDCs are the future, not cryptocurrencies.

By coincidence (presumably) Fabio Panetta, an executive board member of the European Central Bank (ECB) and the ECB’s chairman of a task force on a digital Euro, told the Financial Times last weekend that the introduction of a digital Euro would combat the spread of digital coins created by other nations and private companies. According to Panetta a digital euro (a Euro CBDC) would lead to “a fundamental change in the way in which payments, the financial system and society at large will function’.

The biggest club for central bankers is the Bank for International Settlements (BiS). The BiS said in January this year that “central banks collectively representing a fifth of the world’s population are likely to issue a general purpose CBDC in the next three years” and that 86% of more than 60 central banks it surveyed in late 2020 “are now exploring the benefits and drawbacks of CBDCs”.

Where China goes, others have no choice but to follow. China wants to stifle cryptocurrencies because they lie outside the control of the state, and threaten China’s state-controlled CBDC. China’s CBDC will be a further extension of the state’s knowledge of its citizens; one has to hope that the same will not be true of our own future CBDC. Or if you want to elude the risk of Big Brother CBDC scrutiny you could always use gold – whose value of course goes up and down, but with less volatility than Bitcoin – with Glint.

Soapbox: Inflation is back

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The shade of Paul Volcker – the former chairman of the US Federal Reserve who died in December 2019 – is getting restless.

Volcker pushed up the US Federal Funds rate to an astonishing 20% in March 1980 and kept it above 16% until May 1981. The Federal Funds rate is the interest rate banks pay for overnight borrowing; the rate which affects the Dollar’s value and other business assets; and the rate that sets the mark for interest rates around the world.

The so-called ‘Volcker Shock’ was delivered to combat inflation which in the US had risen to an annual 10%. Volcker stifled inflation – but helped create the 1981 recession, and triggered the Latin American debt crisis. That came to a head in 1982, when Mexico said it was no longer able to service its debt. Prior to Volcker, US policymakers thought that higher inflation would help lower unemployment. They preferred to let the economy ‘run hot’ and ignored the threat of inflation getting out of control – which it did. Are their successors making the same mistake today?

The headline US inflation rate is now an annualised 5%, up from 4.2% last month. This is close to its last peak of 5.6% in 2008, when crude oil prices rose above $140/barrel and US nationwide gasoline averaged more than $4/gallon. The consumer price index (CPI) – the underlying measure of inflation which excludes volatile items such as food and energy – rose by an annualised 3.8% in May, the most since 1992, after a 3% rise in April. The cost of transporting a forty-foot cargo container from Shanghai to the US is now 547% higher than the seasonal average over the last five years. Wholesale price inflation in the world’s workshop, China, jumped by 9% in May, the fastest pace in more than 12 years. It stretches credibility that these rises will not feed through to the average consumer.

Yet Jerome Powell, current chairman of the US Federal Reserve and the US Treasury Secretary, Janet Yellen, are taking a relaxed ‘wait and see’ attitude to rising inflation. They are understandably anxious not to snuff out the nascent post-COVID economic recovery, which could happen if they pushed interest rates higher. Let’s not forget the Fed’s dual mandate – maximum sustainable employment and price stability. They take comfort from the fact that about half of the rise in the latest consumer price index came from components associated with the re-opening of the economy, such as used cars, lodging, airfares and dining out. They do not regard the inflation spike as ‘sticky’ but transitory.

Some components of the CPI rose significantly – single family existing home prices showed a year-on-year increase of 18%. This may well be due to yield-hungry institutional investors bidding up home prices and accumulating property portfolios. According to JD Power, the global data company that tracks the US vehicle market, the average new car price in May was 12% higher year-on-year; retail prices for used cars have gone up by 20% since the start of the year.

Once they have gone up, prices – for everything – tend not to come down. So even if inflation is not overall ‘sticky’, and its rate comes down over the next few months as more workers return and productivity improves, individual prices may prove very ‘sticky’ indeed.

The economic recovery from the pandemic is among “the strongest recoveries from recession since 1945”. But it is an odd recovery. Developed economies are doing well, thanks to loose money splashed by governments who have taken on more debt; the additional money supply amounts to an average of 15% of gross domestic product in high income countries but just 3% in emerging and developing countries.

The tiger never dies

Andy Haldane, the chief economist at the Bank of England (BoE) has said the UK risks a wage-price spiral similar to that of the 1970s and 1980s. “The inflation tiger is never dead” he said. Britain’s consumer price index more than doubled to 1.5% in the 12 months to April and the BoE expects it will overtake its 2% target later this year. “The risks at the moment for me are that we might overshoot that number for a bit longer than we’ve currently planned”, added Haldane.

The BoE governor, Andrew Bailey, on the other hand, evidently shares the relaxed Powell/Yellen view. UK and US central bank officials regard the inflation spikes as ‘transitory’.

