by Alasdair Macleod, GoldMoney:
This year is likely to see wealth destruction on a massive scale. The reason this is not widely anticipated in financial markets is due to a mistaken belief that interest rates are at their peak and will decline over the year. The reason interest rates will rise is due to the colossal mountain of government debt to be financed and the restriction of commercial bank credit for non-financial businesses, forcing borrowing rates up and guaranteeing an economic slump.
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This article summarises the economic outlook, the consequences for government finances, the fragility of the banking system, and the prospects for financial asset values. All these factors are inter-related to combine in undermining the value of fiat currencies in a widespread flight from credit.
Only direct ownership of gold, which remains legal money despite five decades of US and state-educated economists’ propaganda that it is not, protects citizens from the mounting threat of a collapse in the value of credit.
Introduction
Henceforth, my detailed economic and geopolitical analyses will migrate to my newsletter on Substack (https://alasdairmacleod.substack.com/). I will continue to write a summary introduction for Goldmoney’s readers on Thursdays. My market reports for Goldmoney will be published on Fridays as normal.
Accordingly, this is an opportunity to summarise the economic and geopolitical challenges ahead for all Goldmoney readers and how they affect credit and legal money, which always has been and still is gold. There is little doubt now that many of the problems about which I have been warning readers of this column over the years are coming home to roost, and 2024 could go down in history as a year of enormous economic, political, and social change.
Growing instability in the American, European, and Japanese banking systems has encouraged me to emphasise the distinction between money and credit, a topic which is poorly understood even among economists and bankers. Yet growing financial instability is all about the value placed on credit, characterised by obligations which bear a risk of default. And almost the entire Western economic establishment and even its critics mistakenly think that currency is money, having replaced gold. It is an error leading to dangerous misconceptions.
Protecting personal wealth increasingly depends on understanding the distinction between the two, because hoarding real money without counterparty risk is the refuge from an increasingly likely economic crisis, currently facing what we used to call the advanced economies. The economic distinction is no longer appropriate: China is more advanced in terms of consumer goods production than the old school, and India is rapidly catching up. Even the Third World is rapidly evolving. And after multi-decades of socialism, Peronism, and dictatorships Argentina is leading the way back to free markets, a smaller state, and stabilising her currency.
Our governments dare not follow this unexpected change of direction. The legacy of rapid economic development in the nineteenth century and the wealth created have been squandered. Under the accumulating burdens of various socialist delusions, westerners still think someone else owes them a living and that their governments are morally right to rob the rich to keep them in idleness. You can’t blame them for this indolent attitude when the political class thrives on promoting it. But it is our decline and our fall.
The world is bifurcating into two halves — the declining woke old and the dynamic new. While we in the west are declining at an increasing pace, under the influence of our supposed enemies the rest of the world welcomes an escape from our hegemony. Absorbed in our own delusions, our establishments and their media barely recognise this development. And the defeat that looms in Ukraine over Russia and a worsening situation in Palestine hardly disturbs our complacency.
So violent are our economic prospects becoming and the wealth destruction that will follow that we could end up being rescued from our follies by our former empires and spheres of influence. After all, measured by population and GDP we westerners are now in a decreasing minority. Led by the Asian hegemons, the Middle East, Africa, and Latin America will still be there trading with each other and anyone else who can pay for their goods while we go to hell in a handcart. And crucially, Russia, China, members of the Gulf Cooperation Council, and assorted others do understand that gold is money and currencies are merely unbacked credit.
Indebted nations owing dollars could even begin to welcome the collapse of the dollar because it would wipe out their obligations. It would wipe out American hegemony. This was definitely an attraction for supporters of the gold-backed BRICS trade settlement currency which failed to make the agenda in Johannesburg last August.
This is the background we are dealing with for the new year. In our misplaced belief in the fiat dollar and allied currencies, we are rotting from the head down while the rest of the world is rising like a fabled phoenix.
The economic outlook
Investment research echoed by western media has a common theme which runs like this: “The economic outlook is for a mild recession, which will permit interest rates to decline, taking pressure off the financial system.”
The confidence expressed in our economic condition appears to be supported by backward facing statistics. We extrapolate our forecasts from the past, relying on economic models for interpretation. But it is plainly obvious to anyone who is aware of the true economic conditions that non-financial businesses are struggling badly. Bankruptcies in American and European jurisdictions are hitting new highs. Having unexpectedly soared, mortgage expense is leading to personal distress and reducing consumer spending. Small and medium sized enterprises are facing cash flow difficulties at the same time as banks are withdrawing credit facilities. Larger corporations face radical restructuring to deal with their excess debt.
Yet official statistics do not reflect these difficulties.
The current expansion in US and European GDPs relies entirely on excess government spending. We know that the US Government’s budget deficit is probably running at about $3 trillion in the current fiscal year, including interest on its debt. That $3 trillion represents excess government spending being injected almost entirely into the GDP economy. This debasement of the currency amounts to over 10% of nominal GDP, inflating it accordingly. To the extent that nominal GDP does not increase by this amount reflects an underlying contraction of private sector transactions, ex-government.
The next question to address is the consequence of this debasement on the purchasing power of the dollar. Macroeconomists forecasting consumer price inflation currently believe it will decline in the current year to perhaps an average of 3% or even lower. However, after an indefinable time lag currency debasement will almost certainly lead towards a significantly higher than expected CPI figure. The timing difference between currency debasement and its consequence for the general level of prices makes a mockery of the concept of an inflation-adjusted real GDP. This Cantillon effect partly explains why the US economy appeared to resist fears of a recession in fiscal 2023. It was the net result of an indefinable prior debasement, the extra spending from the then $2 trillion budget deficit, and the contraction of private sector activity. These factors are yet to fully catch up with the current situation.
In the same vein, in 2024 the GDP outturn will suggest that the US economy is extraordinarily robust by continuing to grow both nominally and in inflation-adjusted terms. Perhaps the best way to illustrate the falsity of the GDP statistic as a measure of economic activity is to imagine if it had existed to quantify Germany’s economy in the early 1920s. Nominal GDP would have been soaring, while the CPI inflation adjustment lagged, only until the final few months when the paper-mark collapsed in 1923. Yet, at the same time acute poverty by any measure had been growing, and personal wealth completely wiped out.
Today, the US economy faces similar dynamics with the dollar being as fiat as the paper mark, and to think otherwise is delusional. Once this line of reasoning is adopted, it becomes clear that talk of recession is misleading. It is a concept which arose from Keynesianism as a justification for state intervention. Instead, we must consider changes in the levels of economic activity and the long-term legacy of the expansion of non-productive debt. Ignoring the evidence in favour of corrupted macroeconomic statistics not only misleads us all but encourages further destructive monetary and fiscal policies.
