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Soapbox: Stagflation is on its way

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Soapbox Stagflation

What to do when inflation surges and economic growth slows? What to do in a period of stagflation? Stagflation seems to be on its way, according to research by the Financial Times and the US Brookings Institution. They report that stagflation “will hit the global economy this year… mounting price pressures, slipping output expansion and sagging confidence will all pose a drag for most countries” and “policymakers will be left with ‘grim quandaries'”.

On top of the cost of living crisis – according to a UK charity one in eight British adults say they have “gone without heating, water or electricity in the past three months”, while in the US one in three households is classified as ‘financially fragile’, we may soon be experiencing a crisis of fewer jobs. Stagflation normally occurs when there’s a negative supply shock – such as right now, when fossil fuel energy sources have become much more expensive.

People are understandably tightening their belts; but this overall lower spending in an economy can quickly push economic growth into stagnation. Some of those companies that most benefitted from the lockdowns imposed by governments during the Covid pandemic are showing vulnerability under the pressure of inflation. In the UK, subscriptions to video on-demand streaming services are being cancelled in record numbers; a “desire to save money was the most important reason for the cancellations”. Shares in Netflix up to 11 April have dropped by 43% so far this year.

Around the world, consumer spending accounts for the biggest slice of gross domestic product (GDP), around 60%. A buoyant economy is conventionally measured by GDP growth. If people stop spending because inflation puts items beyond their pockets, then recession is not far off – and a spiral of decline could set in. According to Bank of America’s monthly survey of roughly 300 respondents managing a collective $1 trillion in assets, 60% now predict “a bear market in 2022” (i.e. a period of prolonged price declines) and more than 50% expect that high inflation will be ‘permanent’. Stagflation combines the bad economic effects of a recession (stock market declines, unemployment increases, housing market dips) with inflated prices.

What can individuals, who have no control over policy, do in these circumstances? When stagflation weather darkens the horizon, what’s the best protective clothing?

Gold – a good umbrella

The graphic below, from the British-based asset management company Schroders, tells its own story. In periods of stagflation, since 1973, gold has clearly been the best performing asset, showing real (i.e. inflation-adjusted) annual returns of 22.1%. If Bitcoin had been around in 1973 maybe it would have made it into the graphic.

Schroders says: “clearly, the best and worst performers vary considerably across each phase and the dispersion of returns within in each phase has also been stark” meaning that the overall final average disguises ups and downs). The company continues: “Gold is often seen as a safe-haven asset and so tends to appreciate in times of economic uncertainty. Real interest rates also tend to decline in periods of stagflation as inflation expectations rise and growth expectations fall. Lower real rates reduce the opportunity cost of owning a zero-yielding asset such as gold, thereby boosting its appeal to investors”.


Today, consumers will be most obviously noticing the price rises in gasoline and diesel; maybe they have also been feeling spending pain in their weekly grocery baskets too. In the US, the prices of meat, poultry, fish and eggs is 13% higher than in February 2021, while fresh oranges have gone up by more than 14%. In the UK, some supermarket pasta brands have gone up 56%, tomato puree by 33% and other staples by 20%-32% in the past six months. Road transport fuel costs rise; so too does the price of everything that is carried by road. ‘Shrinkflation’ (aka penny-pinching) is back – manufacturers are cutting back on the contents of products but charging the same price, hoping to kid customers; bottles of Dove body wash recently dropped from 24 to 22 ounces in the US but can still be sold for the same price; PepsiCo-owned Gatorade has made a 14% cut in the size of its sports drink bottles.

Stagflation hit the US economy badly around 50 years ago, when the price of crude oil doubled between 1973 and 1975 as a result of an oil embargo by Opec (the Organization of Petroleum Exporting Countries); US unemployment went from 4.6% in 1973 to 9% in 1975.

We are in a highly unusual position right now, when several crucial commodities – such as wheat, sunflower oil, and fertilizer, not just crude oil – have become much more expensive and their supply is lower than we have been accustomed to, thanks to Russia’s invasion of Ukraine. The world food price index for March from the UN’s Food and Agriculture Organization (FAO) rose to its third record high in a row, jumping 34% from the same time last year, and 12.6% higher than in February, a rise that the FAO calls a “giant leap”. Cereal prices are up 37% in the last 12 months, says the organization. The US Department of Agriculture said in early March that fertilizer prices have “more than doubled since last year due to many factors including Putin’s price hike, a limited supply of the relevant minerals and high energy costs, high global demand and agricultural commodity prices, reliance on fertiliser imports, and lack of competition in the fertiliser industry”.

Your box of breakfast cereals has perhaps already gone up in price; if not, it soon will. Higher food prices will hit some people, some countries, much more than others; the World Bank has warned that high commodity prices, collapsing trade growth, rising interest rates and a stronger US dollar will exacerbate fiscal pressures in many countries, making it harder for net importers to service mounting debts. We can see from the example of Sri Lanka what can happen to a poor country, which is dependent on imports for most of its essential items, when it cannot afford to service its foreign debts.

So, what to do in the face of stagflation?

Holding cash is definitely unwise – your unit of fiat currency today will be worth less tomorrow or in months to come. Fiat currency has changed frequently over the past few hundred years and, as pointed out by Deutsche Bank, “just because the current framework is all that we know, doesn’t necessarily mean it will carry on forever… Fiat money has only been the dominant framework for a small fraction of history and as such it shouldn’t be too controversial to suggest it may not always be the system of choice. With endless structural deficits and extraordinary levels of money printing, we have certainly stressed its flexibility in recent years”.

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


Soapbox: Who will pay?

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“Fanaticism consists of redoubling your efforts when you have forgotten your aim” – George Santayana.

It’s been two months since Russia invaded Ukraine. There’s no indication that the war is nearing an end, although it has dropped down the mainstream news media agenda in what some are terming ‘Ukraine Fatigue’. Pope Francis has pointed out the reality of this conflict. On Palm Sunday, he rhetorically asked an audience in St Peter’s Square in Rome “what kind of victory would be one that plants a flag on a heap of rubble?”

Yet we need to keep tabs on the cost of this war, as in one way or another all of us are paying the price, through higher prices for energy and food (which erode the value of incomes), disrupted trade flows, and higher investor uncertainty weighing on asset prices. Never mind the real possibility of the conflict spilling out beyond Ukraine’s borders.

Christine Lagarde, president of the European Central Bank, solemnly informed a Cyprus audience in March: “The longer the war lasts, the greater the costs are likely to be”. No kidding. David Beasley, the head of the UN’s World Food Program, has said the conflict will create “a catastrophe on top of a catastrophe” and may trigger the worst global food crisis since World War Two. The Pentagon said this week that the war would probably enter a “more protracted and a very bloody phase”.

Basic things like shipping pallets — made of Russian nails and wood from Belarus and Ukraine — are becoming scarce in Germany, according to the transport logistics company Transporeon, partly because of sanctions. The cost of insuring shipping to the Black Sea is now “out of control” says Bloomberg. Prices across the board are headed up – and have already hit record highs for some commodities, such as wheat. A “recession shock” is on its way and the “inflation shock” is worsening, according to a note to its clients from Bank of America.

Ukraine has suffered not just loss of lives, but destruction of its infrastructure; everything from school buildings to airports has been blitzed. The city of Mariupol has been “destroyed” with “tens of thousands of dead” according to Ukraine’s President, Volodymyr Zelenskyy. Kyiv’s School of Economics puts the damage caused to Ukraine up to 24 March at almost $63 billion and “global economic losses” at about $543-$600 billion. The financial cost to Russia is estimated to be huge too – around $20 billion a day.

The savagery of the war means that President Putin has little option but to intensify it in the hope that Russia will eventually crush Ukrainian resistance. If his troops can destroy Ukraine’s energy sector then the country could be made uninhabitable; European Union fears that EU countries would have to accommodate as many as eight million displaced Ukrainians will come to pass. To retreat and declare victory on or before the symbolically important day of 9 May (‘Victory’ Day in Russia, which marks the defeat of Nazi Germany in 1945), which some think could be Putin’s intention , may still be within his grasp. But such a ‘victory’ would be hollow indeed. On 15 March, Ukraine’s Prime Minister, Denys Shmygal, said that Ukraine would need $565 billion for reconstruction ; the bill will have gone up since then. Ukraine’s central bank says the war is costing the country the equivalent of $1 billion a day.

