Clinging at straws

The Bank of England (BoE) has since 1998 supposedly been independent from government. That fiction was first exposed first in 2008 when the Great Financial Crash led the government of the day to 'influence' the BoE to undertake Quantitative Easing (QE), and again in 2020, when Covid-19 struck and another round of QE saw the government inject another £400 billion into the economy via the BoE.

Rachel Reeves, the current British Chancellor of the Exchequer (Treasury Secretary in the US) has now confirmed the fiction by taking credit for the BoE's latest interest rate cut, of 0.25%, taking the base rate to 4%. She says the rate cut is creating stability and that "by bringing stability back to the country’s finances we’re putting more money in people’s pockets."

This is untrue in so many ways it's difficult to know where to start. For one thing the BoE also predicted that headline inflation would not be 3.75% in September as it estimated earlier this year, but 4%. Food prices are continuing to rise. Food inflation could be 5.5% this year. Around 10% of a family budget is spent on food. The Food Standards Agency says the poorer you are the more of your income on food to maintain a healthy diet. For the poorest 20% of UK households it rises to around half of disposable income.

US food more expensive too

In the US food-at-home prices are continuing to rise. The US Department of Agriculture says eating at home will cost 2.2% more this year than last. For the 50-60% who eat at restaurants at least once a day food inflation for them is going to rise 4% this year .

Anecdotally in both the UK and US people are reporting prices going much higher than official statistics suggest, for items such as chocolate, where 'shrinkflation' (smaller sizes at the same old price) is rampant.

We need to remember that the US and UK share the same ambition for inflation - a target rate of 2%/year. That target is now looking increasingly impossible. In the US Personal Consumption Expenditures (PCE) inflation is now 3%, with little inflationary impact as yet factored in from tariffs.

Underlying very sticky inflation is the slowly darkening jobs' market in both countries. UK unemployment has risen to 4.7%, the highest in four years, while the number of job vacancies has been in free-fall for three years. US unemployment is almost 4.3%; jobs growth is operating at "near stall speed" says one board member of the US Federal Reserve.

What to do in stagflation?

Economic growth combined with continued inflation is a disaster for governments and individuals. America's tariffs inevitably will slow global growth and put up prices for all imports to that country, from cocoa to cars. On the bright side, inflation erodes the real cost of servicing debt. But those debts may well go up.

While inflation erodes the purchasing power of fiat currencies, slowing economic growth makes governing more difficult, as falling tax revenues put more strain on government spending. That's problematic for Rachel Reeves, who faces a 'black hole' in the UK's public finances of as much as £51 billion ($68.5 billion) and will probably soon have to break an election pledge not to increase taxes. It's embarrassing for the government, which told voters in July 2024 it inherited from the previous government a 'black hole' of £20 billion.

In both countries welfare benefits are running higher than tax revenues can sustain. The US non-partisan Peterson Foundation has highlighted that Social Security and Medicare recipients are facing a 23% and 11% cut in benefits by 2033 without reform, affecting 71 and 79 million of beneficiaries respectively.

Reeves' mantra has been that she is going "further and faster" to deliver economic growth. It's clear that mission has failed. In America the pledge to "make America great again" is still being tested. If they continue on their current tracks neither country will have any choice but to print more money to pay the bills, or try to borrow more money from doubtful lenders - and that won't come cheap.

The future therefore is one in which fiat currency debauchery is baked into the system. Novel assets such as cryptocurrencies hold out the prospect of freedom from government interference while they delude the gullible into thinking they can be used as money.

Far more sensible to hold and use gold as money with Glint. Gold has been an asset for centuries; today it can be used via Glint to buy everything from a sandwich to a Subaru. And for those who just want to save it, gold is the best performing asset in past stagflationary episodes.

For UK clients: At Glint, we make every effort to demonstrate a balanced conversation between gold, silver, 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.

For US clients: Graphic representations of value are for illustrative purposes only. The Glint debt card is issued by Sutton Bank, member FDIC. The sale, purchase and storage of precious metals are offered by Glint and not Sutton Bank. Your investment in precious metals through Glint is

·        Not insured by the FDIC.

·        Not a deposit or other obligation of, or guaranteed by, Sutton Bank.

·        Subject to investment risks, including the possible risk of loss of the principal amount invested.

All investments involve risk, including possible loss of principal. The value of precious metals is affected by many economic factors, including but not limited to the current market price, demand, perceived scarcity, and quality of the precious metal. Precious metals can increase or decrease in value. Past performance is not a guarantee of future results. As such, investing in precious metals may not be suitable for everyone.