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Category: Soap Box

Soapbox: Austrian school economics: individualism rules

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Given that Glint shares some aspects of the Austrian school of economics – above all a scepticism towards fiat currencies – the very briefest of expositions of the Austrian school might be appreciated. So here goes; if anyone objects that some point has been missed, my apologies; but even a remote acquaintance with this ‘school’ reveals that the number of pupils and their shades of opinion rival the number of tadpoles in a pond in spring.

For the original creative mind behind this ‘school’, Carl Menger von Wolfensgrün, the ultimate source of value is the human mind, the individual, and his/her choices. Carl Menger was born in 1840 in what is today the city of Nowy Sącz in southern Poland, then part of the Austrian empire. Menger started his career as a journalist; observing a discrepancy between what his school of theoretical economics had taught him about price determination and what he found in everyday life, he embarked on a study of political economy. Most people today know of the Austrian school of economics thanks to Friedrich Hayek, whose work was admired by the former British Prime Minister, Margaret Thatcher – which is one reason perhaps why his name is so reviled in some quarters.

In 1871, Menger published his Principles of Economics. This argued something that today seems fairly conventional, but which was radical in late 19th century economic theory – that the economic values of goods and services are subjective in nature; what is valuable to you may not be valuable to someone else. He also held that that with an increase in the number of goods their subjective value for an individual diminishes. Menger’s “marginal utility” theory held that utility, usefulness, is not constant but tends to diminish the more we have of something – the first piece of chocolate gives more utility than the 10th piece. This he called ‘diminishing marginal utility’.

Menger’s thought influenced many later thinkers, such as Ludwig von Mises, Eugen von Bohm-Bawerk, Hayek, and many others. The Austrian school – which was never a school but rather an agglomeration of individuals who shared ideas and views to a greater or lesser degree – is that economic laws of universal application are a priori, i.e. they do not depend on experience. It’s a matter of a priori knowledge that 2 + 2 always equals 4; it does not depend on anyone’s view or argument.

This belief in the centrality of a priori thinking is one of the key ways Austrian economics departs from classical and Keynesian (named after John Maynard Keynes) economics. These other schools of economic thought preferred inductive or empirical reasoning, the drawing of general conclusions from specific observations.

Followers of the Austrian school believe that markets should be free from government interference; they hold that value is determined by the importance an individual places on a good for the achievement of his/her desired ends. Value is not a function of how much labour has been spent on producing X, but on how important it is to an individual. “Menger argued that economic analysis is universally applicable and that the appropriate unit of analysis is man and his choices. These choices… are determined by individual subjective preferences and the margin on which decisions are made. The logic of choice…is the essential building block to the development of a universally valid economic theory”. For Austrian school economists, individualism rules.

Austrian economics and money

Since Menger, the Austrian school of economics has, like all schools, fragmented. Austrian economics today exists on a spectrum that ranges from extreme libertarianism (and a rejection of all government rules) to a form of libertarianism that espouses both individual freedom and social equality. While Ludwig von Mises was an early and consistent advocate of the gold standard, Hayek was lukewarm towards a gold standard; his prime concern was to see money supply removed from centralised control, as he saw such control as inevitably leading to inflation and bad investment decisions.

This is the one consistent thread running through all adherents to this school – a distrust of governments, central banks, and fiat money. Austrian school economists generally embrace the idea of free and unfettered markets, with only minimal government interference, although some founders, such as Friedrich von Wieser, advocated an extensive welfare state.

Austrian economics gained greater credibility when Friedrich Hayek, an ardent defender of free-market capitalism, an adherent of Austrian economic theories, and a major 20th century political theorist, became the joint winner of the Nobel Prize for Economics at the age of 75, in 1974.