Americans are not the only ones facing a sudden spike in prices. Russia’s consumer price inflation went up by 6% on an annualised basis last month. Not for Elvira Nabiullina, governor of Russia’s central bank, the ‘wait and see’ stance of Powell and Yellen. The Russian central bank has a target of 4% inflation. Nabiullina and her board pushed up the reference interest rate by 50 basis points, to 5.5%. President Putin is more alarmed than his US counterpart by soaring prices for basic foodstuffs; the UN Food and Agriculture Organization said at the start of June that its index of food prices was 40% higher year-on-year in May. In Lebanon, Syria and Sudan food price inflation is more than 200%, according to UN World Food Programme. Nestlé and Coca-Cola have said they would pass on any increases in basic commodities to retail customers.

The end of deflation

We have become adjusted to things getting progressively cheaper, particularly in tech goods and services. This benign period, known by some as ‘The Great Moderation’, a ‘goldilocks’ period of a multi-decade period of low inflation combined with positive economic growth, which lasted roughly from the mid-1980s to 2007, is ending.

What might this mean for gold? Since President Nixon finally cut the cord linking the US Dollar to gold on 15 August 1971 the average annual growth rate of the gold price in US Dollars has been 10.16%, while the annualised economic growth rate has been 7.91%. The past is no certain guide to the future – but it may contain signposts. According to one of the most thorough analyses of the monetary landscape published this year, “we are likely moving into a period of inflation caused by strongly rising money supply growth… the conservative baseline scenario has resulted in a price target of $4,800 for gold at the end of the decade”.

We are just a short step away from a repetition of the pre-Volcker period, in which a crushing level of international indebtedness – which reached $289 trillion US Dollars in the first quarter of 2021 according to the Institute of International Finance, 12% higher than the end of 2019 and a global debt-to GDP ratio of more than 355% – threatens to de-stabilise the global financial system. Powell and Yellen may say they are content to wait until 2023 to start raising interest rates; but meanwhile the tiger is flexing its claws.

Soapbox: Shifting tectonic plates

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The steadily moving global financial tectonic plates have accelerated in recent months, spurred on by the global pandemic and technological advances. At the epicentre of their drift is the US Dollar, the world’s reserve currency. Like melting glaciers, this process is not going into reverse.

The latest blow to the dominance of the US Dollar as the global reserve currency comes from Russia.

On 3rd June, the Russian sovereign wealth fund, its “National Wealth Fund” (NWF), said it would ditch all its US Dollar assets and increase its holdings in Euros, Chinese Yuan, and – for the first time – gold. Some analysts have said this implies ridding itself of $40 billion in favour of Euros, Yuan and gold. The allocation to gold would be 20%, said the NWF.

As of June 2020, the Russian central bank’s international reserves held 23% in gold. For the first time in recorded history, gold then nudged above the bank’s US Dollar assets (which stood at 22%). Russia has spent more than $40 billion building its gold reserves over the past five years, making it the world’s biggest buyer. The central bank said it stopped buying gold in the first half of 2020 to encourage miners and banks to export more and bring in foreign currency into Russia after oil prices – on which the Russian economy depends – crashed.

As of 1 May, the NWF had the equivalent of $185.9 billion in assets; it forms part of Russia’s gold and foreign exchange reserves, which stand at the equivalent of some $600 billion.

If the NWF needs to spend $40 billion on its ‘new’ assets and would allocate 20% of that to gold, that could mean it would need to acquire almost 150 tonnes of gold, at current prices. According to the head of the Ministry of Natural Resources, Alexander Kozlov, Russia’s gold production in 2020 amounted to 445 tonnes, almost twice that of a decade ago. Whether the new allocation to gold will be subsumed within the central bank’s current gold store, or if it might mean buying gold domestically or on the world market, are open questions.

According to the Kremlin’s spokesman, Dmitri Peskov, “this process of de-dollarisation is taking place not only in our country, but in many countries around the world that have started to have concerns about the reliability of the world’s reserve currency”. Like climate change, the death of the Dollar as the international reserve currency will upset many apple-carts.

Not that Russia sees the Rouble as the next global reserve currency; merely that it is taking steps to ensure that it is less exposed to the demise of the US Dollar. Rather it’s preparing for the apparently inexorable rise of China’s Renminbi as the Dollar’s replacement.

The use of the US Dollar in Russian/Chinese trade has shrunk from more than 80% to just over 20% in just seven years. The share of Russian exports to Brazil, India, China and South Africa invoiced in US Dollars plunged from 85% in the second quarter of 2018 to 33% in the first quarter of 2020.

 


With the US national debt now more than $28 trillion and set to reach 202% of the country’s gross domestic product (GDP) by 2051 according to the US Congressional Budget Office (CBO), there is less confidence that the US Dollar provides the kind of “safe haven” currency it has done previously.

It’s becoming increasingly likely that, as professor Avinash Persaud warned in 2004, “a couple generations of unpaid cheques are [going to be] presented to be paid” and that these ‘due’ checks “will push the US into a series of economic and political crises in the middle of the 21st century”. Persaud said that “within my life time, the dollar will start to lose its reserve currency status, not to the euro, but to the [Chinese] renminbi”. Not that the Renminbi is a dead-cert to become all-powerful. Persaud added: “the fate of the average Chinese today is to grow old before they grow rich, the fate of the average American is more uncertain than most imagine”.

What might replace the $?