Yet by the time the shooting is over neither Russia nor Ukraine will be in any condition to meet the bills for reconstruction. Bloomberg suggests that Russia’s gross domestic product (GDP) will fall by about 9% in 2022 (the Institute of International Finance or IIF puts the likely fall at 15%). The International Monetary Fund (IMF) expects “deep recession in Russia” according to its managing director, Kristalina Georgieva. The World Bank now forecasts that Ukraine’s GDP will shrink by about 45% this year; in the worst case the Bank expects Russia’s GDP to fall by 20% and Ukraine’s by 75%. Both countries will be financially broken, no matter who ‘wins’ – not that a conventional ‘winner’ is likely from this mess.

Calls are already being made for a new ‘Marshall Plan’ to be implemented in Ukraine. While it’s perhaps sensible to start thinking about what needs to be done after the war is over, any plans need to recognise two things: the first is that the fighting may well drag on for months; the second is that finding funds to rebuild Ukraine will stretch already over-indebted governments. Who will pay for this new Marshall Plan?


How the Marshall Plan was divided up


Marshall Plan 2.0

The original Marshall Plan was named for the then US Secretary of State George Marshall. Officially it was called the European Recovery Program or ERP. Signed into law by US President Harry Truman on 3 April 1948, it was a remarkably generous instance of US philanthropy. The Marshall Plan was not entirely altruistic; the US recognised that a Germany and Europe that was economically restored would buy US exports.

The plan lasted four years, during which the US gave $17 billion (equivalent to almost $205 billion in 2020) to help European countries (minus those within the Soviet orbit, who declined the assistance) recover from the war. In 1948, the US had a GDP of some $258 billion, and a national debt of $252 billion, giving a debt-to-GDP ratio of 92%. Nor did the largesse stop there: In 1951, the Marshall Plan was replaced by the Mutual Security Plan, which annually gave to Europe some $7.5 billion until 1961.

Today, the US national debt is officially more than $30 trillion and is forecast to rise above $36 trillion by 2031 (and that’s before any Dollar is mandated to rebuild Ukraine), by which date the debt-to-GDP ratio will have risen above the current 128%. Anything above a 100% debt-to-GDP ratio – 101% for example – means a country isn’t producing enough to pay off its debts. Whether that spells problems for the country in question is a much-debated topic. Japan, for example, has a debt-to-DGP ratio of 266%. Sudan’s ratio is 259% and Greece’s 206%, while Venezuela’s is 350%. Japan can sustain such a high debt because most of the debt is owed to its own citizens, so the perception is it’s less likely to default. But eventually it too will find such a high debt unsustainable. Since 1960, 147 governments have defaulted; Sri Lanka has just defaulted on $51 billion of foreign debts. Russia may join the list.

Ukraine thinks that Russia should be made to pay reparations for “‘the destruction of private and public property’ during the war”; it says it has already assembled an international legal team to lodge claims against Moscow. Kyrylo Shevchenko, governor of Ukraine’s Central Bank, probably spoke for most of Ukraine’s citizens when he said that Russia should pay to rebuild his country. Russia’s foreign exchange reserves now frozen by sanctions – about half out of a total of $640 billion – should be used as “reparation” said Shevchenko. While that might seem ‘fair’ it is also a fantasy – how on earth could reparations’ claims lodged against Russia be enforced?

Proxy war, proxy money

One of the terrors that Moscow has already dangled in the face of the West is an escalation of the Ukraine conflict. Putin has put his nuclear forces on high alert, a Sword of Damocles hanging over Brussels and Washington D.C. NATO members – crucially not NATO itself – are supplying Ukraine with weapons, such as the tanks, rocket launchers and artillery that have been sent from the Czech Republic. NATO is thus fighting a proxy war with Russia.

And this proxy war is being funded by proxy money – money which has become simply digits on an excel spreadsheet, the millions becoming billions and transmuting into trillions. The US Congress has approved $13.6 billion in emergency spending aimed to help Ukraine; $3.5 billion of this is to provide military supplies. Where will this money come from? ‘Deficit spending’ in all probability – it will be added to the mountain of US debt. In the last 22 years, the US Dollar has lost 39% of its value – a Dollar today only buys 60.694% of what it could in 2000.

Ukraine – and Russia too, if truth be told – will need a fresh Marshall Plan to overcome the months of destruction of infrastructure and finances. The trouble is, this is not 1947; neither the US nor any other country – except China perhaps – is in a position to meet the bill, at least not without vastly inflating its own debt and undermining its own currency. The rubble is not merely that of buildings – it’s also of the financial order and certainty that prevailed just a short time ago.

Soapbox: Another US recession?

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Soapbox Recession

With 678,000 jobs in the US added in February it might seem a little perverse to be considering the chances of a recession. Yet on Tuesday 29 March, an unusual and perhaps worrying event occurred – the US Treasury yield curve inverted.

If that seems a bit technical, abstract, and remote, let’s try to figure out its possible implications for your wallet. They could be profound.

The ‘yield curve’ plots the potential yield of all US Treasury securities – bonds, notes and bills. These financial instruments are widely regarded as the safest protection on the block, because they are backed by the US government. They are regarded as the safest place to park your investment; so their yields (the measure of the return an investor can expect) are rather low. These instruments have different maturities (the date at which the instrument becomes due for repayment of the principal and any due interest). The maturities for bills are one month to one year, notes from two years to 10 years, and the bonds are 20 and 30 years. The overall Treasury market is valued at $23 trillion.

The yield curve plots the yield of all Treasury securities.

Typically, this curve slopes upwards because investors expect more compensation for taking on the risk that rising inflation will lower the expected return from owning longer-dated bonds. So a 10-year note typically yields more than a two-year note because it has a longer duration. Yields move inversely to prices.

A steepening curve usually indicates expectations of stronger economic activity, higher inflation, and higher interest rates. A flattening curve can mean the opposite: it suggests that investors expect rate increases in the near term and have lost confidence in the economy’s growth outlook.

Parts of the yield curve are seen as recession indicators, primarily the spread between the yield on three-month Treasury bills and 10-year notes and the two-year to 10-year (2/10) curve. On Tuesday 29 March, the 2/10 part of the curve inverted, meaning yields on the 2-year Treasury were actually higher than the 10-year Treasury.

For some, this inversion – however brief – was a warning. Historically, such an inversion has frequently preceded a recession – since 1900 there have been 28 times when the yield curve has inverted, and in 22 of those cases a recession has followed. When the two-year yield rises above the ten-year yield, it means that investors anticipate a sharp rise in interest rate in the short term; this ‘roaring economy’ will be undermined by the Fed pushing up rates. Because of the inevitable time lags, the raising of interest rates will not induce a recession this year but next.

The government response to the Covid-19 pandemic – shutting most things down – created the most recent recession, according to the National Bureau of Economic Research (NBER – the body that’s the official arbiter of when recessions start and end in the US) but it was the shortest on record, at just two months. A recession is defined as two consecutive quarters of negative growth in gross domestic product (GDP).

The past of course is no guide to what might be going on now. Morgan Stanley strategists say: “We think markets are learning to live with yield curve inversion… The inversion of the yield curve, on its own, is not sufficient to argue for heightened recession risk in the near term… Discussions of an impending recession will continue, but we expect confidence in that view to wane over time”. And the US Federal Reserve has just published a paper which casts doubt over the inverted curve proposition: “It is not valid to interpret inverted term spreads as independent measures of impending recession”.

Other indicators

Perhaps the best source of reliable guidance about whether or not the US is headed for recession is the Conference Board, a non-profit think tank with more than 1,000 private and public corporations as members. It publishes a monthly Leading Economic Index (LEI), which is widely referred to because it comprises economic indicators that give a guide to the future. The February LEI rose by 0.3%, following a 0.5% decrease in January – anything lower than zero usually indicates that a recession is around the corner.

