UNITED STATES OF AMERICA (USA) FINANCIAL POLICIES AND ITS IMPACT

Governments may change their policy and strategy in tandem with the changing economic conditions.
There are many economic theories, but well known are Keynesian theory (after the Great Economist,
John Maynard Keynes) and Modern Monetary Theory (MMT). In context to USA, Federal Reserve Bank
decides the interest rate and the money supply after keeping a watch on economic conditions related to
inflation/ deflation and fear of recession. Strong economic growth usually leads to more hiring of people
and higher wages for a set class of workers depending upon the industry to industry, but not necessarily.
Strong economic growth can also lead to higher profits for corporates, which is a positive factor for the
stock markets.

MMT advocates that the government should use fiscal policy to achieve full employment, creating or
printing money to fund government spending. The primary risk is once the economy reaches full
capacity then there is inflation, which can be addressed by raising taxes and issuing bonds, to remove
excess money from the system. It is a like a more dynamic work for government without worrying about
the excess money created over a long period of time. Here government cannot default because it can
print more money whenever it is required. Once again MMT is for USA and not for the other nations on
the globe as US Dollar (USD) is dominant and reserve currency for the world. All debt on USA is
denominated in its local currency which is USD. As former US Federal Chairman Alan Greenspan said
(CNBC news channel), "The United States can pay any debt it has because we can always print money to
do that. So there is zero probability of default." Nations with debt denominated in their local currency
can always print money to pay debt and shall become the strategy of most. It gives birth to crony
capitalism as and when major banks would feel the pain shall be addressed in the policy by the Reserve
Bank. MMT advocates that the demand can be insensitive to interest rate changes, so a key mainstream
assumption is that lower interest rates lead to higher demand, is questionable. It also advocates creating
money alone does not cause inflation; spending it when the economy is at or above full employment
can. It is debatable by Keynesian theory advocates. Currently, we are witnessing two sets of perception
via MMT and Keynesian Theory. Practically, MMT has been accepted and adopted since 1998 or may be
little earlier. Keynesian theory is traditional policy or mainstream economics adopted by most of the
nations in the world. Taxing and issuing bonds to spend money is the mainstream economics where
unequal distribution of income is addressed. Maximum employment and stable prices are the pillars of
Keynesian theory. Here high interest rates are used to keep the inflation under control and at the same
time, gap between the rich and the poor is taken care of.

Four scenarios in Economy with combination of growth, de-growth, inflation and deflation:
1. Scenario 1 where Growth with deflation, which is good for economy and somewhat better for
stock markets in a way but citizens benefit the most as buying power increase with steady wage.
Every part of economy does not get the benefit.
2. Scenario 2 where Growth with inflation, which is most ideal condition for overall boom in the
economy where every part of economy gets the benefit.
3. Scenario 3 where De-Growth with inflation, which is also known as ‘Stagflation’. This typical
situation is like US economy during 1970s where the inflation is mushrooming to hyperinflation
 and growth is shrinking to de-growth. It is not good for citizens but benefitting a part of
economy where government’s exchequer is getting cushion which is already affected by de-
growth.
4. Scenario 4 where De-Growth with deflation, which leads to collapse of every part of the
economy and to all the countries which are fully exposed to globalization. This is a very bad
situation like 1929-32 in USA.

In recent years, Federal Reserve has adopted the method of Quantitative Easing (QE) which is buying
own government bonds to increase money supply. The other method is Quantitative Tightening (QT)
which is vice versa of QE. Currently we are going through Scenario 2 as mentioned above. In last few
months, we have witnessed the GDP growth falling from 4.2% to 2.4% which is an average growth over
the long term period in USA. Change of interest rates is an impact on the psychology of borrowers so is
on the activity of banks. It is an important role of Reserve Bank of responsible countries to keep interest
rates maintained above at a level where inflation of respective country is ruling at. There should be a
benchmark of interest rate which may go down to a level but not to a level where it should not punish
the citizens to keep money in banks. Negative interest rate is like punishment, as citizens have no choice
but also forced to move money out of saved incomes in banks. There should be always a room for
Reserve Banks to take a drastic step to increase or decrease the interest rates for rescuing or controlling
the economy depending on the economic conditions. The problem in the free economy like USA is that
there is no direct control of Reserve Bank to prioritize the money supply to a particular sector of
economy, which sometimes leads to bubble in a particular sector then to see the consequences of it.
Quantum of money supply to a sector of an economy should have a percentile control or keep a tap on
it by Reserve Bank to avoid any bubble creation.