Hayek is not to everyone’s taste, not least because of his hostility towards socialism (although he opposed all forms of totalitarianism). Hayek saw economic control as a form of totalitarianism: “Economic control is not merely control of a sector of human life which can be separated from the rest; it is the control of the means for all our ends”, he wrote. Born in Vienna in 1899, Hayek fought in the First World War, survived the Spanish flu, and experienced the hyperinflation in Austria, which reached 1,426% in 1922. Hayek’s opposition to the economics propounded by J.M. Keynes – which essentially supports an expansionary fiscal policy, i.e. greater government spending, especially at times of crisis – was coloured by his personal experience of Austria’s hyperinflation. According to Nicholas Wapshott, who has written about both Keynes and Hayek, Hayek believed that “that those who advocated large-scale public spending programs to cure unemployment were inviting not just uncontrollable inflation but political tyranny”.

Probably Hayek’s most famous book is The Road to Serfdom, a sustained attack on central planning and totalitarianism. In his early life he supported the idea of the gold standard, the backing of a national currency with gold. He wrote that “with the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people”.

But his views evolved. In 1976, he published The Denationalization of Money, which advocated the establishment of competitively issued private moneys. He did not think this would lead to monetary chaos; in his view, markets would, of their own accord, converge on one or a limited number of monetary standards. And while Hayek preferred that most activities should be in private hands and kept well away from the state, he did nonetheless see the need for a limited role for government, to perform tasks that markets could not, such as banning poisonous substances and preventing crime, or providing a basic safety net through a comprehensive system of social insurance. He wrote: “there can be no doubt that some minimum of food, shelter, and clothing, sufficient to preserve health and the capacity to work, can be assured to everybody… Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance, where, in short, we deal with genuinely insurable risks, the case for the state’s helping to organize a comprehensive system of social insurance is very strong”. Individualism rules – but society’s weak and sick should be taken care of.

From Hayek to Bitcoin

Ultimately Hayek came to regard his idea for the denationalisation of money – which, he posited, would take money supply into private hands and thus avoid the worst excesses of centralised control, such as increasing fiat money supply – as hopelessly utopian.

That did not mean however that he had fallen in love with governments. He said in an interview in 1984: “I don’t believe we shall ever have good money again before we take it out of the hands of government… We can’t take it violently out of the hands of government. All we can do is by some sly, roundabout way introduce something they can’t stop”.

Hayek’s words were prophetic. The sly, roundabout way had to wait for technological development, in the form of blockchain. Cryptocurrencies seem to be a logical extension of his idea of the privatisation of currencies, an idea he put into print in 1976 with his Choice in Currency: a way to stop inflation. Like many others, Hayek was conscious of how inflation over time drastically erodes the purchasing power of fiat currencies. Since 1913, the US Dollar has lost more than 96% of its value. Cryptocurrency supporters, like those of us who argue for the use of gold-as-money, have realised that the massive expansion of the supply of fiat money in recent years, since the Great Recession of 2008, has fuelled inflation and built up debts – the US national debt is now $30 trillion. The average lifespan of a fiat currency, according to one source, is about 35 years.

Love him or hate him, Hayek still has relevance today. His warnings about totalitarian powers and their control over what constitutes money will only resonate more, the more central bank digital currencies (CBDCs) enter our lives. In today’s fast-evolving financial world, where cryptocurrencies and gold are tussling with fiat currencies, Hayek is worth revisiting – and not reviling. 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: What kind of pain do you prefer?

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“I aim to bring inflation back down to target such that workers can enjoy real wage gains from their labour”. Fine words from Catherine Mann, a member of the Bank of England’s (BoE) Monetary Policy Committee, which sets UK interest rates.

But, according to calculations by Bloomberg, if she wants to bring inflation back to its targeted 2% this year, the BoE would need to raise interest rates to such a level that 1.2 million people would be made unemployed.

Even if the nominally independent BoE had the appetite for such aggressive action, it would be politically suicidal for the government. The BoE has just doubled interest rates again, to 0.5% – and now forecasts inflation will reach 7.25% in April. The British public is already bracing itself for a rise in National Insurance (which employers will also have to pay and are already threatening to push up prices to cover the cost) and household energy costs are likely to rise by 50% in April. Half of gas suppliers in the UK market have already collapsed, as they are forced to pay high wholesale prices but are limited as to what they can charge. Many people in the UK are facing a ‘heat or eat’ dilemma ; pushing people out of jobs after two years of sporadic pandemic lockdowns would be devastating. But so will inflation if it’s not curtailed.

