This blog was written a couple of weeks ago, but I’ve only just got round to posting. And next week I’ll post something about my week in Spain. The trouble is there simply aren’t enough days in a week, or hours in a day. So this is a trifle late, but is still very much relevant.
The US Federal Reserve (the Fed) has reduced American interest rates. The general view is that this means the end of high rates, and a gradual return to the recent normality of a low interest rate economy. I expect to see several pundits forecast a return to the good times.
What can I say? Dont be deceived. Let’s look at both sides of the situation.
On the one side we have the rate cut, and more promised. What is this all about?
Basically, it is a way to at least attempt to save the US banking system. And that doesn’t mean saving the economy or the average Joe. It means saving the wealthy and some semblance of the banking system. It is another attempt at a crack-up boom. It means zombie companies get a bit more breathing space to try and put their houses in order. It means bond interest payments can start to retrace a little, which should allow bond prices to rise back a little towards earlier prices which would mean investors in bonds can liquidate at a better rate. And ultimately the Fed expects things to be rosy for election time, with the expectation of the illusive Goldilocks landing in sight.
Now let’s look at the underlying reality as opposed to the political narrative. After all, since when has the political narrative been reliable? We can do better than that. Let’s look at what is happening outside the magic box that is the American political perceived reality.
The BRICS+ nations have already launched their alternative international trading currency, and it is expected to expand by the end of the year. Do remember that over 150 countries have registered their interest in joining the system. That means the gradual reduction of the use of American dollars for trade. That means foreigners will be selling the dollars they no longer need as a trading reserve. Selling will lead to a fall in the value of the dollar. That wont necessarily worry the average American, but it will hit the government debt. In 2025 there will be a marked decrease in the need for dollars across the world and a consequential drop in the desire to buy US debt. That in turn will mean that either the US treasury will have to print more dollars to pay its debts, or rather the interest on the existing debt, or they will have to up the interest rate payable on government bonds to encourage people to buy more bonds (US debt).
In other words, the drop in interest rates is very much a short term measure. Probably by next easter, or maybe even before, those rates will have to rise to encourage foreigners to keep buying US debt.
Maybe foreigners wont buy US debt at any price, at least, not the long term debt. That will mean ever more issues of paper money to pay off the debt and to cope with increased spending, which will eventually trash the US currency.
Result? The fall in the US interest rate is very much a short-term event. This is not the beginning of a general and increasing fall in rates, but a stop-gap attempt to put off the inevitable disaster. Dont expect this to be the time to start new ventures. This is the start of a fairy tale, but not the Goldilocks one. And I suspect it is going to be a very short story.
There is going to be a secondary fallout. Western currencies are seriously hinged to the US dollar. Expect them to fall as the dollar falls.
We know that the new BRICS currency is going to be 40% backed by a weight of gold. As that becomes a reality in the market place, and more and more countries start to use that currency for international trade, those currencies that are still tied to the dollar will be at a serious disadvantage, especially those that need to import most of the goods they need.
This is where Europe is going to find itself in big trouble. As I have said on many occasions, most of Europe imports so much of its basic needs that there is going to be increasing balance of payments deficits, which will have to be funded by taxation. And you know what that means. Less money in the public’s pocket.
I hope you now see why I have measured some countries by their balance of payments deficit, and also by their supply of gold. Britain scores very badly in both categories. This means that if you dont want to jump out of the pot and straight into the fire, you need to pay attention to a country’s debt level (if it’s 90 or above, steer clear). You then need to check whether there is a balance of payments imbalance. Any country that has a negative number is in danger. And finally, look at the amount of gold bullion in the vaults that could be used to back the local currency.
That latter point is going to be a very sore point in the EU when Brussels starts demanding that each country’s central bank sends its gold to Brussels. That really will put the cat among the pigeons, and that may well happen in a year or so’s time. Maybe less. Beware!
I suspect that 2025 is not going to be a good year for Britain. The real trouble is, I dont think it’s going to be a good year as far as the eye can see across Europe.
Interest Rate Cuts