There is more than enough commentary and opinion as to what’s going on right now, and what needs to happen in both short and long term. Today’s report takes a further look at what the potential consequences are for the global, political, and financial system as a result of the Coronavirus outbreak. These consequences can be broadly placed into two categories: further interventionism and accelerated deglobalisation.
Markets and electorates have become increasingly accustomed to what were previously sacred limits of government power being set aside in moments of crisis (aka the Boiling Frog analogy used many times in this column). Terrorism and the new tech economy helped make Orwellian ideas a reality. The financial crisis ensure that hardly free markets were only accepted as working if they went up. And if they went down, for any reason, central banks were there to print money, lower rates or buy assets. The Coronavirus crisis has now added a third pillar to this once unfathomable triumvirate: Fiscal interventionism.
In the past two weeks, the price action in the markets has been beyond the chaos of 2008. Central banks, now so relied upon and so quick to respond came up monopoly-type numbers of stimulus, programmes and interventions. The net result was something that hasn’t happened in the past decade. Markets didn’t buy it. No matter what the number, no matter how many bonds, equities or trillions promised – it no longer mattered. Neither the Fed nor any central bank can pay wages, ensure contracts are settled, or make people and business spend money, or even go outside.
Therefore, what was previously just a pipe dream for a previously fringe group of economists is looking like an emerging reality. Ideas like Universal Basic Income, Modern Monetary Theory and Negative Income Taxes will certainly be tested in the coming months. If there is no let-up in the lockdowns and shutdowns, then a depression is a certainty. And while all the bailouts for banks and car companies are still fresh in the collective memory, particularly in a US election year, letting anyone or anything fail is just not an option for politicians. The alternative would be a breaking of the perceived social contract between citizen and government: you make us pay taxes, but we insist you look after us in times of crisis. Deficits, government debt increases are things no-one will care about if this takes a real downturn.
And of course, once policies are made and implemented it is almost impossible to scale them back or give them legislative sunset clauses. Income tax was meant to be temporary for example, as was quantitively easing! Free money is a strangely (or perhaps not) addictive thing to offer, especially when there is “no inflation” apparently. So, expect politicians to use this crisis to do all sorts of fiscal creativity, which will no doubt increase government debt, which will no doubt have to be financed by central banks. And the electorate will expect it.
This crisis can also be seen as part of the narrative arc of deglobalisation. There is a feeling across many countries and continents that globalisation has gone too far, too quickly, with only a few really benefitting. The protests that started in Seattle before the turn of the century have become mainstream concerns. Identity, inequality, labour and product standard, nationalism, outsourcing, loss of manufacturing, communities are all real issues that decide elections.
Though this crisis is still ongoing there is a growing chorus of criticism about interdependence in terms of crisis. This interdependence, which had been envisaged to, and perhaps has, made war between nation states almost impossible and unthinkable has become a major problem for many. Take Germany’s refusal to allow face-masks to be exported. Or the closing of the Schengen Area. Or Italy’s turn to China for help while Austria was closing the border. Or the fact that so many ventilators or generic drugs are made outside the United States. In any crisis that is global can the citizens depend of one country depend on their government to be able to supply basic medical supplies. If this is not the case, then they will vote in a government that can.
This means that very soon supply chains are going to be re-oriented back to a national level. The nation-state is once again re-emerging as the most powerful global actor. The move to securing supplies of essential goods, of food and drugs will totally re-orientate the world away from China as the factory of the world. This has huge consequences for the financial and political system.
So what next for gold?
These twin forces of increased governmental power and decreasing globalisation will shake the current system to its core. Agreements on standards, reciprocity, alliances, trade and flows of goods and services will very quickly change. Governments will spend more, take more power, have more control of the economy. The system that has ensured peace will be even more under-treated as nation-states become increasingly focused on self-interest. In the meantime, the nation-states of central banks will continue to have to print more money to finance this increased intervention. Thus, the outlook for gold has never looked better. Of course, in more difficult times gold is an asset that has to be sold to raise cash. But looked what happened after similar price action occurred in 2008/9. Gold just went up. Once the volatility dies down, exactly the same can happen.
Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.