Fiat currencies headed for the trash can?

“Cash is trash” said Ray Dalio, founder of the US-based investment firm Bridgewater Associates, which manages around $160 billion, in January last year. His sceptical view of fiat currencies came at 2020’s global cocktail party for the great and the good, the World Economic Forum in Davos, Switzerland. “You have to have balance… I think you have to have a certain amount of gold in your portfolio” said the billionaire. Can’t disagree with that.

Rapper Dan (Dan Sur), a Mexican musician, has used his head to load up with gold. Dan has told his 1.9 million TikTok followers that he has become the first rapper (will there be more?) to implant gold chain hooks into his scalp. “This is my hair. Golden hair,” he said.

You don’t need to follow Rapper Dan’s lead. But Dalio has a point. Fiat currencies are simply bits of paper that a government declares has value. Something becomes ‘trash’ if there’s so much of it around that no-one values it any more. That’s why people fling confetti at weddings; it’s only purpose is to throw it away. The US Dollar supply has grown fantastically in the last few months; is it becoming confetti?

By the end of 2020, one in five Dollars had been newly created by the US Federal Reserve. This massive creation of fiat money was part of the Fed’s ‘quantitative easing’, or QE for short. Cash can be created on a whim.

The Fed first used QE between December 2008 and October 2014; the Covid-19 pandemic and the worldwide government shutdowns saw the Fed re-start QE. Since June 2020, it has been buying $120 billion of assets a month.

QE has become the main tool of central bankers — not just at the Fed — who are alarmed at slow or zero economic growth. This newly-created money is meant to dribble through the economy, like coffee dripping through a filter, until it reaches and refreshes us all. It fails.

Source: katusaresearch.com

The Fed is not alone — the Bank of England (BoE), the European Central Bank, and others have all created more fiat currencies at a similar rate. The BoE by the end of this year will own £895 billion ($1.24 trillion) of government and corporate bonds, thanks to its own QE. That £895 billion is about 40% of the UK’s gross domestic product. The European Central Bank has its own version of QE, the pandemic emergency programme or PEPP, which will total some €1.85 trillion ($2.19 trillion).

Does QE work? Apparently not — all it seems to do is make the rich richer. The money created through QE buys government bonds from the financial markets; so it goes directly into the financial markets, boosting bond and stock prices.

The BoE estimates that its first bout of QE boosted those prices by around 20%. In the UK, 40% of the stock market is owned by the wealthiest 5% of the population, so while most families saw no benefit from QE post-2008, the richest 5% of households were each up to £128,000 ($177,313) better off.

The BoE estimates that it takes £375 billion ($519 billion) of new money just to create £23–28 billion ($32-$39 billion) of extra spending in the real economy. It’s a very ineffective tool; it relies on boosting the wealth of the already-wealthy and hoping that they increase their spending.

But instead they tend to the extra fiat currencies on investments or savings — further boosting already inflated asset prices. In the past 50 years, the personal savings rate in the US averaged about 8%. In 2020, it soared to 34%. A lot of the Fed’s newly created cash went into equities. A record $120 trillion (£87 trillion) was traded on US stock exchanges in 2020, 50% higher than in 2019.

In a report on QE published in July this year, the UK House of Lords Economic Affairs Committee said QE is “an imperfect policy tool” which helped prevent a recurrence of the Great Depression in 2009 but has “exacerbated wealth inequalities”. The upper house of the British parliament was talking about the UK’s QE, but what it said stands for QE everywhere. The BoE, said the report, was “addicted” to QE. The Fed, the ECB, and other central bankers are all addicts to QE. Like all addictions, giving up — tapering — will be hard.

Inflation turns cash to trash

Many people in the US Federal Reserve will be back-slapping this week. The annualised headline inflation rate rose in August by 5.3%, dropping by a whole 0.1% from June and July. Hurrah! Crisis averted. We can carry on producing more new dollars and keep markets happy. In the UK, consumer price inflation in August rose to 3.2% on an annualised basis, 1% more than the Bank of England’s target.

But your Dollar in 2022 will buy you 5% less than this year. Your Pound will get you 3.2% less than in 2021? Even if the official line, that inflation is ‘transitory’, is correct, it may be stickier than we would like. Prices are several per cent higher than they were; and they are not coming down.

‘Sticky’ inflation is just one headache. There are many problems facing central bankers who would like to turn off their QE spigots, and start tapering.

A shortage of workers is just one — a survey of nearly 45,000 employers across 43 countries showed 69% of employers reported difficulty filling roles, a 15-year high. The US economy has five million fewer people employed than before Covid-19 but still there are record job openings.

And then there are the higher costs necessary to hire and keep workers. Amazon, now the second-biggest US private employer, has just announced a 6% pay rise. In some locations, Amazon is paying $3,000 ‘signing-on’ checks as it struggles to find workers.

There’s also the Delta variant, which keeps popping up and prompting fresh lockdowns and creating further supply-chain blockages. The Chinese city of Xiamen, an electronics manufacturing and exporting hub and home to 4.5 million people in the province of Fujian, has just been placed into a tight lockdown as the authorities pursue their zero-Covid policy.

China’s economy is sluggish — retail sales rose by 2.5% in August year-on-year, the slowest increase in 12 months and far below forecasts. Evergrande, the massive Hong Kong-based property developer, is drowning in more than $300 billion of debt and is close to collapse. Its share price has lost 80% so far this year. Millions of people have given the company deposits for new homes that have yet to be built. Real estate accounts for around 30% of China’s economic output. The authorities won’t let Evergrande go bust, but the cost of saving it will be huge — and will be financed by cash creation from the People’s Bank of China (PBOC).

The Amazon wage hike may be deserved but it sets a benchmark. All US workers will now be looking for a minimum $18 an hour. At the start of this year, President Biden was pushing for a national minimum wage of $15 an hour. The benchmark is now 20% higher than he sought. Psychologically, people are adjusting inflation. This changes their behaviour, their expectations.

In several European countries, energy prices are ‘skyrocketing’ and are expected to go up by 20% for domestic consumers, according to Citigroup. China’s producer price inflation rose by 9.5% in August. The spot price of a 40-foot shipping container between Europe and Asia is now more than 500% higher than a year ago. The full impact of inflationary pressure has probably not yet been felt in consumer inflation data.

Bust before boom?

The danger right now is that we are facing a stagnating global economy before the post-pandemic boom has properly got started.

According to Neil Shearing, chief economist at the UK-based economic research consultancy Capital Economics, there is “a whiff of stagflation” in the air. “It’s now clear that recoveries in the US, UK, Eurozone and China have lost steam in recent months”, he says.

During the last stint of QE, in the years following the Great Crisis of 2008, people feared that all the freshly-created money would lead to a much higher rate of inflation. It didn’t, because the money being injected into the system was largely retained by the financial sector to shore up balance sheets and regain profitability.

The macro-economic picture is very different this time around. Banks are well-capitalised; the newly created fiat currencies, like mercury, finds its own channels — going into physical assets like houses, financial assets like stocks and cryptocurrencies, and commodities, the prices for all of which have soared.

While fiat currencies may not exactly be trash, Dalio is right in one sense. Never before has so much new money been created. And never before has it made so little sense to not put that cash — if you have some — to work, by holding physical assets. Including gold, and especially gold that can be used as money, as with Glint.

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

Cash is fast becoming trash; alarmingly, stagflation looks like setting in. Holding cash, fiat currencies in that environment would be like conserving confetti — a wasted opportunity.

Gold is security. Glint, its key. Great ideas never fade.