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Central banks start wobbling

Trade wars quickly spill over into currency wars, as evidenced in what’s happening to the Chinese currency right now. Last week President Donald Trump announced he will from September impose 10% tariffs on the remaining $300 billion of Chinese imports, on top of the 25% tariffs already imposed on $250 billion of Chinese goods. Then on Monday 5 August China retaliated by allowing the Renminbi – China’s currency – to slip below 7 to 1 US dollar for the first time since May 2008. The Renminbi is allowed to traded 2% either side of a fixed point set by the People’s Bank of China (PBoC); on 5 August the PBoC set that point at 6.9225, the lowest since last December.

Immediately global equity markets plunged and there were forecasts of the depreciation spreading among other Asian currencies, like a stone rippling in a pond – or “like a tsunami”. China’s economy is already growing at its slowest since 1992 and the effective ban by the USA of Chinese imports – and the retaliatory measures, such as China’s ban on some US grain imports, and now the  devaluation of its currency – are indications of how desperately China is trying to fight the US President’s tariffs. The drop in the Renminbi will give China’s exports a short-term boost but capital is flowing out of China – and the country’s citizens will face higher inflation. We need to hope that the aphorism by the 19th century French economist Frédéric Bastiat does not come to pass: “When goods do not cross frontiers, armies will.” Will the US Treasury’s largely symbolic declaration of China as being a “currency manipulator” retrospectively be seen as a first shot moment?

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Many key central banks are applying more aggressive monetary action and talk in the markets is all about when – not if – the next global recession will arrive. The US Federal Reserve has cut interest rates by 25 basis points and it is running out of bullets to fire against the threat of a slowdown. Many of the tools that have been used are failing, and with interest rates now close to an effective bottom it is a dangerous position to be in, where we could see interest rates turn negative, as in Europe. Given the monetary policy shift, one could see central banks across the world running on empty very soon. Investors around the world are far too concentrated in highly inflated asset classes and should be shifting into gold, which has stability and certainty during times of tumult. Highly inflated asset classes are unlikely to be good real returning investments and those that will most likely do well are those that perform when the value of money is being depreciated, while domestic and international conflicts are significant. This points to gold and makes it a significantly viable investment. It is now easier than at any time in previous history to inject some stability into your personal portfolio, through a Glint Mastercard.

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