The fate of the average American is today not only closely tied to the policies of President Joe Biden and his injection of even more debt into American society, but also to moves in such things as cryptocurrencies and Central Bank Digital Currencies.

While the former is an archetypal “meme” stock – a phenomenon that largely owes its success to social media hyperbole – the latter are advancing rapidly across the globe, as governments try to wrest control over money creation away from private cryptos and back into their own hands. Right now, the speed of technological advance and the bureaucratic pace of policymakers (outside China, anyway) seems to give the private cryptocurrency developers the upper hand.

Yet some governments want to use Bitcoin – the leading cryptocurrency – as legal tender. El Salvador’s President, Nayib Bukele, has said his country will become the first to make Bitcoin legal tender, if he can get the measure through the country’s Congress. That shouldn’t be difficult.

A small Central American country

El Salvador’s national currency was the colón until 2001, when it made the US Dollar legal tender too, joining Panama and Ecuador. Making Bitcoin legal tender means every El Salvadoran will need/want to use it, not just rich people. In an economy that is heavily skewed towards cash (about 70% of its citizens don’t have bank accounts or credit cards) but which has a very high penetration rate of mobile phones (about 1.5 per capita in a country of 6.2million) a digital wallet system might just work. It will also make life easier for the two million citizens who live and work outside the country and who annually send some $4 billion home each year.

There is one big obstacle to President Bukele’s ambition for Bitcoin to become the way to buy one’s daily lunch; transaction times with Bitcoin are currently painfully slow. A few per second, against tens of thousands by for example Visa. But if there’s one blockage that technology has proved it can overcome, it’s the speed at which things can be done; Bitcoin’s transaction rate will speed up.

Does this portend that cryptocurrencies will displace the US Dollar as the global reserve currency? It’s unlikely.

For one thing there are simply too many – several thousand, each of them struggling for dominance. And they are too narrowly held, too illiquid, too unwieldy to challenge the Dollar.

For another there is the considerable volatility in cryptocurrency valuations. Bitcoin has dropped by 37% in the past month and is 46% lower than its mid-April peak; Ethereum is down 22.5% in the last month and 37% lower than its peak in May; others (such as Dogecoin, Chainlink and Litecoin) have lost more than 30% in the last month. President Bukele’s popularity might slump if the citizens of San Salvador find their daily sandwich fluctuates hugely in price.

The US benefits greatly from what Valery Giscard d’Estaing (then the French finance minister, in the 1960’s) called its “exorbitant privilege” of having the world’s reserve currency – by which he meant that it could always simply print more Dollars. “Foreign lenders are likely to demand concessions on the terms for such massive external financing”, according to Stephen Roach, a former chair of Morgan Stanley’s Asia section. Forecasting a 35% fall in the Dollar by the end of 2021, he said “the dollar is now (October 2020) far more vulnerable to a sharp correction. A crash is looming”. That view has been hotly disputed – and we are already half-way through 2021.

Nevertheless it’s true that the low borrowing costs that have resulted from the Dollar’s dominance – everyone has wanted Dollars – has facilitated the accumulation of debt. Voluminous amounts of academic literature exposing the threat to economic growth posed by excessive national debt have been published. In 2010, a European Central Bank (ECB) research paper said “above a 90-100% of GDP threshold, public debt is, on average, harmful for growth”. President Biden wants the US to have greater economic growth – as no doubt does the “average American” – but US federal debt is likely to approach 109% of GDP in the fiscal year of 2021, and 130% by 2023. This presents a long-term threat to US economic growth, the Dollar – and the fortunes of all US political parties.

It’s impossible to see how the gradual shift away from the Dollar will play out. It’s going to be a bumpy few years. In this context, all one can sensibly do is try to preserve the value of one’s money. For us that means gold: widely seen as a store of value in difficult times but also, thanks to Glint, now a currency that is as liquid as fiat money. Gold may have fallen 7.5% from its August 2020 peak of more than $2,000 per troy ounce but is up 11% since its March slump, and 9% higher in the last year. That doesn’t mean that gold will continue to rise, but it might prove to hold its value against paper money in the long-term – and is certainly less volatile than cryptocurrencies.

Soapbox: We all want a higher gold price

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GATA – the ‘Gold Anti-Trust Action Committee’ – started life in late 1998 and has for the past two decades been pounding away at its claim that the gold price is suppressed by collusive practices between central banks and large investment banks. It is a classic case of a group of conspiracy-minded people – who might just be right. GATA’s website – www.gata.org – has amassed a huge amount of evidence from publicly-available archives. Whether all this evidence will persuade you is another matter, but it certainly is detailed.

Chris Powell, a US journalist, a member of the Connecticut Council on Freedom of Information, and secretary of GATA, agreed to speak to me. “I’m not a gold ‘bug’,” he says, “I’m a transparency ‘bug’”. He got into successfully fighting trusts as a journalist. “I started reading complaints from internet site proprietor Bill Murphy, who was writing about the monetary metals markets and who went on to become GATA’s chairman. I said we should form a committee and hire an anti-trust law firm and take action. We didn’t think we would be at it more than 20 years. It took us about two years to discern that all this market manipulation was perfectly legal, because the government was doing it”.

