Podcast Summary
The Fixed Exchange Rate System and the Trust in Gold: The post-WW2 monetary system, based on a fixed exchange rate of $35 per ounce of gold, allowed consistent and predictable international trade. However, when leaders have the power to create money, they may print more without sufficient gold reserves, leading to a loss of confidence in the system.
The post-World War 2 global monetary system, which established the US dollar as a trusted currency for international trade, was based on a fixed exchange rate of $35 per ounce of gold. This system allowed countries to trade consistently and predictably, as every currency was related to the dollar, which in turn was linked to gold. However, the system relied on countries believing that they could always exchange dollars for a fixed amount of gold. Unfortunately, as history has shown, when leaders are given the power to create money, they often find it difficult to resist the temptation to print more without sufficient gold reserves, ultimately leading to a loss of confidence in the system.
Governments can create unlimited currency, but rising interest rates increase debt servicing costs: Governments can print money but rising interest rates increase debt servicing costs, potentially impacting public services or taxes
Since 1971, the value of most currencies, including the US dollar and the British pound, is not backed by any tangible asset. Instead, governments can create as much of their own currency as they want. This means that there's nothing preventing them from increasing their national debt, which comes with the risk of having to pay high interest rates on that debt. Until recently, interest rates were low, allowing governments to borrow extensively with minimal cost. However, this trend has started to reverse, and the cost of borrowing is now rising. The UK government, for example, has a national debt of over 2.4 trillion pounds, and the interest payments on it are currently equivalent to what the country spends on the police, court system, and prisons combined. If interest rates continue to rise, the government would have to pay more to service its debt, potentially reducing the amount of money available for other public services or increasing taxes.
Government debt interest payments as a percentage of GDP will rise: Rising interest rates on government debt will strain budgets, potentially slowing economic growth, and highlight the importance of fiscal responsibility
The increasing interest rates on government debt will lead to larger debt interest payments as a percentage of GDP in the future. This is a problem that has been building for decades due to governments running persistent deficits. The UK, with a large percentage of its debt indexed to inflation, is particularly vulnerable. The rising interest costs are already straining government budgets and will become even more burdensome as cheaper debt expires. This is a concern because the funds used to pay off the debt could be better spent on other areas, or taxes may need to be increased, potentially slowing economic growth. It's important to distinguish between borrowing to invest and borrowing to exist. Borrowing for productive investments can lead to future gains, but borrowing to simply cover expenses is a more serious concern. The UK government, for instance, borrowed heavily in the years leading up to 2019, mostly for everyday expenses, and now faces the challenge of repaying this debt at much higher interest rates. This situation highlights the importance of fiscal responsibility and the potential consequences of persistent deficits.
Central Banks' Money-Printing Process during COVID-19: Central banks printed new money through QE, which was used to buy govt bonds, govt issued new bonds ensuring demand, govt spent new money on people, causing inflation in real economy
During the COVID-19 crisis, central banks, such as the Bank of England, engaged in a large-scale money-printing process called Quantitative Easing (QE). This process involved the creation of new money, which was used to buy up government bonds from financial institutions. At the same time, the government issued new bonds, ensuring demand for them. This mechanism allowed the government to finance its spending without officially admitting it. The scale of QE in 2020 was unprecedented, leading to a significant increase in the money supply. Unlike previous QE rounds, this time, governments spent the newly created money directly on people through stimulus checks, unemployment benefits, and furlough schemes. This spending led to the money entering the real economy and causing inflation, unlike before when it remained trapped in the financial system. The official stance of the Bank of England is that QE was not intended to finance government spending, but the timing and amount of QE closely matched the government's cash requirements.
The complex relationship between QE and inflation: Initially dismissed, the role of QE in inflation can have unexpected consequences, potentially leading to financial instability
The relationship between quantitative easing (QE) and inflation is complex and significant. After the implementation of QE, inflation did surge towards double digits, as shown in chart 24. Initially, central banks downplayed the role of QE in inflation, attributing it to pandemic-related disruptions and increased demand. However, history shows that all systems of money are human constructs, and they eventually blow up messily. The global financial system relies on confidence, and when that evaporates, unexpected consequences can occur. In late 2022, the UK's mini-budget announcement led to a near-collapse of the UK pension system, which could have potentially brought down the entire global financial system if the Bank of England hadn't intervened. This episode serves as a reminder of the potential risks and consequences of monetary policy decisions.
The global economy's new foundation is confidence, not precious metals: Roger's book explores the possibility of confidence in current money system being lost, leading to unforeseen consequences.
Key takeaway from the discussion about Roger's book "The Price of Money" is that the global economy is no longer sustained by the backing of precious metals, but rather by confidence. This confidence can be shaken, leading to extreme and unforeseen consequences. The book explores the possibility of this confidence being lost and the potential end of the current era of money. It's impossible to predict when or how this transition will occur, but history suggests it will happen eventually. Those who pre-order the book before its release on March 30, 2023, will receive bonus materials including a free 90-minute video course and access to online wealth sessions with industry experts.
Join live conversations with real estate experts by pre-ordering the hardback version of the book: Pre-order the hardback version of the book to join exclusive live conversations with real estate experts, including Akhil Patel, and deepen your understanding of the property market.
Key takeaway from this episode of The Property Podcast is the opportunity for those who pre-order the hardback version of the book to join live conversations with real estate experts, including Akhil Patel, who is known for his expertise on the 18-year property cycle. This is an exclusive bonus for pre-orders, and the link to claim this offer and purchase the book in various formats can be found on priceofmoney.co.uk. This is an excellent opportunity for those who want to deepen their understanding of the property market and put their questions directly to the experts. So, if you're interested, make sure to pre-order the hardback version of the book and secure your spot in these valuable conversations.