The BoE more than doubled the UK’s interest rate in December, pushing it from 0.1% to 0.25%, as the headline inflation rate rose to an annualised 5.1% (it’s now 5.4%, the highest consumer price index rate since May 1992). Back in the mists of time the BoE had a target of 2% for inflation, but inflation has now clearly escaped the bank’s control. Not only that. Inflation could be “stronger than what is generally expected” according to Nicolai Tangen, the CEO of Norway’s $1.3 trillion sovereign wealth fund. The same opinion is held by economists at BlackRock, the world’s biggest asset manager.

BlackRock’s thinkers believe that we’re “in a new market regime”, by which they mean that the current inflation could prove to be ‘stickier’ than we hope. Alex Brazier – who left his post as executive director of financial stability, strategy and risk at the BoE early in 2021 and later joined BlackRock – summed up for Bloomberg this week the dilemma facing the US Federal Reserve, a dilemma faced by all central bankers: “The Fed has a hard choice — live with inflation or destroy the overall level of demand in order to get rid of supply constraint inflation… The Fed would have to raise rates so high it would create a recession big enough to result in a double-digit unemployment rate”.

In the US, the consumer price index rose to an annualised 7% last year, the highest since June 1982, the year that the movie E.T. was released and Argentina and Britain went to war in the south Atlantic.

Push up interest rates and conventional economics says that might curb inflation, but higher interest rates could slam the brakes on the economic recovery. They would also ripple around the world and hurt developing countries. That’s because many poorer countries have borrowed in US Dollars, exposing them to two risks – bigger interest payments if rates rise, and a weakening of their local currency as the Dollar strengthens (as it will on a rates rise). In the Financial Times, Martin Wolf observed: “Losing control over inflation is politically and economically damaging: restoring control usually requires a deep recession…the Fed continues to ladle out the punch, even though the party is turning into an orgy”.

If you are a citizen of an emerging economy, or a member of a developed one, the big question right now is – what kind of pain do you prefer?

Lingering inflation

Paul Volcker, chairman of the US Federal Reserve between 1979 and 1987, said: “It is a sobering fact that the prominence of central banks in this century has coincided with a general tendency towards more inflation, not less… if the overriding objective is price stability, we did better with the nineteenth-century gold standard and passive central banks, with currency boards, or even with ‘free banking.’ The truly unique power of a central bank, after all, is the power to create money, and ultimately the power to create is the power to destroy”.

The creation of fiat money – banknotes and coins deemed to be legal tender – has exploded during the two years (and counting) of the Covid-19 (and its variants) pandemic. The latest newsletter from the US investment management firm Bridgewater Associates says US monetary and fiscal policies have provided a “massive adrenaline shot of money and credit that is now producing a self-reinforcing cycle of high nominal spending and income growth that is outpacing supply, producing inflation”. From the start of the pandemic to October 2021 US household wealth increased by $32 trillion, although some did rather better than others.

For some, this money creation is the source of inflation. According to Mihai Macovei, writing on the Mises Institute website, “the current surge in inflation… is primarily due to soaring consumer demand fuelled by excessive growth stimuli and monetary creation… We are witnessing a consumption boom and persistent distortions in the structure of production, all bearing a striking resemblance to the boom that preceded the Great Recession”. Others take a much more relaxed view and point out that the Fed printed just $185.7 billion in 2020.

But this is misleading. Printing physical notes is not really how the Fed has created trillions of Dollars during the pandemic years. Instead, the US Treasury digitally creates bonds, which are then bought by a variety of domestic and foreign investors, including the Fed, adding to the US national debt, which is now very close to $30 trillion, the highest ever. While the US does not physically create super tanker amounts of fiat money, it certainly facilitates the lending of new money to the federal government. This is how President Joe Biden could ‘afford’ his multi-trillion Dollar ‘stimulus’ programmes; it’s borrowed.