Says Powell: “The Gold Reserve Act of 1934, as amended in the years since then, which established the US Treasury Department’s Exchange Stabilisation Fund, fully authorised the rigging of not only the gold market but to secretly rig any market in the world. Our dreams of suing the big New York investment banks went up in smoke. So, we decided our best bet to stop this was to expose it”.

GATA has turned from its hopes of running an anti-trust legal action to lobbying, to keep the pressure on those it regards as manipulating the gold price: “the direct focus of our work today is government intervention. None of this stuff would be going on if it wasn’t government policy”, says Powell. “It’s about sustaining the Dollar as the world’s global currency and driving gold out of the financial system, and to control interest rates. We have the documents. We have asked, via a US Congress Representative, the CFTC (the Commodity Futures Trading Commission) the question “does the CFTC have jurisdiction over manipulative futures trading undertaken by or at the behest of the US government? The CFTC will not answer this question”.

How does GATA believe such alleged manipulation is carried out? Powell again: “A primary mechanism by which this is done is the Central Bank incentive programme. In this programme the (futures’ exchange) operator offers volume trading discounts in all futures’ markets. It’s a matter of national security. Currency markets are being rigged in favour of the Dollar. The government has to do this trading via the brokers of all the big investment banks. Look at our documents, it’s all laid out, is this a forgery? Make up your own mind”.

Basel 3 – new bank regulatory recommendations from the Bank for International Settlements (BIS) – are due to be globally introduced in 2023. The London Bullion Market Association (LBMA) and the World Gold Council (WGC) have protested to the UK’s Prudential Regulatory Authority that Basel 3 will either kill off or make prohibitively expensive trading in unallocated gold, or paper derivatives. The BIS has no regulatory power – it’s up to the 60 individual member states of the BIS to implement Basel 3 if they choose.

Does Powell think Basel 3 will be implemented? “I think there is one plausible explanation for enforcement of the Basel 3 regulations”, says Powell. “That is, there is a new division among the major central banks. There is now an EU/China/Russia faction that is fighting the US/UK faction. Certainly, they have good reason to resent US Dollar imperialism, and the weaponisation of the Dollar. The Dollar is now the primary mechanism of US imperialism. If they can knock the Dollar down by revaluing gold, I can see that happening”.

According to Powell, “we have been living by the sweat of the brow of the rest of the world for many years. There is incredible bloat in the US, in the economy and society now. We have been enslaving the rest of the world and that corrupts us. I want the US leading the world by example and freedom and democracy and liberty. We have destroyed the free market by this rigging of the currency”.

Powell argues that gold is the competitor of the US Dollar and that the “architecture of the whole system” is designed to protect the Dollar and to keep gold in a subsidiary place. Basel 3, if implemented, could knock asunder the gold derivatives market – around 100 times more ‘gold’ is traded via this system than actually is produced each year.

China has huge ambitions for its Central Bank Digital Currency (CBDC) and hopes for Yuan can become the global reserve currency. China has a lot of gold reserves; might it choose to back its CBDC with gold? “I would be very surprised if any government wanted to directly connect its currency to gold again. Central banks were very glad to get rid of the gold standard because it brought them into the era of infinite money. Gold is a very powerful restraint on government. All government wants to do with gold is put it in its box, put it in the vault, double seal it up and make sure it never comes out”, says Powell. “But I do think that that the anti-US governments and central banks have figured that gold is their only weapon against Dollar imperialism. They know they can use gold against the US Dollar”, says Powell.

Whatever one thinks about GATA – and this piece obviously does not explore its claims in depth – if you are a supporter of gold as money then GATA is an ally in a common cause.

Even if you regard – as influential people in the gold world do – GATA as being rather fanatical, then one must recognise that the organisation is a bastion of gold. Gold shines a light on the depreciating purchasing power of fiat currencies – and, as money is power, and central banks control the money supply, central banks have a vested interest in seeing the gold price under control. Glint, whilst appreciating that the value of gold can also go down, affecting its purchasing power to the negative, believes in the longterm benefits of gold and so, sets out its stall to provide a mechanism to use gold as money – liquid, instant, safe and reliable. Although the two are not aligned in all aspects, Glint and GATA are allies in a common cause. The prominence and success of gold as a real alternative to fiat currencies.

 

Soapbox: Basel 3 – it matters for gold

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‘Basel 3’ sounds like the brand name of a nasal spray to combat hay fever. Or the third instalment (yes, there have been Basel 1 and Basel 2) of a horror movie sequence.

But it’s much more important – if rather more obscure – than either of those things and it threatens radically to change the gold world. The connection is convoluted, but crucial.

We are still feeling the effects of the last great banking crash, that of 2008. Almost 13 years on, international banking regulators (grouped together at the Bank for International Settlements or BIS) are just about to introduce a mechanism which they hope will fend off the worst if (surely that should be ‘when’?) another systemic failure happens.

The Basel Committee on Banking Regulations and Supervisory Practices, based at the BIS in Basel, Switzerland, started life at the end of 1974 after – there’s nothing new under the sun – the collapse of the Herstatt Bank, a middle-sized bank in what was then West Germany. Herstatt went bust because it had borrowed too much to stake bad bets on the direction of the US dollar. A bank gets into trouble because it borrows too much and makes poor risk decisions; sounds familiar.

