The week of April 15, 2024: The surging gold price, antitrust, pay in the WNBA, bees, and much, much more.
The week of April 15, 2024: The surging gold price, antitrust, pay in the WNBA, bees, and much, much more.
The gold price has been moving up of late. After rising sharply during the financial and eurozone crises (it traded above $1,800/oz in 2011) for the usual “safe haven” reasons, as well as QE-fueled inflation concerns, it drifted quite a bit of the way back. However, it has, with an interruption or two, moved up since September 2018 (when it was trading not far below $1,200). Gold hit $2,000 during Covid-19 (more inflation fears, this time vindicated) before giving up ground again, trading down toward $1,600 in August/September 2022. The price then moved up again, a rise which has been accelerating. Priced at roughly $2,000 in February, gold is now trading at or around $2,400, touching all-time highs in nominal terms.
One explanation may be that U.S. inflation has not yet gone away (interestingly, Costco’s gold bars have been selling briskly). Another may be growing fears over the international situation (the VIX — the volatility (or, less formally, “fear”) index — has also spiked, although not to dramatic levels.
The Daily Telegraph’s Ambrose Evans-Pritchard, admittedly a journalist to whom I rarely turn for reassurance, sounds a more alarming alarm:
Is somebody preparing for an escalation of the shadow Third World War?
“Somebody” is certainly buying gold in size, and it doesn’t appear to be central banks (well, China’s has increased its gold holdings for 17 consecutive months, but not, as far as is known, by enough to account to take the price to $2,400).
On the other hand:
The Chinese people certainly have been buying gold, creating traffic jams at the Shuibei jewellery hub. Precious metal is the only refuge from the property crash and the slump on the Shanghai bourse. Tightening capital controls make it hard to smuggle serious sums abroad.
But even that, argues Evans-Pritchard, citing one expert on the sector, ought not to be enough to push up the gold price so far and so fast.
Maybe.
But this report from Bloomberg (April 20) contained some striking statistics:
Although China mines more gold than any other country, it still needs to import a lot and the quantities are getting larger. In the last two years, overseas purchases totaled over 2,800 tons — more than all of the metal that backs exchange-traded funds around the world, or about a third of the stockpiles held by the US Federal Reserve.
Money has also been “pouring into” Chinese gold ETFs.
Evans-Pritchard runs through the deteriorating international situation, pointing to Ukraine, the Middle East, as well as Taiwan. When it comes to Taiwan, is China preparing to take advantage of the way that the West has run its down its stocks of military equipment attempting to contain both Putin and the crisis in the Middle East? Some speculate, writes Evans-Pritchard, that “China is behind the surge in [gold] buying, building up a war-fighting bullion chest through state-controlled banks and proxies.”
It seems unlikely that China has to worry too much about that. It almost certainly has the finances to support, say, a blockade of Taiwan. It also has allies (Russia, Iran, North Korea) who it could rely on for weaponry and other supplies and would not press too hard for immediate payment. China could also blackmail a number of countries (particularly, perhaps Germany) that have grown unhealthily dependent on its business. Any EU sanctions would be mild, and Beijing knows that.
Evans-Pritchard also suggests that growing concerns about the mountains of debt piled up by some governments may be increasing the appeal of gold. He floats the idea that some major players may be hedging themselves against (or speculating on others doing so) the arrival of “fiscal dominance” in the U.S. and elsewhere.
Turn to the St. Louis Fed to find an article from late last year in which the author, Charles Calomiris, explains what “fiscal dominance” is (spoiler: not good). He warns that “the prospect of this occurring soon in the United States is no longer far-fetched.”
Fiscal dominance refers to the possibility that the accumulation of government debt and continuing government deficits can produce increases in inflation that “dominate” central bank intentions to keep inflation low.
To put it bluntly, it refers to a situation in which a country’s finances have deteriorated so badly that its central bank can no longer keep control.
Calomiris:
The essence of fiscal dominance is the need for the government to fund its deficits on the margin with non-interest-bearing debts. The use of non-interest-bearing debt as a means of funding is also known as “inflation taxation.” Fiscal dominance leads governments to rely on inflation taxation by “printing money” (increasing the supply of non-interest-bearing government debt).
When might this happen?
Calomiris (emphasis added):
[I]f global real interest rates returned tomorrow to their historical average of roughly 2 percent, given the existing level of US government debt and large continuing projected deficits, the US would likely experience an immediate fiscal dominance problem. Even if interest rates remain substantially below their historical average, if projected deficits occur as predicted, there is a significant possibility of a fiscal dominance problem within the next decade.
