by Alasdair Macleod, GoldMoney:
We approach 2018 having seen the seeds planted in recent years for a monetary revolution. They include the massive world-wide expansion of credit and debt since the last credit crisis, and the advent of potentially disruptive cryptocurrencies. Geopolitical shifts of tectonic scale have occurred, hardly noticed by the ordinary person. That was until now. We are now on board a train which is gathering speed towards its buffers: the end of dollar hegemony and its potential collapse.
It might take a few years yet to get there, but the speed of our train is dependant to a large degree to how the engine’s boiler is stoked by America through her isolationist plans. It is very hard to see how the dollar cannot decline significantly with America’s autarkic trade policies, benefiting gold.
Geopolitics are likely to become more prominent in 2018, risking an upset of the precarious balance in what amounts to an ongoing financial war. Upset that balance, and chaos results. President Trump threatens to do just that by formally identifying China and Russia as America’s main adversaries in his National Security Strategy, released only this week.[i] The document repeatedly casts China and Russia as geopolitical villains seeking world domination, and America as the world’s saviour.
The subtext is Trump will compete for dominance on military grounds, while the battle for global power is in fact economic. It is a strategy America is bound to ultimately lose, because empires always thrive on trade, not suppression. Suppression is an end-game. By opting for trade isolationism and military power, the Americans are risking everything on the dollar’s status being maintained, because if the dollar sinks, so does America. However, that is an increasingly likely outcome.
Essentially, Trump’s National Security Strategy document highlights the struggle ahead for a country which has already lost economic control over the world, and like all empires before it, is now in decline. America is being outspent by China nearly everywhere, and, bizarrely, America’s response is to isolate herself through trade protectionism. Instead, by ramping up her military capability, America is becoming more belligerent as her own economy declines, relative to those of China and Russia.
China’s and Russia’s immediate response to Trump’s National Security Strategy was to declare it is a return to the cold war. The question for next year is will this encourage China and Russia to show less restraint, less patience, in their plans to dethrone the dollar?
This has to be our central theme, and how the relationship between unsound fiat and sound money, gold, is affected. Goldmoney readers are rightly interested in the prospects for gold in 2018. They look good, from an investor’s point of view. From an economist’s point of view, it’s not gold that looks good as such, but that the decline towards destruction for the dollar, the world’s reserve currency, is now progressing towards its inevitable conclusion.
This article examines the outlook for gold in monetary and economic contexts, organised under these headings, followed by some concluding remarks:
- How US economic policies can be expected to undermine the dollar, and lead to an accelerating decline in its purchasing power;
- China’s economic and monetary objectives, and how they are being progressed in partnership with Russia;
- The erosion of the dollar’s petrodollar status, and the consequences thereof;
- Global interest rates, the advancement of the credit cycle, and the effect on the gold price; and
- The disruption to the monetary order created by cryptocurrencies.
US economic policy, and the dollar
The White House under President Trump appears to understand that the Democrat’s policy of transferring wealth from ordinary people to the state, and that the concomitant state control over its electors’ day-to-day business and behaviour is ultimately destructive. From a narrow economic point of view, arguably this was what President Trump was elected to change.
The market response to him winning the Presidency was initially positive, with the dollar rising strongly, before the difficulties his administration faced in overturning the status quo become the primary concern. The dollar then began to decline against other currencies, before a slight year-end recovery in recent months. Since Trump was elected, it has become clear that reversing the socialisation of the US economy is not straightforward. The struggles over Obamacare and a budget that proposed to reduce the tax burden on wealth creators are testament to that, as well as the bruising battle for control of the permanent establishment. Instead of a clear progression to a Reagonomics supply-side revolution, the economic risks appear to be increasing, rather than diminishing.
Trump’s underlying economic problems appear to be two-fold. He and his immediate advisors are trade protectionists, believing that US jobs can be protected, and even increased, through trade tariffs and protectionist policies. All history screams at us that this is a horrible mistake, and classical sound money economics clearly explains why.[ii] His second problem is he has inherited welfare legislation that is increasingly costly, and virtually impossible to reverse. So not only is the White House economically rudderless, but it is unable to reduce the burden of the state on the overall economy, necessary for the state’s destruction of wealth to be reduced.
The hope is that tax cuts will eventually generate increased nominal taxes, through economic recovery. Even if we assume that this happens, the budget deficit will increase significantly before it decreases.
Dollar bulls are expected to take this on trust. But while the intention behind supply-side stimulus may be improvement over previous consumer-driven policies, it is far from clear that the hoped-for economic benefits will materialise. An important plank of supply-side reform is a return to free markets. That is not what is happening. If anything, the drift towards state control is increasing, which is what trade protectionism is really about.
The current mistaken policy over trade was exposed to earlier generations by the Smoot-Hawley Tariff Act of 1930, which made the depression considerably worse than it would otherwise have been. Tariffs are not just a tax on consumption, but they are a tax on producers importing raw materials and those importing goods for further assembly as well. They are therefore regressive with respect to economic progress. They do not fix the trade deficit, nor are they in any way constructive to supply-side reform. Furthermore, the trade deficit is certain to increase despite tariffs, driven by a higher budget deficit and an expansionary monetary policy.
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