The free money delusion

What's not to like about free money? The world got used to government give-aways during the recent pandemic. Like any other drug, addiction to free money quickly followed. Universal Basic Income (UBI) is in today's world has been given a leg-up by Covid; it's now digging trenches for the long haul. In June the ruling African National Congress (ANC) announced a week before South Africa's general election its intention to transform the state's Covid grant into a UBI, paying a regular sum to all people between the ages of 18 and 59 within two years, with no condition to be seeking work. The scarcely concealed bribe still lost the ANC its majority. Kenya runs the world's largest UBI scheme to date, giving around 5,000 people about 75 cents a day since 2017.

The UBI idea is taking a hold among richer nations too. In the UK the University of Bath runs something called the "Bath Beacon" which "brings together expertise around Universal Basic Income" according to its website. American universities have established "research centers" which are thinly disguised lobby groups on behalf of UBI. A "guaranteed income" is championed in the US by a group calling itself "Mayors for a guaranteed income" (MGI), which proclaims on its website "this is our new deal moment", giving its mission as advocating for a "guaranteed income - direct, recurring cash payments - that lifts all of our communities, building a resilient, just America". Think tanks have been busily producing papers in support of UBI; there have been some 160 tests globally of a UBI according to the Stanford Basic Income Lab. Most are agreed that poverty and inequality are problems needing solution; but is the state responsible for that solution?

Bangkok bungle

The latest nation to join the 'free' money trend is Thailand, population around 72 million. Thailand's ruling Pheu Thai party is promising to give away to 45 million of its citizens the equivalent of $14 billion, worth about Baht 10,000 ($300) each. This is roughly equivalent to a month's salary for a minimum wage earner. Originally intended to be distributed via a digital 'wallet', this will now be a cash handout. The Prime Minister, Paetongtarn Shinawatra, says the first phase of the handout will benefit some 14.5 million people and that there will be "many more stimulus policies following this one." According to the country's minister of finance in July "every government must create debt..." The handouts will go to people defined as lower-income, with incomes not exceeding around Baht 840,000 (some $20,000/year). The thinking behind the cash giveaway is that it will stimulate economic growth. But will it?

To the printers!

There are restrictions as to what the free money can be spent on - no alcohol or tobacco for instance. The money will come from within the 2024 and 2025 budget, which runs from 1 October 2024 to 30 September 2025. This budget is Thailand's largest on record, with a projected fiscal deficit of Baht 865.7 billion ($24 billion), equivalent to 4.3% of the country's gross domestic product (GDP); this will take Thailand's debt load to around 65% of GDP, close to its self-imposed ceiling of 70%.

The 'free' money will come at a cost. Here's the lesson for other governments of other nations that might be considering following in Thailand's footsteps. The handout is a blunderbuss whereas the government needs to be a sniper. Individuals getting the cash may consider themselves fortunate, but the larger economic effects are uncertain. Printing fiat currency and giving it away will obviously devalue that currency and it will not combat the structural issues that cause poverty in the first place. Lots of paper money sloshing around an economy can stoke inflation. Moreover, there is no guarantee that the money will be spent productively; it may well be shoved under a mattress. Or it may go toward paying down debt - Thai household debt is one of Asia's highest, at more than 90% of GDP.

Inequalities in income reflect inequalities in education and consequent poor access to higher paying jobs. It encourages the belief, which can swiftly metamorphose into a popular demand that the state will always come to the rescue. It can come to the rescue - until markets decide, as they did with the UK government under Prime Minister Liz Truss two years ago, that such unfunded largesse is unsustainable. Such unfunded cash injections as Thailand is starting will give a short-lived economic boost, but printing fiat money to placate populations is a fool's errand.

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.