The US Federal Reserve and the US Treasury Secretary, Janet Yellen, spent much of last year trying to persuade us that inflation was ‘transitory’. That narrative had bitten the dust by the end of last year. Meanwhile the US debt rose to levels unseen since the Second World War, and is still climbing. Inflation has only one major benefit – it makes interest payments on that debt mountain less onerous.

Wage-price spiral

The Fed has a dual mandate – to achieve price stability and maximum employment. The US labour market is now very tight; the prime-age non-employment rate, unemployment rate, number of unemployed people per vacancy and quit rate are all stronger than the 2001-2018 average.

Yet real (i.e. inflation-adjusted) earnings in the US are around 4% below trend. Prices in the UK and on the other side of the Atlantic are generally rising faster than wages. The fear of governments and central banks is a return to the 1970s, when the phrase “wage-price spiral” became familiar.

One big difference between the 1970s and today is that the power of trades unions is not what it was. Workers do not have the same organised ‘muscle’ to enforce demands for higher wages. According to the website, by last October America’s billionaires’ wealth had surged by 70% during the pandemic; the 745 billionaires held at that time $5 trillion, compared to $3 trillion held by the bottom 50% of US households. In the months before mid-term elections in November, President Joe Biden can ill afford inflation to continue unchecked – but equally he cannot risk throwing the fragile post-Covid economic recovery under the bus. As BlackRock argues, the risk is high: “policy cannot stabilize both inflation and growth at the same time: it has to choose between them. In other words, central banks have to either accept higher inflation or destroy demand to rein in inflation. Given the historical relationship between unemployment and inflation, if central banks had sought to keep inflation close to 2% amid the supply constraints experienced in the restart, this would likely have meant needing to drive the unemployment rate up to nearly double digits”. But doing nothing is not an option; watch this space.

Soapbox: Digital Dollars recede into the future

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Soapbox Digital Dollars

What’s behind the extreme swings of global markets?

On Monday this week, the Dow Jones Industrial Average fell 1,000 points, only to close about 100 points up on the previous day. The S&P 500 closed on 20 January below its 200-day moving average for the first time since 2020. On Monday it fell by as much as 4% but closed slightly higher. The Nasdaq is still headed for its biggest one-month loss since October 2008. The mini-flight from those assets perceived to be risky (tech stocks were badly hit) spilled over into cryptocurrencies. The leading crypto – Bitcoin – plunged by 50% from its peak of almost $69,000 2 ½ months ago. According to Bloomberg, “the most-speculative stuff is leading the way down… Cryptocurrencies were (and are) even more vulnerable to a sudden shift in investors’ faith”. Gold, however, rose, by around 2% in Dollar and Sterling terms.

Bitcoin’s nose-dive is bad news for El Salvador, whose President, Nayib Bukele, uses his mobile to trade public funds for Bitcoin. Some Salvadorans have claimed that money had gone missing from their digital wallets linked to Bitcoin, which has been legal tender in the country since last year. The International Monetary Fund (IMF) has urged El Salvador to drop its Bitcoin dalliance, but that message is likely to fall on deaf ears. El Salvador has been hoping for an IMF handout of $1 billion, but maybe more generous and less exigent donors – China, Russia maybe? – will step up.

Was it the rising tension between Russia and NATO over Ukraine? Was it an uncomfortable feeling that the US economic recovery is shakier than assumed? Or was it a sense among investors that finally the US Federal Reserve has to get serious about inflation – now shockingly around 7% officially – and will therefore raise interest rates several times this year? Shockingly, the Federal Open Market Committee (FOMC, the policymaking arm which sets interest rates) on Wednesday this week said it would leave the key interest rate at its record low of 0%-0.25%; it might start rate hikes in March.

According to a Gallup poll published this week almost 80% of Americans expect inflation to increase over the next six months – and, as we know, expectations about inflation often become a self-fulfilling prophecy. When the Fed eventually ends its purchases of Treasury and mortgage bonds borrowing costs will become higher, in addition to higher prices for everything else. And now that the IMF is pencilling-in global economic growth slowing this year to 4.4% (from an estimated 5.9% in 2021) the possibility is that with too much monetary tightening the US economy will suffer. The Fed is “at risk of tightening policy into a slowing economy” says one seasoned observer. The greatest impact of higher interest rates will be on – the US government, the world’s largest borrower, with almost $30 trillion in debts. In the US fiscal year of 2021, the federal government spent more than $562 billion in interest on this debt.