When it collapsed Herstatt had accumulated losses of almost $30 million (£21 million) against assets of just $2.5 million (£1.76 million). Herstatt’s bankruptcy brought to light systemic risks associated with the increasing internationalisation of banks. That’s when Basel 1 appeared. Basel 2, which we are still living with, happened in June 2004 and was “aimed at rewarding and encouraging continued improvements in [bank] risk measurement and control”. Basel 2 failed; the events of 2008 showed that.

When the heavily indebted US investment bank Lehman Brothers collapsed in September 2008 people began to fret about the collapse of the global credit system. The Basel Committee (as it’s now known) set about trying to “strengthen the regulation and supervision of internationally active banks”. Basel Committee wheels grind slowly but surely.

Two years later, in 2010, the Committee issued a draft of proposals (Basel 3), aimed at the creation of a “global regulatory framework for more resilient banks and banking systems”. Among the many pages of Basel 3 you can find a proposal to raise minimum liquidity coverage ratios for banks and to introduce a Net Stable Funding Ratio (NSFR). Some of Basel 3 will take effect for European banks at the end of June. In the UK, all changes are due to become effective as of 1 January 2023.

The goal of these new regulations is to limit risk levels that banks take on in their eager hunt for profits. One unexpected and possibly unforeseen result of these regulations will be to undermine bullion bank trading in unallocated gold metal. Here’s where it gets really interesting.

Most bullion traded is not physical but a derivative, such as via an exchange traded fund (ETF) and settled on an unallocated account basis. Under this the customer does not own the gold but has only a general entitlement to an amount of metal. Not only does a customer with an unallocated account not own the gold; they are just a creditor of the bank. Legally, they are merely a depositor of gold. So, when, or if that bank collapses the person holding unallocated gold will have to stand in line with many other creditors all trying to get their money back. Bullion banks engage in what could be called ‘fractional precious metals trading’; they trade far more gold than they hold in their vaults. All unallocated gold obligations appear on the bank’s balance sheet.

Gold fans have already started salivating at the possibility of much higher gold prices as a consequence of the introduction of Basel 3; they see a decline in the trading of unallocated gold and a higher gold price. But for now, the link between any potential decline in the trading of unallocated gold and a higher price is purely hypothetical.


Source: Bullion Star

Paper promises

There are about 35 bullion banks active in the global gold market. The London Bullion Market Association (LBMA) says it has 76 full members around the world – refiners, dealers, traders, banks and others. This includes 12 market makers, who are obliged to provide buy and sell quotes. Market members pay the LBMA £26,500 a year for their membership.

In London, all bullion trade is done by a group of bullion banks through a private company called the London Precious Metals Clearing Limited (LPMCL). The majority of gold held by the LPMCL clearing banks is unallocated; this gold can be lent and is held on the bank’s balance sheet. In March alone this year more than 600 tonnes of gold, valued at more than $34 billion (about £24 billion) was bought or sold – ‘cleared’ through the LPMCL. Global mine production in 2019 was 3,300 tonnes of gold. Over the course of a year much more gold is traded than the annual supply. How is that possible?

The answer is that most of this gold is traded via the derivatives market, or contracts that derive their value from an underlying entity. Paper, in other words.

Metal shortage ahead?

Allocated gold is never recorded on a bank’s balance sheets, simply because the bank doesn’t own it; Basel 3 is all about trying to minimise systemic risk in banking, so balance sheets are what count. Bullion banks’ unallocated gold however is recorded on their balance sheets. Basel 3’s NSFR (Net Stable Funding Ratio), would require the banks to hold 85% of the value of this gold. So, to comply with the NSFR banks would either have to create a huge increase in their shareholders’ equity to provide the required reserves, or their dealing in unallocated precious metals will become very much more expensive and also difficult to fulfil. They are unlikely to take custody of many times the quantity of physical precious metals that they now hold – there just isn’t enough physical metal available. Nor do they have the storage capacity to hold enough physical gold.

The bottom-line implication of Basel 3 is that, according to some, trade in unallocated metal in London and New York would be “wiped out”.

All this debate is entangled in conspiracy-minded allegations about how central bank gold lending, with commercial bullion banks willing participants, is done to artificially repress the gold price.

Will Basel 3 become implemented in full or diluted? Some powerful lobbying against Basel 3 has already been started by two of the most powerful forces in the gold world – the London Bullion Market Association (LBMA) and the World Gold Council (WGC). They have sent a joint protest letter to the Prudential Regulation Authority, the UK’s banking regulator, saying “the effects [of Basel 3] would not just be limited to the London OTC (over-the-counter) market but would be felt globally across the entire gold value chain”. So, it may be that Basel 3 gets watered down. It’s too early to tell.

Basel 2 failed, according to one academic, because of ‘regulatory capture’ – “large international banks were able to systematically manipulate outcomes in Basel II’s regulatory process to their advantage, at the expense of their smaller and emerging market competitors and, above all, systemic financial stability”. The fate of Basel 3 – the future price direction of gold – may hinge on the power of “large international banks” which can dictate “the regulatory agenda”. Or on the degree to which the Basel regulators might resist being taken hostage.

