According to the latest estimates, taxpayers will be on the hook to cover £85bn in losses stemming from the unwinding of the Bank of England’s quantitative easing (QE) policy. The scheme is set to lose about £20bn a year until the early 2030s – a yearly figure worth more than a third of our current defence budget.
And these estimates may, if anything, be too optimistic. Until very recently, it was widely assumed that the Federal Reserve would lower interest rates in the United States in the run-up to the election. The Bank was no doubt hoping that it could follow suit.
But inflation seems to be sticking around and it is widely anticipated that the Fed will now maintain interest rates where they are. If interest rates are kept high for a longer period – or worse if they must rise again due to an uptick in inflation – it will mean even heavier losses for the taxpayer to fund.
Meanwhile, as the BoE frets over the consequences of its funny money programme, other countries are bolstering their gold reserves. The Chinese central bank, the Peoples’ Bank of China, is now in its 17th straight month of rapacious gold-buying. Chinese gold reserves have risen from roughly 1,950 tonnes in the third quarter of 2022 to 2,260 tonnes today – an increase of 14pc.
Not to be bested by their central bank, Chinese consumers are also getting in on the action. Fearing that higher-for-longer American interest rates will force a devaluation of the Chinese yuan, Chinese retail demand for gold is soaring with a 10pc rise in jewellery demand and a 28pc increase in bar and coin investments in the last year. Put together, and gold is flowing in one direction: from West to East. Why?
The straightforward answer is that the Chinese authorities are concerned about being overexposed to the US dollar. After the Russian invasion of Ukraine in February of 2022, the United States and its allies froze Russia’s foreign exchange reserves. This has led to a wave of panic in non-Western countries who fear that if the geopolitical winds turn against them, their reserves might be frozen too. China, in particular, is concerned about this as tensions mount in the South China Sea.
There are also fundamental reasons to be nervous about the US dollar. High interest rates in the United States relative to the rest of the world are currently putting upward pressure on the dollar. But this, combined with high inflation in America, is diminishing the international competitiveness of the economy.
This may mean that the American trade deficit will rise in the coming months. The American trade balance has already taken a beating in recent years, with the deficit growing from $45.3bn at the beginning of 2020 to $68.9bn today, despite the tariffs imposed on China to try and improve competitiveness.
If a rise in the US dollar causes a further deterioration in the balance of trade, we might see a whipsaw effect in the medium-term, where the currency is eventually forced to rebalance so that Americans live within their means. This, in turn, will impact the continued global willingness to use the dollar as the global reserve currency.
If this brave new world starts to emerge, British policymakers have not positioned the country well. Around the same time as then Chancellor of the Exchequer Gordon Brown handed the Bank of England the keys to experiment with funny money policies as it pleased, he also sold down Britain’s gold reserves.
Yes, that’s right: Brown simultaneously handed the Bank over to economists to run on theories and models, while at the same time selling the family silver. Over the course of the sale, 395 tonnes of gold were sold by the Bank on the Treasury’s behalf, at an average price of $276 per troy ounce. Today, it sells for around $2,300 per unit.
Why did the Chancellor do this? He claimed that the value of gold was volatile, and that Britain’s portfolio required diversification. Put differently: as with so much else, the style of the Blair government meant doing exactly what the “experts” told them.
Common sense would tell you that gold is a very old form of money and holding some of it might provide protection against the contingencies thrown up by history. But history seemingly held little weight for Blair’s cult of the expert.
It holds a great deal of weight today, with premature declarations of its end now looking particularly foolish. The geopolitical order is being shaken violently and there are no guarantees that the dollar-based system, born out of the last global conflict in the Second World War, will be with us forever.
In such a world there is every reason to believe that people might return to older forms of money to weather the uncertainty, or even to try to create a new monetary system. If something is not broken, there is no need to fix it as the old saying goes – and the gold standard has worked as a way to do business time and time again.
Given this, it would be nice to have a bit of that yellow metal in the bank. Sadly, the economists and politicians who gave the Bank of England the powers that have done such damage to the Treasury’s balance sheet decided otherwise for us, consigning barbarous monetary relics like gold to the dustbin of history.
We can only hope we don’t pay too high a price for their arrogance.
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