As some air squeaked from the ‘bubble of everything’, the US Federal Reserve published its white paper on a possible Dollar Central Bank Digital Currency (CBDC). CBDCs share their underlying technology – blockchain – with cryptocurrencies, but they differ in just about everything else. One commentator, disappointed at the report’s ‘on the one hand, on the other-ness’, dismissed it as “lame”. The report said: “the Federal Reserve does not intend to proceed with issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law”. The Fed’s report changed the CBDC landscape little, if at all. It stopped short of calling for a CBDC to be introduced, saying instead that it wants a public debate about it, taking in the views of Congress and other ‘stakeholders’. Digital Dollars may be on their way, but not yet.

While the Fed was publishing its report on The US Dollar in the Age of Digital Transformation, in the UK the upper house of Parliament, the House of Lords, published its own CBDC analysis, with the rather more sceptical title Central bank digital currencies: a solution in search of a problem?

The House of Lords report notes that more than 90 central banks are exploring CBDCs and thinks that’s because central banks are worried that big tech companies, such as Meta/Facebook, could issue their own digital currencies to the users of their vast networks, giving them tremendous market power. And there is the decline in the use of physical cash, which may undermine public confidence in the monetary system.

But a UK CBDC may pose significant risks, it adds. “These risks include state surveillance of people’s spending choices, financial instability as people convert bank deposits to CBDC during periods of economic stress, an increase in central bank power without sufficient scrutiny, and the creation of a centralised point of failure that would be a target for hostile nation state or criminal actors”.

Crypto crash

“When there’s no stability, people look for alternative solutions”. That quote deserves to be engraved on the heart of every central banker and government finance minister. It belongs to ‘Orhan’, said to be a 39-year-old Turkish web security expert, who was interviewed in the Financial Times about the surge in cryptocurrency trading in Turkey, which in 2021 was an estimated 10 times greater than 2020. The temptation of cryptocurrencies for Turks had been that it was seen as a protection against the declining purchasing power of the Lira, the country’s fiat currency. By the end of 2021 the Turkish lira had lost around 40% of its value against the US Dollar. With the slide in cryptocurrencies, that protection now looks weaker.

Russia’s central bank, which is planning its own (rouble) CBDC, has now proposed a ban on the use and creation of cryptocurrencies on Russian territory, because, (it says) of threats to financial stability, and to protect citizens’ wellbeing and monetary policy sovereignty. Cryptocurrencies were given legal status in Russia in 2020 but were barred from use as a means of payment. Following China’s ban on all cryptocurrency transactions and mining last September, Russia became the third-biggest cryptocurrency miner, after the US and Kazakhstan.

Cryptocurrencies had a good pandemic, achieving a global market value estimated at $3 trillion at the peak (now halved), thanks in part to the massive monetary stimulus from the US administration. One commentator suggests that “over the last five years, its massive price gains appear to be driven by a heady mix of speculation, network effects, and hype”.

Meanwhile, Russia’s central bank has been steadily building up its official gold reserves, which now are higher than its US Dollar reserves. The rouble has slid to around 79 to the Dollar, its lowest since late 2020. On the other hand Russia is very happy that one of its major exports, crude oil, has now hit $90 per barrel, the first time that level has been seen in seven years.

Threats to global payments

To Winston Churchill is attributed the saying “to jaw-jaw is always better than to war-war”; we must hope that Presidents Putin and Biden agree. They have much more in common than they perhaps realise, not the least of which is the international SWIFT (Society for Worldwide Interbank Financial Telecommunications) payments’ system, which is a secure communications platform used by financial institutions, although it does not hold or move money and securities. Each year it facilitates trillions of Dollars in cross-border payments; it is trusted by all.

