Central Bank Gold Buying At Highest Since 1950s, As 30% Of World Economies Are Now Sanctioned By The G7

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by Tyler Durden
Monday, Apr 24, 2023 - 02:35 PM

By Michael Every of Rabobank

ARS-sault and Barter-y

Optimists were assaulted by Friday’s data, the Eurozone manufacturing PMI down to 45.5 despite subsidies, stimulus, and lower energy, and the US only 50.4 despite being ‘back in the factory business’. Services PMIs were better but that’s where much core CPI is located, so suggested stagflation; as did Japan’s core CPI at 3.8% y-o-y; as did UK retail sales with food prices at a 45-year high - as the Financial Times noted, the BOE won’t get CPI back to 2% until that is back under control: but it can’t control it. There was also a battering from the geopolitical sphere:

Against this, the Financial Times notes central bank gold buying at its highest since the 1950s, as 30% of world economies are now sanctioned by the G7, and the US debt ceiling looms, arguing dollar hegemony is in trouble. However, it errs in saying the US relies on foreign capital inflows to supplement its local capital stock when, as Michael Pettis puts it, those flows supplant it, forcing up either debt or unemployment. Larry Summers also just defended the dollar on Bloomberg, asking if China is really somewhere people want to hold their reserves, and arguing capital --and people-- are flooding out. Even Russia’s central bank says CNY isn’t a good option.

More broadly, what are gold buyers going to sell it for or price it in? Worse, gold either forces barter trade to balance, so the end of our global system of large imbalances, or a 19th century zero-sum imperialism to force people to let you run trade surpluses. As Dr. Pippa Malmgren says on this ‘new’ anti-US market meme: “Tactics without strategy leads to disaster. This is not about de-dollarisation. This is about replacing the medium of exchange from dollars to violence.”

Indeed, if the US is talking about a world where it doubles its defence spending, buy the buck and buckle up. As Yellen noted in her speech: “It’s important to know this: pronouncements of US decline have been around for decades. But they have always been proven wrong. The US has repeatedly demonstrated its ability to adapt and reinvent to face new challenges. This time will be no different.” Many would feel more confident if it weren’t Yellen saying it; but Foreign Policy’s ‘The Myth of Multipolarity: American Power’s Staying Power’ makes the same case.

Could the US afford to spend another $1 trillion a year? Could anyone? It’s all relative. But we are moving closer to a point of praxis on that and many fronts. The US banking sector may see a credit crunch due to rising rates, with auto loans and commercial real estate the core of concerns. That raises the likelihood that we move towards another predicted outcome: higher rates and acronyms, like QE, to reallocate capital from irrelevant to (national security) productive sectors, paid for by central banks, as the ECB’s Lagarde told us last week. In this zeitgeist, a recent Financial Times op-ed talked of ‘The contentious idea that still challenges the Fed’: that there is nothing stopping central banks allocating credit if they want to - they just haven’t wanted to.

Yet the luxury of too-high rates --so no national security spending, just austerity-- or too-low rates --so no national security spending, just bubbles-- surely cannot be long for this geopolitical world. It makes zero sense to have one base rate, especially if it’s zero, and expecting the economy to make a green transition, or fight a Cold War or a hot one. It’s cut rates and let bubbles rip, as markets keep expecting; or embrace Biden’s national security state capitalism, or the Heritage Foundation’s ‘common good’ capitalism with a moral mission – and higher rates.

The US still has to act in a world of ARS-sault and barter-y where EM want to drop the dollar: to offer carrots, like swap lines or dollarisation *for friends*, and sticks, like tariffs, capital controls, and higher rates to push down commodity prices. That’s realpolitik where economics is not real or political: a colleague and I just laughed at one ‘history of trade’ saying barter was “swapping spears for furs”: if you have spears and the other guy furs, then you have spears *and* furs.  

Indeed, why is the US is to now crack down on shadow-bank hedge funds and private equity? Yes, to ensure financial stability. However, also to use the financial system to achieve national goals, while hitting elements that provide nothing useful nationally, China-style; the US already copied tariffs, economic coercion (i.e., sanctions), industrial policy, and capital controls. To quote Fox News: “"I bet right now (Blackstone CEO Steve) Schwarzman is calling everyone he knows in DC to get the Fed to back off. The Fed won’t, of course, because no one is going to bailout a bunch of fat cats."” Didn’t we also just see the same thing happening in China?

By the way, China also just told its unemployed white-collar students to roll up their sleeves and try blue-collar work. What a shock to some US blue hairs that would be! Or perhaps they might enlist, given recruitment numbers are vastly short of targets, a five-alarm fire in military circles.