Paper Roses

This is a well known track my Marie Osmond, the one female sibling of that famous Osmond Male Dynasty. The track was recorded in 1973 and only two years after the US Dollar came off the Gold Standard which I have referenced in the next paragraph and I would like to begin with a short history lesson for the benefit of some who may perhaps not be totally familiar with major international currency developments and events, particularly over the 20th Century.

The majority of developed countries have historically pegged their own currencies to gold in order to stabilize?their currency exchange.? When WW1 broke out in 1914, many countries had to suspend their commitment to the?Gold Standard in order to pay for their military expenses with paper money.? This suspension led to devaluations but Britain, to its credit, held on to the Gold Standard in order to maintain its position as the world’s leading currency. When Britain finally abandoned its commitment to the Gold Standard in 1931, the United States became the lender of choice for many countries that wanted to buy U.S Dollars.? ?

Britain’s actions were catastrophic for the bank accounts of International Merchants who were trading in Sterling and this abandonment eventually paved the way for the US Dollar to replace Sterling as the leading Reserve Currency.? The U.S Dollar was officially crowned the Global Reserve Currency during WW2 in 1944, backed by the world’s largest gold reserves thanks to the BRETTON WOODS AGREEMENT. Instead of having their own gold reserves, other countries were therefore keen to accumulate their foreign currency reserves in U.S. Dollars.? The trend towards accumulating US Dollars continued apace, even after President Nixon abandoned the United States commitment to the Gold Standard in 1971.? This drastic move was of course designed?to help curb inflation and to prevent foreign nations from overburdening US controls by redeeming their dollars for gold.? From 2013, no countries were using the Gold Standard.?? Money not backed by Gold is often referred to as Fiat Money precisely because there are clearly opportunities to over indulge with Paper Money thus creating bubbles due to unlimited supply; and we have seen significant over-indulgence from money printing in the New Millennium but more on this later.?

Many countries have still maintained their Gold Reserves – and indeed since added to them - built up during the years when the Gold Standard was in place.? However, this did not include the UK because Gordon Brown, when he was Labour Chancellor, decided in his infinite wisdom and with the blessing of Tony Blair, to sell a large chunk of our Gold Reserves.?? Between 1999 and 2002 a substantial amount - 401 tons to be precise - was sold at an average price of $275 per ounce raising around $3.5bn.? These funds were then ploughed back into Public Sector Wages.? Gold is of course now trading some 12 times higher in Sterling terms adjusting for the US Dollar’s appreciation, but I doubt we will ever get an apology from Gordon Brown because most politicians have the skin of an Armadillo and are generally blessed with very little humility. Their main aim is gongs with precious little regard for implementing policies that are in the best interests of the populous.

Around the time of the Millennium the Economist Magazine did a cover article about the US Dollar, headlined the American Peso.? This headline was perhaps a tad unfair at the time because pre-Millennium, President Clinton had all but eliminated the US Budget Deficit.? At the time there was much more concern and focus on US Trade Deficits and in 2001, a new acronym, BRIC, was created by Goldman Sachs Chief Economist, Jim O’Neil.? This acronym embraced the four major emerging economic forces of Brazil, Russia, India and China. ?The focus on US trade was directed towards the increased presence of China as a rising economic force which was making anything that moved and selling every item of manufacture to the United States.? This staggering volume of exports placed significant pressure on the US Trade Deficit.? In sharp contrast to the US, on the other side of the equation, China was receiving billions of US Dollars and recording a massive trade surplus.?

Under normal circumstances, there was a case for some US Dollar devaluation designed to contain import growth to the US and boost export growth from the US but the potential downside for the US Dollar was materially softened as the Chinese looked to recycling their enormous US Dollar pay-cheques back into US Treasury Bonds and China still owns a substantial amount of US Treasury Debt.? What could have been a vicious circle was thus rebranded by the Investment Experts as a virtuous circle.? However, it wouldn’t be too long before this virtuous circle was sidelined by what some commentators would refer to as the President Bush/Prime Minister Blair illegal war on Iraq which, arguably, was triggered by the attacks on the Twin Towers of the World Trade Centre in New York and on the Pentagon in Washington.? The potential impact of Trade Deficits on currency exchanges was therefore soon side-lined as the seeds of Fiat Money, Debt Instruments and Budget Deficits were planted.

Supply and demand is clearly an important determinant in the fortunes or otherwise of a currency’s value.? The supply and demand can be driven by different components, economic growth prospects, inflation and the direction of interest rates, short term floating and long term fixed, to name just three.? The value of a currency is also a major determinant of value in the Investment World when translated back into a clients base currency but there are many leading Investment Strategists who will say that currency forecasting is A MUGS Game and they probably have a point.? A number of well known global equity fund managers have historically come unstuck from currency hedging ?- and all names are withheld for legal reasons - when the alternative and much safer and cheaper option was simply to just apply an opinion on currency expectations to the stock selection process.?