The 11,000 SWIFT member institutions sent more than 35 million transactions per day through the network in 2020. Prior to SWIFT, Telex was the only available means of message confirmation for international funds transfer. Telex was slow, insecure concerns, prone to human error, and lacked a unified system of codes to name banks and describe transactions, which SWIFT has had since its formation in 1973.

President Biden has dropped strong hints that cutting Russia off from the SWIFT system might be one of the sanctions imposed against Russia if it invades or conducts and incursion into Ukraine. SWIFT is governed by Belgian and EU law, so it could ignore the US, but the US might indulge in some arm-twisting to get it to cooperate. Cutting Russia out of SWIFT is a ‘nuclear’ option but one that Russia might feel it can shrug off; like the US’s other major ideological opponent, China, Russia has been busily constructing its own domestic financial communications system, called the System for Transfer of Financial Messages (SPFS), with more than 400 member banks. By 2020 the SPFS handled 20% of all domestic financial communications. China’s SWIFT alternative is called the Cross-Border Interbank Payment System (CIPS). But China is backing more than one horse; a year ago it became known that China had created a new entity, Finance Gateway Information Services, 55% of which is owned by SWIFT and the other 45% by China’s central bank and other Chinese entities, including CIPS. Finance Gateway is charged with information system integration, data processing and tech consultancy.

Reserve status fight

Both Russia and China are clearly taking steps to shore up their financial ramparts against any high-level sanctions by the US. While the rouble can only dream of achieving global reserve currency status, that’s not true of China’s yuan. Co-opting SWIFT, by approaching with stealth, China is playing a much cannier game than seeking outright naked conflict.

At Beijing’s Winter Olympics starting next week, China’s own CBDC, the e-yuan, will be much in evidence. Despite its zero-Covid policy, the number of athletes and visitors will be large; they will all be encouraged to use the CBDC, for taxis, luggage-trolleys, restaurants. And meanwhile, digital Dollars recede into the future.

Where does all this leave gold? Sitting comfortably, I’d propose. Gold has been an internationally accepted form of payment for centuries; it has undergone periods of inflation, deflation, cold wars, hot wars, government hostility and the mockery of the conventionally-minded. And now, with Glint, gold finally has its very own super-fast payments system.

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: “In the name of God, go”

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Soapbox God Trust No One

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

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

But telling the truth is what holds our societies together.

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

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

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

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

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

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

Declining trust

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

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

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

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

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

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

Our finances depend on truth

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

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

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

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

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

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

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline. Yet last year’s decline of about 4% in the Dollar price of gold – the first decline after two stonkingly good years – still beats the 7% decline in purchasing power of fiat Dollars.

Soapbox: Cryptocurrencies rise – so does fraud

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Cryptocurrencies Soapbox

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

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

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

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

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



What is ‘DeFi’?

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

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

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

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

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

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

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

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

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

Regulating the unregulated

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

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

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

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

Officialdom moves in

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

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

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

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

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


Soapbox: Misinformation is everywhere

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Misinterpretation Fact Fake Soapbox

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

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

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

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

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

What is the new normal?

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

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

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

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

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

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

Interest rates will rise this year

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

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

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

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

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

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

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

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

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

Soapbox: Character building

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

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

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

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

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

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

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

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

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

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

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

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

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

Glint’s Editor, Gary Mead, interviewed Ron Wayne in December 2021, at a time when inflation, low interest rates and rising national debt were driving people to look at alternative currencies like gold, silver and crypto, to save and spend their wealth. At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

Soapbox: Central bankers are fresh out of ideas

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Soapbox Central Bankers Inflation

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

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


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

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

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

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

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

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

Transitory turns durable

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

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

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

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

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

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

A delicate balance

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

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

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

Soapbox: None of us are far from Turkey

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Soapbox Turkey

“Our money has no value anymore”.

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

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

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

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

Root of the problem

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

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

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

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

Authoritarianism is bad for growth

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

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

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

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

Soapbox: Kick the can down the road

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

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

Soapbox US Debt Graph

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

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

The clock ticks loudly

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

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

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

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

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

Soapbox Federal Debt Graph

We’ve been here before

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

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

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

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

Gold for Christmas

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

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

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