Fiat money losing out

How much will the US spend on the war with Iran? The Center for American Progress, a US-based liberal research organization, puts the cost so far at $25 billion. The Defense Department has asked for an extra $200 billion, in addition to its annual budget of $838.7 billion, which was approved by Congress in January. That extra $200 billion will probably be approved but only after much wrangling.

The costs of this war are hitting everywhere. In Britain the Chancellor, Rachel Reeves, has said the government is preparing to financially help poorer households via 'targeted support'. Unlike 2022, when Russia invaded Ukraine and energy prices surged - then the UK afforded universal energy subsidies. Not this time.

Poorer countries, in Latin America, Asia and Africa, are already taking emergency measures to protect their populations against the much higher fossil fuel prices. Fertilizer costs have also soared. Brooke Rollins - the US agriculture secretary - said that 25% of American farmers have yet to secure fertilizer supplies for the next planting season, calling it a "national security issue".

Higher prices in the UK, the US - everywhere. How will they be paid?

Big debts, big costs

With both the US and the UK facing fiscal deficits - the government spending more than it raises in taxes - the need will be either to cut spending somewhere, or to go cap in hand to possible lenders.

The US fiscal deficit this year will be almost $2 trillion (almost 6% of Gross Domestic Product, or GDP, the country's overall economy) and the country's total national debt is $39 trillion. America accumulated a trillion Dollars of debt in its first two centuries; it now pays $1 trillion interest every year on its debt. The debt held by the public will be around 100% of GDP this year and is on course to rise to 172% of GDP by 2055.

The UK's position is little better. As in the US, an ageing population is pushing up health and pension spending. Britain now annually spends more on its debt than on defense, transport and housing combined. Moreover, a quarter of UK government debt is inflation-linked - a surge in inflation will push up the servicing cost on this debt.

The 38 nation member Organisation for Economic Cooperation and Development (OECD) has now said the UK faces the biggest hit to growth of all G20 countries, which includes the US. In 2026 Britain's economy will barely grow, at just 0.7%, against the OECD's previous forecast of 1.2%. Inflation in the UK will accelerate to 4% this year said the OECD. It added that despite higher inflation the Bank of England (BoE) will not raise interest rates this year. It does not mention stagflation but that seems an inevitable fate for the UK later this year.

Lucky US

The US is more fortunate than the UK. It is energy secure, and its sophisticated capital markets mean raising capital is easier than anywhere else. It has a mammoth economy, accounting for about a quarter of global output. Most important it has the world's reserve currency - meaning it can borrow in its own currency at rates lower than anyone else and can run persistent deficits without creating a balance of payments crisis.

The UK is more exposed to the adverse macro-economic impacts of the Iran war than the US. But eventually the US debt will be looked at skeptically. The temptation will be for a US government to print money to cover debts and costs. The US has printed vast quantities of fiat money in its history, such as when President Nixon ended the Dollar's backing by gold, which allowed the US to print money without constraint. US governments since then have pressed the money-printing button when times get tough.

Given the recent gold-price rout it may seem strange to remind everyone that gold has been used as money for centuries, and that it has always recovered from similar reverses. Inflation may be on its way back, meaning that gold-supportive interest rate cuts are delayed, but gold is not a wartime - or short-term - thing. It doesn't rust. It doesn't betray. It is forever.

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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