I have no opinion on the allegations about the suppression of the gold price. But I do have an opinion on how you should hold your gold – in an account that specifically allocates the gold to you. Glint is not a bank, it is not a member of the LBMA and gold is not regulated by the Financial Conduct Authority. If you hold gold through Glint, no-one can lend, borrow, or otherwise mess with it. Meanwhile, we need to keep an eye on Basel 3.

Soapbox: Mark Mobius speaks – The asset manager who backs gold

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“At the end of the day, when you look at all these currencies around the world, they have all devalued – throughout history all currencies have devalued”. That’s how Mark Mobius, former executive chairman of the Templeton Emerging Markets Group and now a founding partner of Mobius Capital Partners, opened our conversation. The author of many books, his latest (published in 2020) has a timely title – The Inflation Myth and the Wonderful World of Deflation. I spoke to him in his Hong Kong office (via Zoom, of course) to find out what he thinks of gold today and how he sees the rise of cryptocurrencies.

“The good news is that because of technology the cost of goods and services is going down. Inflation measures don’t really tell us that because they refer to baskets of goods and services which constantly change, so you can’t really compare one period to another. I still believe a gold standard would make a lot of sense because it would prevent governments from over-printing [fiat currency] and devaluing their currencies”.

We stray onto the topic of Central Bank Digital Currencies, about which Mark holds strong opinions. He says: “The entire financial world is being digitised. What is this digitisation? It’s just another way of communicating the value of money from one place in the world to another. So if a central bank says now ‘we’re going to digitise US dollars’, that’s entirely different from Bitcoin for example, which is a created ‘currency’ that has no basis in a government or any foundation. People are getting confused over Blockchain. Blockchain is a very simple mechanism for ensuring safety in transactions. A lot of people think this is a solution to the problem of transferring money – no, this is not a solution because Blockchain can be hacked”.

As for gold, Mobius says that “gold goes through cycles. Sometimes it loses value against fiat currencies but going forward it will continue to rise simply because those currencies continue to be devalued. There’s a limit to the amount of gold available around the world. So I think gold will come back and surge”.

Money is power said the 7th US President Andrew Jackson. Mobius agrees and feels “that’s why these cryptocurrencies will not be available as real money, in other words as money which you could spend. You can see that already – the US government is starting to crack down on the various cryptocurrency exchanges. I think governments will increasingly crack down on these cryptocurrencies because it threatens the very power of governments, which is the ability to create money”.

Elon Musk’s decision not to allow Bitcoins to buy his Tesla cars was couched in terms of “the rapidly increasing use of fossil fuels for bitcoin mining” tweeted Musk; but his abrupt volte-face on Bitcoin – on 24 March he said people could buy a Tesla using Bitcoin – nevertheless shook the Bitcoin price and rocked its claim to currency ‘status’. In the UK, the Bank of England’s deputy governor, has just said that “it looks probable in this country that if we want to retain public money capable of general use, and available to all citizens, the state will need to issue, public digital money”. In other words, if governments want to retain control over money – if they want to keep power – they will soon need to provide digitised fiat currency.

Some countries are already rapidly rolling out their own central bank digital currencies, including China. Might the Chinese Renmimbi be about to topple the US dollar from its international reserve currency status? Mobius thinks “not yet. It will take a while. The big challenge that the Chinese have is that they still want to control the exchange rate against other currencies. The day they give up on that is when the Renmimbi could become a truly global currency. The effort to create a digitised Renmimbi makes a lot of sense for the Chinese because the big problem they have now is they have to work through the US system, in most cases to trade, the Swift system, which monitors and enables the transfer of money. The degree to which they can create a digitised currency which does not require going through this system could be an incredible boon for the Renmimbi”.

Mobius is dismissive of the latest fashion in macro-economics, the so-called Modern Monetary Theory, which argues that it doesn’t matter how much governments print and spend currency. Debt is not a problem, according to this. Balancing budgets is for the birds – just create more money. “This will just devalue currencies further, there’s no doubt about that”.

 

 

Our chat draws to an end but we can’t part without a consideration of the big question of the day – are we in an inflationary or deflationary environment? Mobius considers “we are in a deflationary environment. A lot of economists hate deflation, they think it’s very bad, because they think you have to have inflation to create growth, but in my latest book I point out that we have had growth even during this deflationary period. As for gold, I don’t have a clue what is going to happen to the gold price in the short-term, but in the long-term it’s just going up”.

 

 

Soapbox: Inflation – Who do you believe?

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We’re far away from Weimar Germany but perhaps closer to 1989’s Argentina than we think.

In Germany in 1923 hyperinflation took off; a loaf of bread that cost some 160 Marks at the end of 1922 cost 200,000,000,000 Marks by late 1923.

In 1989 in Argentina inflation hit 2,000% a year. As you did your weekly shop on Avenida Florida you found store assistants ahead of you busily stamping higher-priced stickers over the existing price.