How are US consumers feeling? The Conference Board’s Consumer Confidence Index went up slightly in March, to 107.2, against 105.7 in February. But the index of consumer expectations dropped from last month’s 80.8 to 76.6. A separate and equally well-regarded independent survey of consumers, the University of Michigan’s Consumer Sentiment survey for March fell to 59.4, “the lowest reading since August 2011”. And the expectations for inflation rose to the highest reading since 1981.

Nor are Americans alone in looking to the future with some trepidation. In the Eurozone investor morale is now at its lowest in almost two years according to the Sentix Index, which takes the temperature of some 1,200 German investors and assesses their opinion on ten different markets. Expectations are even more dismal and are at the lowest since December 2011. Sentix commented: “No region is able to resist the negative momentum at the moment, even the important Asian region is already fighting stagnation”.

Recessionary protections

According to the London-based brokers Shard Capital the “question we should ask ourselves, is not whether we’re going into a recession or not, but how severe will it be?”

While a recession may not be around the corner, it is almost inevitable that after such an exuberant party in 2021 that there will be an almighty hangover. Money became confetti-like in 2021; the amount of new flotations testifies to that. Globally, initial public offering (IPOs) reached an all-time high of more than 3,000 last year. This year we have not only astonishingly high inflation in many parts of the world; we face the serious possibility of a major economy – Russia – defaulting on its foreign debt and an economic slowdown in another, China. For the founder of the world’s largest investment firm, BlackRock, the era of globalization is coming to an end.

People everywhere are now hunting for secure bolt holes where their money will be safer in such a topsy-turvy world. Do cryptocurrencies offer a protective umbrella? Even the International Monetary Fund (IMF) reckons that crypto assets “have matured from an obscure asset class”. Not so fast, says John Plender, one of the Financial Times‘ senior writers. In his opinion “any claim bitcoin might have to be a geopolitical hedge has been severely dented by its performance at the start of the war in Ukraine. Against a background of plunging markets gold strengthened while bitcoin fell. Today, the gold price is close to its all-time high in August 2020, while bitcoin is well below its record high last November. So much for the great crypto store of value”. Gold is “particularly attractive” says Plender “in a period when governments have been engaging in fiscal pump priming in response to the 2007-09 financial crisis and Covid-19, and central banks have been printing money furiously. The attraction is all the greater when yields on index-linked gilts, a less speculative hedge against inflation, are negative and guarantee a loss to investors if held to maturity”, It’s surprising to find that the FT has written favourably about gold; historically the newspaper has tended to dismiss gold as an asset. To some extent Plender continues this tradition, as he writes that gold is the “ultimate bolt hole for frightened money”. At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

Today, thanks to Glint, gold is not simply for “frightened money” – not least because we have turned gold into money which you can use in your everyday life. And if we are headed for a recession, when the risks of other asset classes rise, people will tend to opt for gold because gold is security. Glint its key.

Soapbox: Weaponizing currencies

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Soapbox Weaponizing Currencies

As the fighting in Ukraine becomes more intense, journalism standards are under pressure; sorting truth from lies is akin to sorting through missile-demolished buildings – you wish it hadn’t happened, and if you slip you may damage yourself.

News media organisations that traditionally required at least two sources to verify a story before publication or broadcast, seem to have lost their way. Now ‘leaks’ and anonymous rumours suffice.

Thus we have Reuters reporting that “Russian precision-guided missiles are failing up to 60% of the time in Ukraine, three U.S. officials with knowledge of intelligence on the issue told Reuters, a possible explanation for the poor progress of Russia’s invasion” – although at least Reuters acknowledge it was “unable to independently verify the figures”.

It’s been claimed on social media (via CNN’s verified Twitter account) that the US actor Steven Seagal – who holds both US and Russian nationality – is fighting with Russian ‘special forces’. Not true; CNN says the Tweet was fabricated.

Then there’s the question of military casualties. Russia says around 1,300 of its troops have been killed; NATO says the ‘real’ figure is 7,000-15,000. Ukraine official sources it even higher.

The first casualty of war is of course truth and degrees of truth.

Pavel Zavalny, chairman of Russia’s State Duma committee announced that so-called ‘friendly’ countries will be allowed to trade with Russia in their national currencies, Bitcoin, or gold, at a press conference last week.

One thing seems crystal clear – the weaponization of currencies is one unexpected consequence of this war and the sanctions imposed on Russia by the West. Money has lived through its own Cold War ever since President Richard Nixon killed the Gold Standard in 1971. The days when the US Dollar ruled supreme are over. The mutual hostility between fiat currencies – and alternatives such as cryptocurrency, or gold – has come into the open. The English language newspaper Global Times, controlled by China’s Communist Party, reported on 16 March that China was talking to Saudi Arabia about buying oil in Yuan and that India was considering buying Russian oil for Rupees. It added with some glee that these moves could “contribute to the decline of the dollar’s reserve status, which the US has taken advantage of by printing as many dollars as needed to fund its spending for decades”.

Global Times quoted a Chinese policy wonk as saying in light of “the increasingly frequent abuse of US unilateral sanctions, countries are stepping up their efforts to look for a backup currency for their international trade, and the yuan is one of the options on the table… With the world’s multi-polarisation process continuing, the trend will gain momentum and contribute to the internationalization of the yuan”.

Cryptocurrencies’ day in the sun?

In January this year, Russia’s central bank drafted proposals to ban all cryptocurrency trading and mining, because cryptocurrencies “have aspects of financial pyramids, because their price growth is largely supported by demand from new entrants to the market”. But former enemies can swiftly become allies when the shooting starts.

Ukraine is already well versed in cryptocurrencies; one source says it had the highest level of crypto usage per capita in 2020. On the second day of Russia’s invasion Mykhailo Fedorov, Ukraine’s digital transformation minister and his colleagues set up official government wallets that could accept cryptocurrency payments. By 19 March, the government had received more than $100 million in cryptocurrency donations.

Crypto exchanges are now allowed to operate in Ukraine, consumers have protections against possible fraud, and the National Bank of Ukraine and the National Securities and Stock Market Commission have been appointed regulators. The National Bank may even eventually launch its own digital currency. Ukraine’s government plans to issue its own collection of non-fungible tokens (NFTs), under the working title Meta History: Museum of War. (An NFT is a collectable token traded on a blockchain).

While Ukraine is pursuing the cryptocurrency option at full speed, the West is trying earnestly to prevent crypto use by Russia. The European Commission rules that specified companies and persons in Russia and Belarus are banned from trading digital assets in the European Union. The Office of Foreign Assets Control (OFAC) in the US has stated that US citizens and digital assets firms are required to comply with sanctions against Russia.

For some, such as Sergey Vasylchuk, all this marks a milestone on the route to cryptocurrency’s wider acceptance. He says: “Mass adoption is now inevitable”. But his objectivity is questionable – he’s the founder of Everstake, a cryptocurrency intermediary based in Ukraine.

This war is being fought on many levels – bombs & bullets, information warfare, and cyber onslaughts. The imposition of wide-ranging sanctions has meant the weaponization of currencies, creating ripples far beyond Moscow’s oligarchs’ dachas.

De-stabilisation looms

The West has shown a remarkable unanimity in response to Russia’s aggression. It has kicked some Russian banks out of the SWIFT international payments system, frozen its central bank’s overseas reserves and blitzed Russia’s means of stabilising its currency. But it has also shot itself in the foot.

A critical part of US global hegemony has long been its possession of the world’s most sought-after currency, the Dollar. But if your central bank’s reserves are in Dollars and can be frozen when you need them most, what’s the point in having them? Better to hold your reserves in something else, like Yuan, or Bitcoin, or Gold.

President Joe Biden, who wants to see the US develop digital assets ‘responsibly’ , has issued a warning that the G7 (the inter-governmental political forum consisting of Canada, France, Germany, Italy, Japan, the United Kingdom, and the US) will cooperate to enforce sanctions on “any transaction involving gold” related to the Russian central bank. Russia has around $630 billion in its reserves, 23% of which are in gold – slightly more than its Dollar assets. As Biden tries to clamp down on Russia’s gold transactions, President Putin signed a law that exempts individuals from paying 20% value-added tax on gold purchases.

