Entitlements have in-built limits

The position of Jerome Powell, the soon-to-be superseded chairman of America's central bank, the Federal Reserve, initially looked a hot topic for this week's newsletter. Powell is supervising a lavish refurbishment of the Federal Reserve building in Washington D.C. The initial costs of the refurb were put at $1.9 billion but they now are more than 30% higher, at $2.5 billion. The US Department of Justice (DoJ) has threatened a criminal indictment against him for the cost overruns.

Powell has accused the White House of orchestrating the DoJ's investigation. Eleven heads of other central banks have sent a joint statement supporting Powell, arguing that the independence of central banks from political interference is sacred.

One of the signatories was Anna Breman, governor of New Zealand's central bank. She has now been publicly reprimanded by the country's foreign minister for joining the central bankers' protest.

Central bank independence has its limits

Which establishes a well-known fact - central banks are not as independent as they claim. Their claimed 'independence' is a fantasy.

Powell himself has demonstrated this.

In 2020, during the Covid-19 panic, and when Powell occupied the same job, the US decided to lock-down its population. A costly move. Powell happily complied with the political desire to pump money into people and businesses that were forced to close their doors for months. The Federal Reserve he was then chairman of printed and injected trillions of Dollars, bloating inflation which still can't be brought down to the Fed's own 2%/year target. December's consumer price index rose by an annual 2.7%, and the annual rate of food inflation was 3.1%.

The notion that central banks don't pay attention to their governing politicians is hard to reconcile with events. Breman's independence has got her a rebuke, while Powell happily complied with Biden's blunder.

Growing entitlements = danger

More worrying than Powell's DoJ investigation is the inevitability of the demands on all governments. More entitlements are coming and will need to be funded. In the US, Congress is responsible for all spending laws, including all entitlement programs.

Entitlements are now the biggest slab of the US federal budget, bigger than defense. They are driving the country's national debt, fast on its way to $39 trillion. The US spends more than $6 trillion annually. More than half goes on just three entitlements - Social Security, Medicaid and Medicare.

US Entitlements are as old as the republic. Payouts started in 1862, to veterans of the civil war and their families. Irene Triplett, who died in 2020, was the last person to receive a civil war pension. She had a check for $73.13 every month until her death at the age of 90, more than 150 years after the war ended.

The combined cost of the major US entitlements in 1970 was 3.6% of gross domestic product (GDP) and about 20% of all federal outlays. By 2024 it was almost 11% of GDP and 46% of all federal spending. By 2050 it is expected to reach almost 14% of GDP and will be 53% of all federal spending. By the end of 2050 total borrowing is expected to reach 146% of GDP, up from 98% today and 39% in 2008.

Expanding entitlements isn't just a US problem - all Western democracies are facing the same difficulty. Mortality rates at older ages have fallen, while birth rates have remained low. Managing their benefit commitments will become a vast dilemma for our governments.

Efforts by the French government in 2023 to increase the retirement age from 62 to 64 sparked nationwide violent protests. A looming pension budget deficit forced the pension date change.

Other people's money

Those concerned with a possible debt crisis will pay attention to Margaret Thatcher's quip that "you eventually run out of other people's money." There is currently no sign of this in the US at least. On 12 January there was above-average demand for the $39 billion of 10-year US Treasury notes.

According to an analysis by J. P. Morgan from last September, "investors shouldn't fear a sudden panic over [US] government insolvency, but they should prepare portfolios for the risk of elevated inflation and more volatile sovereign debt markets." That may be true for the US economy, which has a consistent record of innovation and growth. Europe may be more vulnerable to insolvency, given its meager economic growth rates, its significantly higher proportion of older people, and the greater demand for state benefits.

Despite that, foreigners are increasingly wary of holding US national debt. Their share of US national debt peaked in 2008 and has declined marginally since then. The proportion of Dollars in foreign central banks fell to its lowest late last year, to slightly more than 56%.

With gold now at more than $4,600/oz it might seem a forbidding price point to get into gold. And given the undoubted underlying strength of the US economy the Dollar looks secure. Yet we are living through a fresh phase of history, in which changes are coming along almost daily. In such situations holding gold through Glint, where it can be used as money in a trice, must make sense.

For UK clients: At Glint, we make every effort to demonstrate a balanced conversation between gold, silver, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

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·        Not insured by the FDIC.

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·        Subject to investment risks, including the possible risk of loss of the principal amount invested.

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