Annual inflation today in Argentina is officially almost 50% but few believe that official figure. At street level, it feels very different, partly because Argentines have lost confidence in their paper currency, the Peso.

Argentina is the world’s biggest exporter of soymeal – crushed soybeans largely used as animal feed. But rather than export their soymeal Argentine farmers are holding back their beans, selling just limited amounts to cover on-going costs; the beans are being held onto as a hedge against probable future declines in the value of the Peso. High inflation and a collapse in the purchasing power of a currency usually go hand-in-hand.

Officially, the annual inflation rate in the US for the 12 months ending in March 2021 was 2.6%, according to the Consumer Price Index, which is based on a market basket of consumer goods and services” according to the US Bureau of Labor Statistics. The US inflation rate from January 2000 to January 2010 was 26.63%. In the UK, the official inflation rate is also based on a basket of goods, the Consumer Prices Index; this rose we are told by 1% in the 12 months to the end of March 2021.

The relatively languid official data about the current level of inflation is disputed. The Sage of Omaha – Warren Buffett – told shareholders of his Berkshire Hathaway company at the start of May “we are seeing very substantial inflation… We’ve got nine homebuilders in addition to our manufacture housing and operation, which is the largest in the country. So we really do a lot of housing. The costs are just up, up, up. Steel costs, you know, just every day they’re going up”.

Manufacturers of core commodities in the Eurozone that expect to put up prices in the next 3 months: Source, European        Commission.

 

That wholesale price inflation will inevitably feed into higher consumer prices. Bloomberg’s commodity index is up by 17% so far this year and has reached record highs. The futures price of crude palm oil, to take one basic agricultural commodity, used in everything from lipstick to processed foods to biodiesel, has gone up more than 100% in the past 12 months. Goldman Sachs said at the end of April that it sees commodities rising by another 13.5% over the next six months on a worldwide reversal of coronavirus curbs, lower interest rates and a weaker dollar.

Cost-push and demand-pull

Governments have a vested interest in balancing inflation; worried about voters, they try to maintain stable prices but also to inject a little ‘controllable’ inflation into the economy. If an economy is not running at full capacity a little bit of inflation in theory helps increase production – more money swirling around translates into more spending, which means more demand, which in turn triggers more production and greater employment. That’s the theory. The reality is that it is always a tightrope act.

The US explicitly adopted a 2% per year inflation target in 2012 but it has relaxed that recently. The International Monetary Fund (IMF) described inflation targeting as “a pragmatic response to the failure of other monetary policy regimes”. Prior to inflation targeting central banks set targets for money supply or exchange rates.

There are two basic causes of inflation – demand-pull and cost-push. Demand-pull works when consumer demand pulls prices up; cost-push happens when supply-side costs force prices higher. Some economists argue that there is a third cause – an expansion of the supply of fiat currencies, of paper money. Put these things together and we have a heady cocktail. And all three things are now going on at once.

There is cost-push: in the US the latest Institute for Supply Management (ISM) figures say that factories’ waiting time for production materials reached 79 days in April, the longest in records dating back to 1987. US purchasing managers last November said there were just eight materials they were struggling to obtain. Today it’s 24. According to one assessment the price of houses in 25 countries rose by an average 5% in the last 12 months, “the quickest in over a decade”.

Then there is demand-pull. In the US wages in the private sector in the first quarter of this year rose by the most in 18 years. The US National Federation of Independent Business reported in a March survey that about 28% of small businesses put up salaries – the biggest cost for businesses – and started offering signing-on bonuses just to find suitably qualified applicants. More generous welfare benefits and (in the US) the pandemic relief checks are giving workers the chance to be more selective. According to a survey published in April job vacancies were up by 22% during January-March this year in the US while the number of applicants was down by 23%, year-on-year.

And there is vast expansion of money supply. Aggregate money supply increased by $14 trillion in 2020 in the US, China, Eurozone, Japan and eight other developed economies. This exceeds the previous record increase of $8.38 trillion in 2017. “Much of the money that landed in the laps of investors [in 2020] found its way into the stock market, pushing the global value of stocks to more than $100 trillion for the first time and the average stock price for a member of the MSCI All-Country World Index to a stratospheric 31 times earnings” says Bloomberg.

How will this all end? It’s not at all clear. If inflation looks like getting out of control then central banks will have to push up interest rates, which – for now – they show no inclination towards. Not least because too much is riding on the loose money policies – financial markets would tumble and over-leveraged companies would go bust. Janet Yellen, the US Treasury Secretary, said at the start of May that she didn’t think there is going to be “an inflationary problem”. That’s a view not shared by other Americans, and it’s not borne out by the remarkable rise in the price of many basic commodities. The price of copper, for example, has doubled since its pandemic low in March 2020. The New York Fed’s monthly survey of consumer expectations – gauged by a survey of some 1,300 households – found that rental cost expectations increased for the fifth consecutive month and are now expected to rise by 9.5% over the next year.