It’s one thing to announce a sanction, it’s quite another to try to enforce it. China has notably not joined the chorus of criticism of Russia; Xi Jinping and President Putin signed an agreement before the start of the Beijing Winter Olympics, committing them to a close partnership “against” the US. One of their agreements no doubt was a pledge to continue their policy of de-Dollarization. Is that true? I have no idea, but in the current context it would make sense.

In the dark days of 2008, when the global financial system appeared to be on the verge of meltdown, a commodity trading friend said to me: “if all this wasn’t really scary it’d be really exciting”. Fourteen years later the possibility of a global catastrophe seems much more intense – not just the sabre-rattling on both sides but the financial re-ordering that will inevitably happen. The demise of the Dollar is unlikely to happen overnight; but it will happen.

And what will replace it? China is convinced it will be its own Central Bank Digital Currency (CBDC), the e-Yuan, perhaps backed by the considerable amount of gold it has built up over years.

But staking a claim to the international reserve currency requires more than just having ‘first-mover’ advantage; it also requires being trusted, and it requires possessing something the world needs. As a massive producer and exporter of some of the world’s most important commodities, Russia may stake its own claim – no matter what was agreed between Presidents Putin and Xi.

Soapbox: From the frying pan into the fire

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Soapbox Dollar Frying Pan

“Inflation is much too high. We have the necessary tools, and we will use them to restore price stability”. Inflation is much too high – that’s now the message from the chairman of the US Federal Reserve, Jerome Powell, speaking to the National Association for Business Economics Annual Economic Policy Conference the other day.

It’s taken him a while – too long, many think – to grasp this reality. Only a year ago he was telling American households inflation was ‘transitory’. Plenty of people are lining up to tell him ‘I told you so’. Others are pointing out that real interest rates are minus 7% and still falling (with inflation at 7.9% and still growing) – and that cash is fast becoming ‘trash’. To keep ahead of inflation your investments must now return a real (i.e. not merely nominal) 8%.

In the UK, the Chancellor – the person holding the government’s purse-strings, today delivered his ‘Spring Statement’, a kind of mini-Budget that the Treasury delivers to Parliament when it publishes its economic forecasts. Rishi Sunak has been given a “large windfall” from bigger than expected tax revenues. The total government deficit (spending over income) for the 2021-22 financial year is now expected to be £153 ($202) billion. He is under enormous pressure to do something for hard-pressed householders, be that to cut duty on road transport fuel, or drop an increase planned for April in National Insurance (which many see as a tax on jobs).

Cash becomes a candidate for ‘trash‘ when inflation erodes its purchasing power. The US Dollar is losing purchasing power by almost 8% a year right now; the Pound Sterling by 6.2%. In both cases the direction is for higher still – and the hands of the US and UK central banks are tied. If, as seems quite likely, inflation reaches double digits, then $100 or £100 today will be worth $90 or £90 next year. If inflation is one percentage point higher than the interest on your savings, the purchasing power of your £100,000 will lose value over the 20 years – down to £81,791. For us unfortunates who are not oligarchs this is a disastrous prospect. Not quite the same as having bombs destroy your home, admittedly, but bad enough.

A central bank’s conventional remedy for high inflation is to raise interest rates. But an uncomfortable side-effect of putting up interest rates is that government interest payments on national debts also rise; in the US, even a small rise to 0.5% in interest rates would push the average annual interest bill on its $30 trillion debt up by $94 billion, to well in excess of $600 billion a year. The UK’s nation debt is officially around £2.65 trillion, although if we factor in all liabilities including state and public sector pensions, the real national debt is closer to £4.8 trillion, around £78,000 for every person in the UK.

Just as the West is exiting the Covid-19 pandemic, which added some $19.5 trillion to global debt , an unprovoked war is started by Russia’s President Putin. Whichever way the war goes, it will stimulate further inflation, cut global economic growth, and exacerbate global debt levels.

Energy costs are going through the roof – in the UK gas and electricity bills are going up by the equivalent of a 6 pence rise in the basic rate of income tax, according to one source. The war will also provoke instability in North Africa, a region where bread is a staple food and which is heavily dependent on grain exports from Russia and Ukraine – from both countries exports of grain will be low this year, pushing up prices and forcing demand rationing.

Powell and Sunak have just cleared the frying pan (Covid) but have strolled into the fire (inflation). We are obsessed with news about refugees and destruction of cities; news that would shock under normal circumstances seems to pass unnoticed, be it inflation in Argentina likely to exceed 60% this year, the posting of troops at gasoline stations as crowds fight over price increases in Sri Lanka , or the higher risk of a global stagflationary recession.

According to a sobering assessment by the Iranian-American economist Nouriel Roubini, as a result of this war “we have entered a geopolitical depression that will have massive economic and financial consequences well beyond Ukraine. In particular, a hot war between major powers is now more likely within the next decade”.

Unintended consequences

One of the unintended consequences of the G7 group of countries seizure of Russia’s foreign exchange reserves might be the appearance of a “new monetary order” according to Zoltan Pozsar, formerly of the Federal Reserve and US Treasury Department and now an investment strategist at Credit Suisse.

His argument is that in future, which country – particularly ruled by an authoritarian regime intent on grabbing territory – will risk not being in control of its foreign exchange reserves? After this war is done, says Pozsar, money will not be the same: “the US dollar should be much weaker and, on the flip side, the Renminbi” (Yuan) “much stronger, backed by a basket of commodities”. He anticipates a “Bretton Woods III”; “from the Bretton Woods era backed by gold bullion, to Bretton Woods II backed by inside money (Treasuries with un-hedgeable confiscation risks), to Bretton Woods III backed by outside money (gold bullion and other commodities)”. He also sees Bitcoin (“if it still exists then”) as probably benefiting. Now that Goldman Sachs has become the first bank to trade cryptocurrency over-the counter, a Bitcoin-linked instrument, Bitcoin looks like it is here to stay; how it will fit alongside planned Central Bank Digital Currencies (CBDCs) is yet to be clarified, although President Joe Biden issued on 9 March an ‘Executive Order on Ensuring Responsible Development of Digital Assets’, which called for a broad review of digital assets and continued research into a US CBDC.

Pozsar’s forecast of such a major re-wiring of our monetary system could be wrong, although the accumulation of gold by Russia’s and China’s central bank in recent years hints that something is going on. But if he is right, then gold and other physical commodities will become more important and probably more sought-after.

The chance that the US Dollar will be displaced from its perch as the international reserve currency has certainly increased in the past 12 months. There are many straws in the wind. One such comes from Saudi Arabia, which sells 25% of its oil exports to China. It has been under pressure by China to accept payment in Yuan (Renmimbi) for several years and is now reportedly seriously considering doing so ; Saudi Arabia pegs its own currency, the Riyal, to the Dollar, so damage to the Dollar would hurt its own currency, but maybe that’s now a lesser concern.

The petrodollar came into existence in 1974. That year Saudi Arabia struck a deal to buy US treasury bills before they were auctioned. In return, Saudi Arabia agreed to price its oil in Dollars, and it lent on other major oil producers to adopt the same policy. The annual global oil trade is estimated to be worth $14 trilllion. If the Yuan replaced the Dollar in that trade countries would have to maintain Yuan reserves, and the Dollar would lose ground. US economic and political hegemony would shrink.

All this may seem quite remote from the tasks facing Rishi Sunak and Jerome Powell, both of whom are facing ever-more strident calls for easing the financial burdens on ordinary consumers. Yet Sunak and Powell are to some extent reaping what they sowed. By overseeing a massive expansion in the supply of money – by putting a lot of cash into consumers’ hands – they uncorked the bottle containing the inflation genie. It will be a superhuman task to get it back in that bottle.

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

Soapbox: Putin is doing a Samson

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Soapbox Putin Samson

Like everyone I have been struggling to understand Vladimir Putin’s reasoning for his full-scale invasion of Ukraine, Russia’s neighbour to the south. And like everyone struggling to make sense of the senseless, I turn to history to find comparisons.

Because Putin has conducted his war with such brutal indifference to civilian casualties the obvious comparisons spring to mind: Adolf Hitler, Joseph Stalin. Putin lacks the rhetorical power of Hitler and has yet to kill his closest associates through kangaroo court trials, so he’s no Stalin; he seems much more like Samson, the fabled Israelite warrior and judge.