The moment of crisis occurs “when the bond market begins to believe that government interest-bearing debt is beyond the ceiling of feasibility,” a moment brought closer as the interest rate needed to attract buyers moves up, a process that cannot continue indefinitely. At some point, a government bond auction will “fail” in the sense that the interest rate required by the market on a new bond offering is so high that the government withdraws the offering and turns to money printing as its alternative.
This is a scenario that I have heard mentioned over the years (Paul Ryan referred to it at a recent Coolidge Foundation conference I attended on the debt). During the financial crisis, I was at a talk given by a veteran banker, the late John Whitehead, in which he discussed the same thing. Whitehead put no date on when the breaking point might arrive. It could, he said, be years away, but if it did occur, there might, he stressed, be little immediate warning.
Fears that the monetary easing that accompanied the financial crisis would be followed by inflation (with interest rates to match) were never realized. On the contrary, what followed was a decade or so when money was more or less “free.” With interest rates so low, no one cared much about the country’s growing debt. It remains a mystery (to me) why the U.S. did not take advantage of those conditions to issue a large amount of very long-term debt. This, after all, was the era in which both Austria and Argentina (Argentina) were able to issue hundred-year debt.
Those days are gone, and as I wrote in last week’s Capital Letter, there are good reasons to think that we have now entered an era of higher interest rates, and not just because of mean reversion after a period in which they were abnormally low. There is the need to fund the piles of government debt in the U.S. and (as I discuss below) elsewhere. On top of that there are the trillions that will be needed to fund the “race” to net zero and, among other calls on cash, vastly increased defense expenditure. Making matters worse still is that the much of the “investment” in net zero is better seen as spending on often unnecessary and frequently shoddy repair work, which will divert capital away from projects that would generate higher returns.
One way for a country to weather a debt crunch is to grow its way out of it. Pouring money into climate-related projects that are likely to deliver inferior returns is not the way to deliver such growth. Moreover, the relentless carbon-paring central to climate policy is also likely to slow down the rate of economic growth. That will please environmentalists who, to varying degrees, are either suspicious of, or hostile to, growth, but it will make the debt problem worse. There is also a clear danger that penal tax increases, sold on the basis, however misleading, of bringing down the debt, will discourage the entrepreneurial spirit and capital formation essential to create growth strong enough to propel a country out from under its debt burden.
The U.S. benefits from its ability to borrow all its debt in its own currency, something that it can do because of its economic and military strength and (traditionally) benign politics. These three factors combine to attract buyers for the dollar and its financial proxies, making them a safe haven for worried investors in troubled times. Being able to borrow so easily in its own currency means that the U.S. need never default. It can always print more dollars. That would erode the value of the country’s debt through inflation (creditors would only receive real pennies on the real dollar), but it wouldn’t technically amount to default — and in this area “technically” matters a lot.
Less fortunate countries must rely to a significant extent on foreign “hard” currency (such as the dollar) borrowing as lenders who, particularly those from abroad, have limited faith in the value of debt denominated in the national currency. How willing would you be to exchange dollars for a promise to be repaid, say, in Lebanese pounds? The danger for the borrower is that if it runs into fiscal trouble, it cannot print more of its own money to pay off that hard currency debt. And printing more of its own currency to pay the bills at home, will mean that its value will fall against hard currencies such as the ones in which it has borrowed from international lenders. This makes the debt even harder to repay and adds another twist to the inflationary ratchet, especially if the borrower is heavily reliant on imports. Printing money becomes a route not to salvation (however dubious), but default.
When the members of the nascent eurozone swapped their own currencies into euros, they effectively turned all their debt into foreign borrowing. Although there were various tricks that could be (and were) played that gave the eurozone’s indebted members more wiggle room than was often understood, their obligations remained denominated in unforgiving euros, rather than, say, almost infinitely malleable lire. For this and other reasons, the currency union entered a prolonger crisis. As it happened, those running the eurozone did not want to risk a formal default by any of its members, and the currency union’s weaker brethren were, one way or another, bailed out, despite promises by the euro’s founders that this would never happen.
According to Evans-Pritchard, the eurozone may again be heading towards trouble. That’s no great surprise. A massive exercise in central planning masquerading as economic liberalization, it forced fundamentally different economies into a one-size-fits-all single currency union and has proved to be a Procrustean bed for those that don’t fit, most notably in the eurozone’s south, turning difficulty into catastrophe when times turn tough.
As Evans-Pritchard sees it, the European Central Bank is “in a debt trap”:
It continued to buy buckets of Club Med bonds even when inflation was over 10pc. This was patently a fiscal rescue for semi-solvent states. The ECB has backed off for now but will be forced to shield Italy again with fiscal transfers disguised as QE in the next downturn.