If you are in need of a good model for currencies that are undervalued or overvalued for a specific reason and without employing a highly paid currency strategist, a simplistic and fairly accurate approach to currency forecasting is The Big Mac Index.? This index is a survey done by The Economist Magazine that examines the relative overvaluation or undervaluation of currencies based on the relative price of a Big Mac across the world.? Switzerland?boasts the world's most expensive Big Mac, priced at $7.73 US dollars, showcasing the country's robust economy and relatively strong currency. The global average for a Big Mac cost?$5.17?in 2023.? For those who are interested, the cheapest Big Mac last year was in Venezuela at $1.76.? There is also a similar index based on Café Latte’s for those who are interested.

Anyhow, I must get back to the title theme of this article, Paper Roses.? Since George W Bush was elected to the White House in 2000, I don’t really need to remind anyone that US Dollar Debt has ballooned out of all proportion, not only in the United States, but also in many Emerging Markets.? The surprise is perhaps that the US Dollar continues to attract support as the Worlds Global Reserve Currency but also recognising that it has recently been driven by the Federal Reserve’s higher interest rate policy.? However, the following question now has to be asked.? Will the Status Quo continue to prevail??

I have alluded in past articles to burgeoning debt in US Government Policy and amongst the US Consumer and the Secondary Banking System but it is US Government Debt that must now give rise to real concerns for the status quo.? Intervention in Vietnam and the invasion of Iraq were both driven by 710 reasons and if you invert 710 you get a simple answer, Oil.? However, this time around the debt is already endemic in the financial system and there are now no more material reasons towards why the US Government would want to dole out further huge tranches of capital that are driven by debt and debt alone without any pay-back.? The only solution for Israel, as most sensible people would conclude, is a two state solution which unfortunately doesn’t feature with the current Israeli Government. ?An ‘eye for an eye’ appears to be their only solution with little or no regard for human rights. ?Meantime, back home in the US, attempts to avoid another breach of the US Debt Ceiling seem as far away as ever, with the unsavory prospect of a dog-fight looming between Trump and Biden for the prize of the next Presidential confirmation.? Surely, the US populous cannot be serious about returning either of these gentlemen to the White House can they? Both are way past their sell-by dates and there must be an alternative solution to the problem.

However, one thing that you can guarantee is that there will be massive pressure on the US Federal Reserve to cut short rates in an Election Year, but not on the back of lower inflation figures.? The prime reason for lower short rates is not political but is all about debt roll-over as the Federal Reserve looks to buying back fresh debt at lower yields as existing debt it already owns matures.? It is the archetypal situation of robbing Peter to pay Paul.? The forecast for total outstanding debt is currently standing at around $34 trillion - $34,000,000,000,000 - and a lot of noughts.? The figure, arguably, is also understated as the total debt allegedly does not account in total for Medicare Costs and Retirement Costs.? Indeed, I have seen articles pointing to a total debt number that is approaching $100 trillion which is a mere $333,000 per capita, assuming a US population of 300 million.

Debts of this magnitude are not only unsustainable but also unforgiveable.? It would never have happened had the US remained on the Gold Standard and it also begs two other questions. Can the US maintain and does it deserve to maintain its dominance as the Global Currency Lender of Last Resort?? Secondly will the curtain come down on the US Dollar? bearing in mind the majority of those Emerging Market Economies that hold huge tranches of US denominated debt would be major beneficiaries from any material US Dollar sell-off.

?Not everyone will agree with my conclusions and there may indeed be some dissenters but the important point to grasp is that these specific issues need to be discussed, debated and challenged by Governments, Economists, Investment Strategists and Investment Advisors globally. We have now arrived at Check Point Charlie.

.Paper Roses lyrics are therefore highly appropriate especially if you look at them and replace the word Roses with the word Dollars

Paper Dollars, Paper Dollars; Oh how Real those Dollars seem to me

But they’re only Imitation; Like your Imitation Love for me

I am not sure who is to blame for this outcome.? There are plenty of candidates but leaving aside the blame culture, they are where they are and the United States is clearly running out of Fresh Road.? The demands from Ukraine and from Israel are not helping the situation.? What’s more these two wars don’t appear to have a short duration and I will therefore sign off, to quote APPOLLO 13, with the following words

Houston we have a problem

However, it’s not Houston or APOLLO 13 this time around that has the problem but Capitol Hill and I am just beginning to wonder why anyone with a sane mind would want to take on the demands of the US Presidency in such an uncertain economic and political environment.? Maybe those new potential recruits have therefore seen the light and just don’t want the hospital pass; which is why the US will continue to be led by Older Statesmen like Trump and Biden who perhaps deserve to sort out the mess that they and their predecessors, post millennium, have been responsible for creating.