In the Bible’s Book of Judges Samson appears as a super-strength legend who massacred an entire army of the Philistines using only the jawbone of a donkey. His treacherous lover Delilah cut off the source of his super-strength – his hair – while he slept. He was then delivered to the hands of his deadly enemies – the Philistines. As his hair grew back, his strength recovered and – once more powerful – he pulled down the temple in which he is jailed, killing himself and everyone inside.

For me, Putin is doing a Samson. He has become indifferent to his future, his reputation. His nihilism is complete. Any hope that he might one day shake hands with a US President disappeared once it became known that he was offering Middle East mercenaries $400 a day to fight Ukraine. Russia has a long association with nihilism, but previous nihilists have never been in control of nuclear weapons. Putin is pulling down the temple which will kill him, slaughter untold numbers, and damage us all. His war has changed our life more dramatically than in a century.

It has changed the global economy, changed expectations, and perhaps will usher in the death of the US Dollar as the global reserve currency. The Financial Times highlighted this unintended possible consequence: “If your dollars can vanish at the whim of the issuer [such as the US sanctions against Russia] then a reserve must exist [needs to exist] outside the dollar-based financial system”. That ‘new’ reserve sounds like gold to me.

Four weeks into the war, we’re just at the start of its consequences. As Nestle, Philip Morris and Sony joined Unilever, Mondelez, Procter & Gamble, and McDonald’s (among others) in boycotting capital investment and/or operations in Russia, in protest against the invasion, Putin must be astonished – as are many of us – at the speed and apparent unanimity of Western reaction. Even Goldman Sachs has decided to turn its back on Putin’s Russia.

Yet all these boycotts merely seem to be provoking a doubling-down; Andrei Turchak, secretary of the ruling United Russia party’s general council, said Russia might nationalise idled foreign assets. He said: “We will take tough retaliatory measures, acting in accordance with the laws of war”. For Putin and his supporters, we are therefore already ‘at war’. Even though the desire to punish Putin is understandable, does the fact that he has committed murder give any government the right to confiscate his (and others’) assets?


Russia’s reserves


The World Bank’s chief economist, Carmen Reinhart, has warned that Russia is edging towards a sovereign debt default on $40 billion of its external bonds ; this would be Russia’s first major sovereign default since the Bolshevik revolution in 1917. The ratings agency Fitch has downgraded sovereign Russian debt from ‘B’ to ‘C’, saying a default is imminent as sanctions and trade restrictions have undermined Russia’s willingness or ability to service its debt. The risk is that such a default could set off a chain reaction among Western financial institutions, making the financial crash of 2008 look like a tea-party.

Collectively international banks are owed more than $121 billion by Russian entities, according to the Bank for International Settlements (which has suspended Russia’s membership). Will they get the money back? Pimco, the California asset manager, for example reportedly holds $1.5 billion of Russian government bonds. Goldman Sachs and JP Morgan say they are “unwinding” their Russian businesses; other banks will follow.

Sovereign debt risks are high and Western governments seem to want them to get higher. Liz Truss, the UK’s foreign minister, said: “We want a situation where they [Russia] can’t access their funds, they can’t clear their payments, their trade can’t flow, their ships can’t dock and their planes can’t land”. The noose around the Kremlin is tightening – and not just Moscow but all of us will pay a price. Perhaps the only persons who will profit from this mess will (as usual) be the lawyers; as Russian-owned assets are confiscated, and debts go unpaid, lawyers will make a fortune challenging the legality.

The costs we are facing

Choking off Russia’s access to Western brands is an understandable (and laudable) response to the laying waste of Ukrainian cities, but it comes at a price.

The sportswear firm Adidas for example has closed 500 of its Russian stores (around 25% of its total); it has said its sales will drop by up to €250 million ($277 million) as a result. Holders of Adidas shares will be wondering if the company’s dividend (1.51% last year) can be sustained. Profits of all companies that are ‘doing the right thing’ by shunning Russia will be hit, their dividends probably will be lowered, their costs rise. This is true not just for Adidas but all companies that have cut their Russian connections. Re-establishing them one day in the future will be costly; maybe not as costly as re-building the blitzed Ukraine, but still…

The price of most commodities has spiked since the invasion started. Nickel trading on the London Metal Exchange (LME) was suspended after the price hit $100,000 a tonne. Russia is the world’s third-biggest nickel producer and accounts for about 17% of high-quality nickel production. Traders who have been ‘short’ these commodities (i.e. those who have bet that the price will fall) have been caught out and forced to cover their positions, leading to higher volatility and loss of liquidity. Jeff Currie, head of commodity research at Goldman Sachs, told CNBC that “liquidity in these markets [is] collapsing across oil, gas, metals, agriculture”.

Official consumer price inflation in the US is now 7.9% but that is a retrospective figure, covering February. Unofficial assessments put the real figure at twice that. Bloomberg says: “A few weeks ago, many economists were eyeing February as the peak in U.S. consumer inflation. Now it’s looking more like a fresh baseline.” Expectations are that US inflation will rise to 8%-9% next month thanks to the Ukraine war. In the UK inflation (as measured by the consumer price index or CPI) is at a fresh 30 year high of 5.5% but is widely expected to rise above 9% and stay at more than 7% until spring 2023. In the UK staple foods such as bread, potatoes and pasta are likely to rise in price by 10%-50% in the coming months say farmers and importers; the international price of wheat has gone up by 50% in the past two weeks.

Russia and Ukraine combined supply almost a third of global wheat exports. According to the US Department of Agriculture’s latest assessment, the Ukraine war will cut wheat exports from Russia and Ukraine by 12% this year. The impact of this calamitous drop (and consequent price rise as countries compete for supplies) will be most felt in Afghanistan, Algeria, Egypt, Kenya, Pakistan, Tanzania, Turkey, Yemen, and European Union countries. Many of those countries are already deeply unstable; bread prices became a flashpoint in the build-up to the 1789 French Revolution. The Ukraine war might spark another catastrophe 4,000 kilometres distant.

The mainstream media – in the UK at least – has become obsessed with the fate of Chelsea football club, now that its owner Roman Abramovich has fallen foul of UK sanctions, but the ripples from the Ukraine war are much more profound than kicking a ball around. Germany is more than doubling its military spending, from €47 billion ($52 billion) in 2021 to €100 billion ($110 billion) this year. From where will this extra money come from? More taxes, welfare cuts, or the printing press?

President Putin and Russia are no doubt feeling encircled by hostile forces. But so is the chairman of the US Federal Reserve, Jerome Powell, and his peers at other Western central banks. Powell et al are caught between the Devil and the deep blue sea, between the need to take action against inflation by raising interest rates, and the fear of an economic recession partly a result of the Ukraine war.

It is not what we at Glint seek, but this kind of scenario is perfectly constructed for gold. It’s not just that gold has often been regarded as a safe place to park your money when inflation is rising, or when geopolitical anxieties are high – or when both are (as now) hotter than for decades. When your fiat currency – your Pounds Sterling, your US Dollars – are losing around 8% of their purchasing power every year, and equity markets are fragile, gold is an alternative. Luca Paolini, chief strategist at Pictet Asset Management says “Europe is probably already in recession… consumers aren’t going to go out and spend the savings they’ve built up when there’s a war happening on their doorstep, and that’s before you consider a big increase in inflation”.

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

Soapbox: Powell versus Putin

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Soapbox USA Russia

He wants to raise interest rates. He needs to raise interest rates. He fully intended to raise interest rates. And then along comes a war and upsets the apple cart.

Consumer inflation in the US is now more than an annualised 6% (including food and energy bills), a full 4% above the former target, which is rapidly being lost sight of.

The ‘he’ is Jerome Powell, chairman of the US Federal Reserve. It’s the Fed’s job to conduct monetary policy “so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates”. The Federal Reserve is still expected to make the first of several interest rate rises at its meeting next week. The Biden administration has even said it is prepared to temporarily suspend the tax on gasoline, currently levied at 18.4 cents per gallon. National average petrol prices in the US have jumped to $3.50 a gallon, their highest in more than seven years.