Italy’s debt to GDP currently stands at around 137 percent of GDP, a considerable improvement over recent years, but still a number that will be hard to bear, as Evans-Pritchard warns, when recession strikes. Italy is no Greece, the minnow that could have capsized the eurozone a decade and a half ago, but the EU’s third largest economy, behind France, where debt to GDP is a less than reassuring 113 percent. Germany, the country that, more than any other, underwrites the eurozone remains financially strong, but is struggling to adjust to the loss of deceptively “cheap” Russian gas and the impact of decarbonization on its energy-intensive (and vital) industrial sector. Economically, it has become too dependent on China, a relationship that could easily turn toxic.
The U.S. has in no small part retained its safe haven status thanks to the absence of competition. Even in bad times, it tends to be, to quote an old description, the healthiest horse in the glue factory. Where else is the worried investor going to turn? The eurozone is structurally unsound, China is both politically and financially untrustworthy (as its own individual gold buyers may well be taking into account). Japan? Its debt/GDP ratio is over 260 percent. After 17 years, it has finally abandoned negative interest rates (barely: the range is 0-0.1 per cent), but is sticking with bond purchases. This is despite the fact that, as Evans-Pritchard explains, “core inflation is 2.8pc and the Rengo wage round is running at 5.2pc…With a debt-to-GDP ratio above 260pc, Japan cannot return to sound money without risking a fiscal crisis.”
To be sure, there are places with safe haven potential, well-run, neutral Switzerland has a debt/GDP ratio of 40 percent, and the local currency has proved to be a handy store of value. A U.S. dollar will buy less than one (0.91) Swiss Franc. In early 1975, it would have bought 2.5. The problem is that there are not enough Swiss Francs (or proxies) to accommodate those who would take financial refuge there.
If I had to guess, the primary reason for the spike in the gold price is indeed buying by individual Chinese investors. It’s probably telling that, as Bloomberg reports, the Chinese authorities have issued warnings to investors about chasing the current rally, and that both “the Shanghai Gold Exchange and Shanghai Futures Exchange have raised margin requirements on some contracts.” Nevertheless, the picture painted by Evans-Pritchard (as I wrote earlier, not a journalist to whom one turns for reassurance) is sufficiently bleak that it is possible to understand why some investors might be turning to gold as, in his words, a “hedge against dystopia.”
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and National Review Institute trustee, David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 166th episode, David is joined by Lowell Miller, the founder and former head of Miller-Howard Investments, who taught David the philosophy of dividend-growth investing he has held dear for a couple of decades now. Together, they walk through Lowell’s fascinating journey from Rolling Stone poet to leading dividend-growth guru, what it meant to David’s life and career, and why that approach to investing is as important now as it has ever been.
The Capital Matters week that was . . .
Tax
Tax Day marks the culmination of a season steeped in dread and procrastination for many Americans. This annual ritual should serve as a stark reminder of our relationship with the government. Yet, the meaning of Tax Day has been distorted by an institution we take for granted: automatic withholding…
Today is Tax Day, the holiday for publishing tax-related commentary…
Industrial Policy
Free-market advocates will sometimes be mocked for comparing too many government programs to Solyndra. But can you blame us when, 13 years later, the federal government is giving more than ten times as much money to a company led by Solyndra’s former CEO?
Electric Vehicles
The story from Canada mirrors that in the U.S. Plenty of buying from eager and affluent early adopters (with their own garages to minimize charging problems). Other buyers are not so sure, which is hardly surprising…
Fiscal Policy
In early March, Michigan officials argued in court for higher state income taxes. This move provided an opportunity for Ohio lawmakers to underscore their contrasting policy direction. While Michigan’s leadership is embroiled in legal battles to impose income-tax hikes, Ohio is formulating a comprehensive, long-term strategy aimed at abolishing the state’s income tax altogether…
Transportation
The Federal Railroad Administration’s (FRA) years-long regulatory adventure into mandating the crew sizes of freight trains continues. On April 2, the FRA finalized a regulation requiring two-man crews for most freight trains. Railroads are suing to block the rule from going into effect, arguing it is arbitrary and capricious. The FRA is supposed to be a safety regulatory agency, and the railroads argue there is no evidence that mandating two-man crews is related to safety…
Energy
The news out of Ukraine has not been encouraging of late, and, as discussed here, if the Russians make a major breakthrough (or worse) the implications will not be confined to that country.