 

During periods of high inflation, whether in Weimar Germany or 1989’s Argentina or today’s Venezuela people do their best to acquire physical assets. Being able to hold something real and concrete is essential when prices are spiralling – in those situations fiat currency, paper promises by government, tends to lose its meaning. Yet people still need a means of exchange to be able to buy their daily bread. At Glint we believe we offer our clients the ideal means of squaring this circle – hold a physical asset, gold, and yet be able to use that physical asset to be able to spend on the essentials. With Glint you can buy, save – and increasingly relevant perhaps – spend in gold.

Soapbox: Negative interest is no answer

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

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

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

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

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

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

 

Governments lack dexterity

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

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

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

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

 

Continental lessons

 

 

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

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

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

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

Soapbox: It’s payback time

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US President Joe Biden has given away trillions of dollars to American citizens, is preparing to give trillions more – and then to claw back some of that ‘free’ money.

A President who comes from Delaware, the state which is a kind of US onshore tax haven – companies that are incorporated in Delaware can pay a corporate tax rate of 0% – risks looking like a hypocrite if he clobbers people too much.

The US Congress listened on Wednesday evening this week as the President outlined his ideas as to how to fund his American Families Plan. This plan is the third big economic package since he took office, following his $1.9 trillion fiscal stimulus plan in March and a proposed $2 trillion infrastructure bill, still fighting its way through Congress.

This third plan, called the American Families Plan (who would be so churlish as to oppose a plan for families?) proposes more generous child support until 2025, extra funds for universal pre-kindergarten schooling and community colleges, and other social welfare ideas; to pay for it the total capital gains tax for the richest Americans would go up to almost 44 %. The top rate of income tax would rise from 37% to almost 40%. Americans earning more than $1m a year would face the application of ordinary income tax rates to capital gains and dividend payments.

These ‘reforms’ would also hit private equity and hedge fund managers – easy targets one might think – by effectively eliminating the preferential tax treatment of their profits, or ‘carried interest’. At the moment, carried interest is taxed at the lower capital gains rate rather than ordinary income, but Biden would equalise their tax treatment. The president is also considering taxing unrealised capital gains passed on to heirs at death. Taxes on capital gains and dividends are currently 20%; under Biden’s plans they would be treated as ordinary income, at a 39.6% rate.

The mere whisper of some of this on 22 April invoked an immediate response. The S&P 500 index fell 1%. Next day, Bitcoin fell below $50,000, leaving it almost $14,000 lower in value since it hit a record high the previous week. People were nervous that capital gains tax rises would hit their pockets, so they got out of some assets while the going was good. The gold price also dropped, from $1,793 per ounce at midday on 23 April to $1,774 by 3pm that day. US corporations are well-accustomed to finding tax loopholes – 60 years ago corporations paid around a third of federal tax revenues but today its just 10%. No wonder the US Treasury Secretary is keen to gain support for a global minimum corporate tax rate. Without that, much of the intended corporate tax take will still elude the Treasury.

The ‘wannabe’ FDR

In May 2020, New York magazine ran a feature on Biden under the title “Biden is planning an FDR-size presidency” – the FDR being Franklin Delano Roosevelt, the former Democrat President who in the 1930s faced the Great Depression and started many state-funded programmes to get America working again. FDR is either a US 20th century hero or a bogeyman, depending on whether you believe it’s the state’s duty to rescue a society or that such a rescue should be left to the free market.

Biden sees himself following in the footsteps of FDR; he told CNN in April 2020 that the challenge being faced by a Covid-wracked US economic collapse “may not dwarf but eclipse what FDR faced”. The financial sums are certainly much bigger – under Roosevelt’s New Deal US debts grew from $22 billion in 1933 to $33 billion by 1936. In those days, the word ‘trillion’ was hardly ever used. The devaluation of the US dollar can be felt in the ease with which we have moved from talking about ‘billions’ to ‘trillions’; a US Dollar today buys less than 5% of what it would in 1933.

Under the Biden American Families Plan, the tax rates on individual incomes below $400,000 would not increase. New and expanded tax benefits, including provisions for child care, first-time homebuyers, educational debt relief, retirement savings, health insurance, and long-term care insurance, could reduce taxes for average families. Those who will suffer will be corporations and those taxpayers with incomes of $400,000 or more. Individuals with incomes of more than $1 million would pay the same rate on investment income as on wages.

Will it work?

Raising taxes, especially on the ‘rich’, and spreading money and welfare on the ‘poor’ is a classically populist measure. Whether social engineering will make America ‘more equal’ (whatever that means) is an open question. FDR’s New Deal hired Americans to work on the improvement of their own country; as they worked for the government, so the government worked for them. Legacies of the New Deal can be seen all across the country, from bridges, tunnels, roads, schools and libraries to monuments, murals and sculptures. What the New Deal called for was a greater sense of rights and duties – the state funnelled money into work-creation schemes and the citizenry were called on the step up to the plate and reciprocate and work on behalf for the state’s projects. American society is very different today from 1933; will citizens today step up to the plate or just be happy to take the money?

Imposing more taxes on the ‘rich’ is no doubt politically popular but without addressing loopholes such as the Delaware get-out it will seem unbalanced. Biden has scarcely been in office more than 100 days; his intentions remain a work in progress, and will no doubt face stiff Congressional opposition. The dramatic loss of purchasing power of the Dollar since FDR’s time, however, shows no sign of halting.