Of course, the Ukrainian invasion and the response from the West are bound to give inflation a fresh kick higher, although the higher prices (such as for grains and base metals) will take a little while to feed through into consumer staples. Other price rises, particularly for fossil fuels like crude oil and gas, have immediately jumped. But it’s evident that this fresh war in Europe comes at a time when the West is economically (if not politically and militarily) ill-prepared. The Bank of England’s (BoE) deputy governor, Jon Cunliffe, has warned the war may hurt growth, spurring a drop in the value of the most risky assets and raising the level of uncertainty. The BoE’s policy maker Silvana Tenreyro said she expects “upside surprises on inflation”, which will deliver a shock to the terms of trade.

Raising interest rates – which might knock the gold price – has become much more problematic after this war. The war will impede economic growth, by how much cannot yet really be grasped, and the US and the West generally is not in a condition to tolerate growing job losses after the recent pandemic. In one sense this war matches two people who (some may say) are having a disproportionate influence over our life – it’s Powell versus Putin. A man facing a serious inflation surge against one who apparently doesn’t care.

Cooling growth

The one certainty of war is that it is economically damaging not just for the attacked party but for the aggressor too. The UK’s National Institute for Economic and Social Research (NIESR) reckons that the conflict in Ukraine could knock $1 trillion off the value of the world economy and add 3% to global inflation this year by triggering another supply chain crisis. It will also force European governments to borrow more to pay for the mass influx of more than one million refugees and strengthen their military forces. The collapse of the rouble will drive Russian inflation to 20% said the NIESR, and in the UK it will average 7% in 2022. Jagjit Chadha, director of NIESR, said: “Supply chains will be further fractured, and monetary and fiscal policies put under a severe examination”. Russia has been steadily building up its foreign currency reserves since it annexed the Crimea in 2014, from $368 billion then to some $630 billion today. The trouble is that around half of this expanded reserve is held overseas in foreign banks. Russia can’t get hold of it after Japan, the European Union and the US barred Russia’s central bank from tapping into the billions of foreign reserves Moscow had been saving up in their banks.

Cui bono?

Cui bono – who benefits from this war? Clearly Ukraine’s infrastructure has been seriously damaged and the loss of human life is no doubt currently under-estimated. But Russia too has lost, not just access to many financial markets and had its credit rating downgraded to junk status; its President Putin will never recover trust or credibility among Western leaders. Nor will the US and its NATO allies be beneficiaries; they risk looking impotent in the face of an authoritarian bully.

China however, which has not joined any Russian sanctions, and has said it will continue trading with Russia, is rubbing its hands in glee, although some commentators believe Beijing is involved in an “uncomfortable balancing act”. China takes just 2% of Russia’s exports and is not dependent on a single source for oil and gas.

What China has been quietly doing for years is to build up its own reserves in gold, and it must be thinking of Russia perhaps becoming a distressed seller of its gold reserves of about $137 billion. China’s ultimate ambition is to see its own currency displace the Dollar as the international reserve currency. Bringing about that change will need patient years – which President Xi Jingping has, unlike President Putin. And to persuade the world that the Chinese Yuan might be a credible challenger, a massive backing from gold could be useful.

Putin needs an escape hatch

“Putin doesn’t do humiliation well”, according to Bill Browder, formerly the largest foreign portfolio investor in Russia. In 2009, his Russian lawyer, Sergei Magnitsky, died after being deprived of medical care in a Moscow prison; he’d uncovered tax fraud linked to Russian officials. Browder was banned from Russia in 2005 and labelled a ‘threat to national security’. Putin’s response “is scorched-earth carpet-bombing with massive civilian casualties as a way of showing everybody he’s not a guy to be messed with”. The war in Ukraine is turning ugly, with Russian forces failing to sweep the opposition aside with ease. Military stagnation may be on the cards, as stagflation is on the cards for the global economy. While stagflation will be uncomfortable, a military stagnation may encourage Putin to double-down and use those scorched-earth tactics. He needs to be permitted a face-saving escape hatch. We only need to remember how humiliation served the victors of the First World War very badly to realise that.

Whatever the outcome, the prospects for safe-haven assets – including gold – have dramatically improved. It seems a little cold-blooded to be thinking of assets to protect oneself while many people are thinking how to protect themselves against bombs; nevertheless, we all need to take what cover is possible, literally and metaphorically.

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

Soapbox: Playing with fire

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Soapbox Ukraine Russia Fire

President Putin obviously bit off more than he can chew. Given his reckless gambling of Russia’s future, his under-estimation of Ukrainian resistance may simply make him only more dangerous to world stability and peace. His adventurist expedition into Ukraine has already created around half-a-million refugees and up-ended the global diplomatic and economic order; we must hope it does not end in a global military catastrophe. “We’re in a dangerous spot” says a Moscow-based defense analyst. As far back as 2018 Putin, fearing the slow decline of Russia as a world power, rhetorically asked: “Why do we need a world without Russia in it?”.

Far from the West ‘abandoning’ Ukraine, as one pro-Putin Russian journalist anticipated in advance of the invasion , the West has discovered a new and risky unanimity. Even Sweden broke its principle of not exporting arms to countries at war and decided to send 5,000 anti-tank weapons to Ukraine. Artis Pabriks, defense minister of Latvia, one of the Baltic states that some suggest would be next in Russia’s sights, has said “Europe must give Ukraine everything it asks for”. Everything?

A knife in a gunfight

Last Saturday, the US and Western allies agreed to put severe sanctions on Russia’s central bank ; the following day, in explicit retaliation, President Putin ordered Russia’s nuclear forces to be placed on ‘high alert’, although as the US magazine Time said: “The practical meaning of Putin’s order was not immediately clear”. It’s still not clear. While the US appears not to have responded in kind, Ukrainians (and others) worry that it’s bringing a knife to a gunfight.

Others are loading their guns, ratcheting up the tensions. Belarus, run by President Alexander Lukashenko, a close ally of Putin, claimed that a referendum conducted on Sunday “had seen enough public support for constitutional changes that would revoke the country’s neutrality and its nuclear-free status. The changes would allow Russia to station nuclear weapons on Belarusian soil”. This is playing with fire.

What impact does sanctioning Russia’s central bank have? In this fast-developing story it’s not yet entirely clear. It looks as though all its foreign exchange reserves ($630 billion at the last count ) are blocked, but Special Drawing Rights (or SDRs, the international reserve asset of the International Monetary Fund) and gold still seem to be available. Russia may own its foreign reserves but it doesn’t control them, as most of them are outside the country.

The rouble crashed more than 40% when the markets opened on Monday and the Russian central bank more than doubled interest rates, to 20%. It also banned foreigners from selling local securities, both efforts to shore up its currency and head off inflation.

As the rouble collapses, Russians will face much higher prices for imported goods. Russia imports “almost everything its citizens eat, wear, and use”. And the clouds are gathering over Russian banks – which and how many is still in doubt – who will be removed from the SWIFT international payments system, said the US, UK, Canada and EU on Saturday, to “ensure that these banks are disconnected from the international financial system and harm their ability to operate globally”. Cutting Russia out of the SWIFT system is a “financial nuclear option” according to the French finance minister, Bruno Le Maire , adding that “when you do have a financial nuclear weapon in your hands you do think carefully before using it”.

A double-edged sword

Sanctions may hurt Russia’s economy in the long-term, although according to Vladimir Solovyov, a Russian TV host (who has also been placed under sanctions), “we’ll endure it all. We’ll rebuild our own economy from scratch, an independent banking system, manufacturing and industry. We’ll rely on ourselves”. But it will hurt the West’s too. Higher prices for Russia’s fossil fuel, metals and grains exports will feed into higher costs-of-living for Western consumers – and completely disrupt plans by the US Federal Reserve and the Bank of England to raise interest rates to fight inflation. Indeed, the worry now becomes that a recession will hit, or even stagflation.

Russian exports of all commodities, including oil, gas, metals and grains, will be severely disrupted by these sanctions. Russia produces 10% of global oil and supplies 40% of Europe’s gas. It is the world’s largest grains and fertilisers exporter, its top palladium and nickel producer, the third-largest exporter of coal and steel, and fifth-largest wood exporter. This exclusion from world trade of substantial parts of the world supplier of one-sixth of all commodities is unprecedented. It has already pushed up the prices of these commodities, inadvertently punishing the West (which relies on them) and boosting Russia’s financial war-chest. For now – but how much longer? – the gas continues to flow. Russia may well decide that one form of retaliation might be to turn off the gas – but it’s in neither side’s interest to switch off the gas.