Meanwhile, Europe continues to adjust to the continued absence of (most) Russian gas, something that it has managed to do much better than anticipated (not least by me) a couple of years ago. Nevertheless, as Russia intensifies its attack on Ukraine, it is also trying to increase the pressure it puts on Europe…
Universal Basic Income
The basic-income battle is heating up in Texas. Harris County wants to implement a program granting 1,500 households a direct, no-strings-attached $500 payment per month. Texas AG Ken Paxton filed suit, claiming the policy is unconstitutional because counties lack the authority to give away public revenues. The legal contest will likely be protracted and contentious. An important precedent is at stake: Is providing universal-income support a valid public purpose?…
Antitrust
At home, the administration is using antitrust policy to wage war on the most successful U.S. tech companies. In the recent Department of Justice complaint against Apple, the government’s case rests on a claim that “as developers created more and better products, content, apps, and services, more people bought iPhones, which incentivized even more third parties to develop apps for the iPhone.” Yes, quality attracts consumers, which in turn attracts more innovation and investment. As former representative Mimi Walters wrote: “If success becomes an antitrust violation, then the government’s real target is not any specific company but the free market itself.” …
The Department of Justice (DOJ) and the Federal Trade Commission (FTC) regulators are in anti-monopoly litigation against Meta, Google, and Amazon. In an effort to leave no one out, Joe Biden’s antitrust enforcers have sued yet another American technology giant: Apple…
Banking Supervision
The Basel Committee suffers from the same tendency as all international organizations: a need to continually justify its existence according to the politically salient issues of the day. And there is no trendier issue in central banking than climate change, which a number of major central banks have incorporated into their mandates. Amid intense international interest, particularly from the European Central Bank, the Basel Committee has pursued a broad agenda to weave climate change into its recommendations on regulation, supervision, and disclosure…
Labor
Some on the right will try very hard to see daylight between organized labor and the progressive movement. Despite decades of decline in union membership, culminating in a record-low membership rate last year, some still see political opportunity in rejecting conservatives’ traditional approach to organized labor in favor of a more conciliatory approach.
Organized labor doesn’t see it that way, and it continues to fund the panoply of progressive institutions. Organized labor is progressivism, and progressivism is organized labor…
Despite wall-to-wall positive coverage of labor unions in the past two years, and constant press about the union “renaissance” and “resurgence,” the union membership rate in the U.S. declined to a record low of just 10 percent in 2023. It’s only 6 percent in the private sector…
Environment
You’ve probably seen or heard of the “Save the Bees” campaign that environmentalists have been pushing for the past several years. The idea was supposed to be that bees were dying out because of some combination of late-stage capitalism, corporate greed, and probably Republicans. If too many bees died, then it would make it harder to pollinate plants, which would kill the food supply, and everyone would die. Environmentalist predictions usually start and end at the same places (“late-stage capitalism, corporate greed, and Republicans” -> “everyone dies”) with only the mechanism connecting them changing.
The mechanism this time was the bees…
Regulation
Unsurprisingly, the Securities and Exchange Commission’s (SEC) recent decision to finalize its onerous and unprecedented climate rule is attracting significant legal pushback as state attorneys general, industry groups, and my own company (among others) challenge the Commission’s authority to implement the rule. While the litigation will raise important technical and legal issues with the rule, the biggest threat it poses is to the betterment of human lives.
While testifying before the U.S. House of Representatives’ Financial Services Committee last week, I emphasized that the SEC’s rule will make it more expensive and riskier to produce oil and natural gas in the U.S., and consequently will lower energy production…
Securities Law
I was traveling when the decision came down, but I’d be remiss if I didn’t put in a word for the Supreme Court’s unanimous opinion in Macquarie Infrastructure Corp. v. MOAB Partners, L.P.
This decision pared back a theory of liability in my old area of practice, federal securities litigation under Section 10(b) of the Securities Exchange Act of 1934 and its implementing rule, Rule 10b-5. The bulk of such suits are class actions brought after a big drop in a stock’s price, on behalf of buyers of the stock who claim that they were misled by what the company told the markets…
The Fed
How can the stock market be soaring to repeated new highs when the Federal Reserve is trying to constrain the economy? In the last year, as it was trying to restrain inflation, the Fed unintentionally enabled nearly $1 trillion of liquidity to flow into the financial markets, boosting stocks, other risk assets, and, quite possibly, the economy…
The WNBA and Pay
Fortunately for Clark, her excellence will be rewarded — by the market. Nike appears set to offer Clark an endorsement deal of around $10 million. She would also have a signature shoe with the company, an honor only a small handful of NBA players have. She was already a Nike-sponsored athlete at Iowa, and she earned an estimated $3.1 million in name, image, and likeness compensation during her college career. In addition to Nike, she already has sponsorship deals with Gatorade, State Farm, Buick, Xfinity, and several other major companies, no doubt with more to come.
So don’t let the WNBA’s union pay scale get you down. Caitlin Clark is going to be paid what she’s worth. And if you want WNBA salaries to be higher, buy WNBA tickets and jerseys and follow the WNBA season so that TV networks are willing to pay more for the rights to air the games. Then there will be more revenue to go around, and WNBA players can have million-dollar salaries, too.
To sign up for The Capital Letter, please follow this link.