President Putin may not win on the battlefield of Kiev, but he may see a lot of damage inflicted on the West’s economy. As a senior figure of the financial services company Marex, which specialises in commodity trading, rhetorically asked the most recent edition of the UK’s Sunday Times, “who do sanctions really hurt, Russia or the consumer? One of the reasons sanctions unwound relatively quickly last time was the cost of raw materials for US carmakers spiked up”.

China smiles

As Russia and the West overturn the apple cart of international trade one country has been relatively tight-lipped. More than 14% of Russia’s foreign exchange reserves are held in China, but would China want to provide that? China might then face sanctions of its own, cutting off access to Dollars and Euros. The Russian central bank has 2,299 tonnes of gold as part of its reserves, the fifth largest stockpile in the world, which is actually held inside Russia. Russia could try to sell some of this gold, but who would dare buy it? Russia’s central bank says it’s resuming gold buying from its domestic market, no doubt prompted by the sanctions. China has the money (the gold is valued at about $132 billion ) and the appetite, but would China pay the full current market price for the gold, or demand a discount from a ‘distressed’ seller? And China would probably be reluctant to buy the gold and leave it sitting inside Russia. Maybe China will invite Russia to join its Cross-Border Interbank Payment System (CIPS), which is a home-grown alternative to SWIFT. But the CIPS is tiny, with around 1,200 members compared to SWIFT’s 11,000. China would no doubt like to displace the Western-dominated SWIFT cross-border payments’ system, but as yet it cannot.

Trapped rat

Apart from the loss of life and the displacement of hundreds of thousands of people, there is another reason why a speedy and peaceful end to this conflict is imperative. The West has responded forcefully and with one voice, but the greater danger today is that President Putin, who for the past few years has been surrounded by sycophants, might feel trapped, and lash out even more recklessly. It will be difficult to swallow, but for the sake of avoiding the risk of an even more serious conflict, it is necessary not to corner Putin, not to encourage any more playing with fire.

Gold whiplashed last week when Russia’s troops first marched across Ukraine’s borders. It has settled a little since then but feels – like us all no doubt – a little on edge. All that can be really said with any confidence is that the world is in a state of high anxiety. And while we at Glint make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power, we strongly believe that gold is the fairest and most reliable currency on the planet, although it isn’t 100% risk free. But is anything 100% risk free right now?


Soapbox: The unthinkable is here

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President Putin has frequently told the world in recent weeks what he really thinks of Ukraine, but we have refused to listen or have turned a deaf ear. Putin considers Ukraine to be part of Russia. He has said this since at least July 2021; Russians and Ukrainians are “one people” he said then. He continued: “…the wall that has emerged in recent years between Russia and Ukraine, between the parts of what is essentially the same historical and spiritual space, to my mind is our great common misfortune and tragedy. These are, first and foremost, the consequences of our own mistakes made at different periods of time. But these are also the result of deliberate efforts by those forces that have always sought to undermine our unity. The formula they apply has been known from time immemorial – divide and rule. There is nothing new here. Hence the attempts to play on the ‘national question’ and sow discord among people, the overarching goal being to divide and then to pit the parts of a single people against one another”.

In an hour-long rambling speech, apparently without autocue, Putin this week addressed the Russian people on television, asserting that Ukrainians are part of “our family” . He added: “The whole idea of the so-called pro-Western civilizational choice of the Ukrainian democratic power was and is still not in creating better conditions for the good of the people but to serve the geo-political adversaries of Russia…” He lambasted Ukraine for its alleged corruption, its political mismanagement, decrees that repress the freedom of speech, and for preparing “armed conflict against Russia” with weapons of “mass destruction” – which sounded like the pot calling the kettle black.

Mutual trust between NATO and Russia has been “lost”, he said. He went on: “we have every reason to believe” that the “level of military threat to Russia will be increased manifold”. It’s “like having a knife against our throat…the only goal they [NATO] have is to contain Russia… Russia has a right to take counter-measures to enhance our security and that’s how we plan to act”.

And as he sent Russian forces into Ukraine – which he said were intended to “‘de-Nazify’ Ukraine and ‘defend’ victims of ‘genocide’, despite there being no evidence of such crimes” – he warned the West against “the temptation of meddling in the ongoing events” because that would see a response from Russia that would “lead you to consequences that you have never encountered in your history”.

Some argue that the West only has itself to blame for this situation; “at least four Russian leaders have implored the West to let them into this gilded club [NATO] and each time they were contemptuously brushed off”.

But that was then – and this is now. The unthinkable is here. None of us know where this will end.

The push against mush

Ukraine has been a tinderbox long before its former President Yanukovych rejected the Ukraine-EU Association Agreement in November 2013. For more than a decade Ukraine has been subjected to cyberattacks, many of them thought to derive from Russia, according to an online book called Cyber War In Perspective – Russian Aggression against Ukraine. The latest such attack – a ‘distributed denial of service’ (DDoS) attack – hit Ukraine’s defence agencies and a couple of banks last week.

In 1922, the Ukrainian Bolsheviks forcibly established the Ukrainian Soviet Socialist Republic, one of the founding republics of the Soviet Union. Millions of people died in the Ukraine in the 1930s in a devastating famine, the Holomodor, caused by Stalin’s policy of confiscating agricultural produce. The Holodomor was the subject of an excellent 2019 movie, Mr Jones.

Ukraine became independent in 1991 when the Soviet Union fell apart. Luhansk and Donetsk were effectively annexed by Russia in 2014 following anti-government protests in its capital, Kiev. But clearly President Putin regards
Ukraine’s independence as an historical mistake, which he aims to correct.

No-one knows what is in the mind of Vladimir Putin. Only one thing is certain – he seems to be using the policy of Vladimir Lenin, who said “you probe with bayonets: if you find mush, you push. If you find steel, you withdraw”. The West must now decide how it responds to this Ukrainian turmoil – will it hold steel or merely mush?

Limited options

No one in the West seriously contemplates going to war against Russia over Ukraine. Ukraine after all is hardly a shining beacon of honest democracy. Transparency International ranks the country at a lowly 122 out of 180 on its Corruption Perceptions Index; Russia holds position number 136.

So the West’s response has been to pledge tough sanctions against Russia. President Joe Biden has said President Putin has “never seen sanctions like the ones I promised will be imposed”. The European Union says it “reiterates its unwavering support to Ukraine’s independence, sovereignty and territorial integrity within its internationally recognised borders”. The UK has said sanctions against five Russian banks and three oligarchs are just the “first barrage of what we are prepared to do” according to Prime Minister Boris Johnson.

Yet a key sanction that could be imposed probably won’t be. Germany has halted the opening of the Nord Stream 2 gas pipeline, which would have doubled the capacity of its imports to 110 billion cubic metres. Nord Stream 1 already supplies two-thirds of Germany’s imported energy; half Germany’s 40m households keep warm using natural gas, 97% of it from overseas. Shutting off gas imports from Russia would hit Russia’s foreign income – which last year was more than $55 billion from gas, mostly supplied to Europe – but no German politician would be prepared to let their countrymen freeze.

Nor would any Italian politician either – Prime Minister Mario Draghi said last week that sanctions should not include anything that affects energy; Italy imports 90% of its gas needs, mostly from Russia.

There have been suggestions that the US and Europe might in concert cut Russia off from SWIFT, the Society for Worldwide Interbank Financial Telecommunications. President Biden could invoke the Defending Ukraine Sovereignty Act of 2022 to authorise sanctions on providers of specialised financial messaging services such as SWIFT.

In 2014, Russia invaded and annexed Crimea and there were calls then to exclude Russia from SWIFT, which never happened. Dmitri A. Medvedev, then Russia’s prime minister, said at the time that such a move would be a “declaration of war”. Nikolay Zhuravlev, the vice speaker of Russia’s Federation Council, has said this week that booting Russia from SWIFT would see retaliations; European countries would not get their imports of Russian oil, gas and metals as a result of Russia’s being unable to receive foreign currency.

The cost of crude oil has surpassed $100 a barrel; gas prices in Europe tripled last year and are climbing again, inflation in the US and the UK is its highest in decades, and in the Eurozone has hit a record high since the euro was created more than two decades ago. The US national debt is now some $30 trillion, the interest alone on which was around $378 billion in 2021. Russia’s national debt is less than a trillion Dollars. The US national debt is now around 133% of GDP, while Russia’s is less than 20%. The US – NATO’s strongest member – is in no condition to fight even a short war in Europe, and Putin knows that.

Does the West have the appetite, unity, resilience – or even the money – to fight an economic war against Russia over Ukraine? President Putin, who senses that the West and NATO lack their former strength, will push, and push, until that question is finally answered.

It’s an immensely depressing fact but war and its associated chaos results in people everywhere looking for a safe haven for their wealth. Gold is often seen as this safe haven par excellence and so it proves once again. Gold has gained around 9% so far this month, largely on fears as to what Russia might do. Boris Johnson, not a man with demonstrably reliable judgement admittedly, said this week that Russia is planning “the biggest war in Europe since 1945”. The likelihood is that we are witnessing the second act of a five act drama which started back in 2014, when Russia took Crimea from Ukraine. The remaining three acts still allow time to load up with gold – which thanks to Glint is not just an investment but also usable as money – before the final curtain.

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

Soapbox: Credibility on the line

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Soapbox Federal Reserve

James Bullard, who has been president and CEO of the Federal Reserve Bank of St Louis since 2008, has just contributed his entry for 2022’s “understatement of the year” competition.

Bullard, who sits on the FOMC (the Federal Open Market Committee, which sets US interest rates) has just told CNBC that with US headline consumer inflation now at 7.5%, the highest in 40 years, “our credibility is on the line”. According to some commentators, inflation in the US is actually 15%, if it was still measured as it was 40 years ago.

US consumers don’t really care about Bullard’s credibility; their focus is on gasoline and fuel oil prices (up 50% and 41% respectively in 2021). UK consumers are equally under the cosh of rising prices; when inflation is factored in, wages in the UK fell by 1.2% in December. Andrew Bailey, governor of the Bank of England, who is paid more than £500,000 a year, more than 18 times the UK average wage, said earlier this month that workers should “moderate” their wage demands this year; at the same time UK citizens are facing the biggest fall in living standards since records began, in 1990. Bailey understandably fears a wage-price inflationary spiral, but his tactless advice was called a “sick joke” by trade union leaders.

Bullard’s recommendation for dealing with this “lot of inflation” (as he calls it) is akin to trying to use a plastic swatter to bat away a cruise missile; he said he would like to see the FOMC raise interest rates by 1% by 1 July; the FOMC next meets on 15-16 March.

Admittedly the US central bank, the Federal Reserve, is between a rock and a hard place. A rise to 1% in the main interest rate will do little or nothing to curb the current inflation. The US economist John Taylor created a rule in 1993 which suggested that, to stop inflation and keep it in check, interest rates should rise by 1 ½ times as much as inflation. Which implies that base US interest rates should be 10.5% now, not 1.25% by July.

That isn’t going to happen, for two basic reasons. The first – and most pressing for President Joe Biden’s Democrat Party, who will face testing mid-term elections in November – is that an interest rate of 10.5% would slam the brakes on America’s nascent post-pandemic economic recovery.

The second reason is the US federal debt. When a former chair of the US Federal Reserve, Paul Volcker, started pushing rates much higher to tame runaway inflation in 1980, US federal debt was about 25% of US gross domestic product (GDP). The interest bill then was tolerable. But “the government can borrow as long as people believe that the fiscal reckoning will come in the future. But when people lose that faith, things can unravel quickly and unpredictably”.

But today, with federal debt of almost $30 trillion and around 130% of GDP, any rise in interest rates will vastly increase the $562 billion the US spent in 2021 on interest on its federal debt.

As one commentator puts it, “higher interest rates may be an effective tool to suppress inflation, but with soaring national debt they are an anathema to the economic stability of the nation. Unbalanced budgets, growing debt and higher interest rates mean that every government program becomes at risk, as the percentage of the federal budget consumed by debt interest payments grows”.

Credibility is not so much “on the line” as shredded.

History repeats itself

The Fed has a history of making “occasional but very costly mistakes” according to two members of the Shadow Open Market Committee, which was set up in 1973 with the objective of evaluating the policy choices and actions of the FOMC.

In their opinion, by the end of last year “negative real rates had risen to their highest level ever, money supply had surged, inflation was accelerating and labour markets were severely stressed. Once again, the Fed’s delayed exit from overly aggressive monetary ease poses a significant challenge and economic risks”.

We are all aware of what is being blamed for rocketing inflation – supply-chain disruptions, tight labour markets, spiralling commodity costs (particularly crude oil, surging towards $100 a barrel, for the first time since 2014), China’s zero-Covid policy, but one of the main culprits – massive stimulus programmes – rarely gets a mention. The failure to withdraw its economic stimulus on a timely basis, due to the Fed’s unbalanced approach, which prioritises employment over price stability, is the root cause of inflation getting out of control, according to the Shadow economists.

Inflation is now a global problem. The horror headlines are in Argentina, with inflation above 50%/year, Lebanon (more than 200%), Turkey (around 40%), but few central banks are hitting their targeted inflation level. While policymakers’ attention is currently gripped by Russian sabre-rattling over Ukraine, inflation is arguably as much a threat to global stability than tanks sitting on borders; inflation is a creeping poison rather than a naked threat.

Even Russia, which seems to hold plenty of cards from its gas and crude oil strengths, cannot escape inflation. Russia’s annualised inflation is now almost 9% and its central bank has pushed up the main interest rate to 9.5%, with expectations it will soon go to 10%. In the UK, inflation reached 5.5% in January, exceeding expectations. Gas and electricity prices in the UK are currently forecast to rise by 50% in April, which will push annualised inflation beyond 7%. In the Eurozone annualised inflation in January hit a record 5.1%, primarily driven by soaring energy costs, which rose by more than 28%. Interest rates in the zone – currently at 0.5% – have not moved since 2011.

For some financial commentators, such as the US stock broker Peter Schiff, the most likely outcome of this apparently uncontrolled inflation is stagflation: “there is no interest rate that the Fed could put to fight inflation that the economy could withstand. If the Fed has to fight inflation, we not only have a massive recession, and a crash in the stock market and in the real estate market, but we have a much worse financial crisis than the one we had in 2008”. The US government has persisted in holding taxes low while increasing spending – not least on costly wars – which has resulted in the kind of structural deficits now seen. In the view of one seasoned market observer, “the advanced countries are all in the same boat. They did not take the action they should have taken last year to control inflation before it set in. Share markets have been losing trust in the wisdom of central bankers. There is a danger they end up doing too much too late”.

How can individuals protect themselves against the creeping toxin of inflation? In the US, your Dollar is currently losing some 7% a year of its purchasing power; in the UK, the Pound is losing around 5%. It’s a commonly held view that interest rate hikes are negative for the gold price but that isn’t necessarily the case; through much of the 1970s, gold prices rose sharply, while interest rates rose. And the 1980s saw declining interest rates, yet a bear market in gold.

The bottom line is that fiat currencies are steadily losing value and have been for years. The notes you carry and use are unbacked by anything except the promise of a government. That promise has since the financial crash of 2008 felt increasingly precarious – do we trust the ability of central banks and governments to safeguard our welfare? As distrust has grown, so too have efforts to move beyond fiat currencies. The development of cryptocurrencies, supposedly beyond the control of any individual (although obviously not beyond the influence of celebrities) is one such effort.

But with some 17,000 such ‘currencies’ in existence it’s difficult to envisage any one of those become so ubiquitous as to take on the full roles of currency, although Bitcoin is having a good go. There is however an easier, simpler, and speedier option to either fiat money or the complexities of cryptocurrencies – gold, which has been used as money for centuries. Using gold as money has become simplicity itself with Glint. Gold’s credibility is never on the line.

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.