Capitalism is good but at the same time it is moral duty of the government to take care of their citizens
by regulating markets. There are Councils, Commissions or Boards created by every country which
regulates the money markets and is supposed to protect investors against mismanagement and fraud.
Ideally, these types of regulations also encourage more investment and help to protect the stability of
financial sector. This does not always work, as the financial crisis of 1998 and 2008 is demonstrated. The
Security Exchange Commission (SEC) in USA had relaxed the net capital requirement for major
investment banks, allowing them to carry significantly more debt than what they had in equity,
eventually housing bubble burst which led to failing of banks. Who is responsible here? Regulations
itself are flawed for crony capitalists where blame has to be taken by Capitalism.

Money supply had been artificially created by US Federal Reserve after NASDAQ bubble burst of 2000 to
protect the economy rather than leaving it to natural self-correction. Excessive money had flown into
debt market where banks started lending to Sub-prime mortgages in housing sector. Parallel to it there
was also inflating of commodity prices where Gold went from USD 280/oz. level to USD 1980/oz. in span
of 8 years. After 2008, further QE is leading to higher cost of medical and numbers rising in student
loans. Another bubble is brewing which shall be exposed once we may witness rise of a particular sector
and mad rush for the same which could be a bond market. US treasury bonds at the time of very low
interest rates have gone to historical levels where bubble shall burst when there shall be no confidence
in powerful currencies.

Federal Reserve has made a cushion for itself by raising interest rates upto 2.50% during the growth
period. It has also started QT program which is to improve its Balance Sheet. Any impact of de-growth as
a recession, Federal Reserve may start reducing interest rates again. If required, it may start a new
program of QE which may be the fourth one. Impact of QE4 with lower interest rates may lead to
stagflation (Scenario 3 as mentioned above), where eventually interest rates would rise with rising
inflation due to high money supply. In the recent scenario of slight money tightening and rising interest
rate, there was one choice left for the investors and the money managers that was to chase US Dollar as
safe haven which led to underperformance of other assets like commodities and precious metals. It shall
prove to be short lived as money supply has to go up to fill up the trade deficit and debt servicing by the
US government. This is the advantage of US Dollar being universal currency and also there is no debt of
foreign currency on US government but the local currency (US Dollar), which is manageable to an extent.
Eventually, increase of money supply by US government and inherit weakness in US economy by the
way of huge debts piled up cannot be neglected, hence the tide would once again turn towards
weakness of US Dollar (USD) and higher prices of other assets classes like stock markets, commodities
and precious metals. ECB (European Central Bank) already indicated that they will not increase the
interest rates for the year 2019 which was also the reason for the appreciation in US Dollar because of
high interest rate environment and performing stock markets. The real intend of US government is to
keep US Dollar weak and gradual higher interest rates but no support from Europe and Japan to increase
interest rates in their respective countries also led to strengthening of US Dollar. US Federal Reserve
Bank is forced to postpone the hike in interest rates for the same reason so that US Dollar should not
appreciate at faster pace.

Whether there is for Quantitative easing or tightening, it shall not affect the prices of Gold and Silver as
they are like safe haven than a hedge. Gold is a fiat currency. Sequentially, after Gold as fiat currency
then metals, like Silver and Copper are useful which can be further denominated as lower grade fiat
currencies. There shall be systemic failure in financial markets due to high circulation of money by the
big nations in the world. US government and European nations shall be responsible for the mess created
by paying debts through increasing money supply (printing notes and Quantitative easing). Since 2000,
keeping interest rates low and increasing money supply to nullify the effect of recession due to bubble
burst from the beginning of NASDAQ crash in 2000 to Sub Prime Mortgage crisis in 2008, which has
resulted into a giant bubble, and in near future, it shall be a matter of sovereign financial crisis. There is
approximately amount of USD 21 trillion of debt on US Government with increasing trade deficit and
fiscal deficit. The question is how US government will pay the debts if it is not able to raise more money
by issuing Treasury Bonds? It is evident that debt is paid by borrowing more debt. This vicious circle shall
end and it shall end very badly because here the point is failure of sovereign debt crisis. Increasing
interest rates and Quantitative tightening to control inflation shall lead to depression in the economy as
the debt amount to bring down to even US$ 10 trillion would mean financial crisis where several banks
would fail in Europe and US. It shall take a decade to bring normalcy in US economy as the mess created
is gigantic since the year 2000.
USA waging a Trade War against China and other countries is itself an example that the top politicians
and bureaucrats realize the real problem is within USA of debt servicing and trade deficit. Immediate
solution is required to service debt so Trade War is one of the ways which shall have a collateral damage
effect. Double whammy of fiscal and trade deficit would lead to depreciation of USD. Currently, USD is
appreciating because of higher interest rates and performing stock markets. It shall be short lived. China
was holding US Treasury worth USD 1.25 trillion till last year which has come down to USD 1.12 trillion.
What if China decides like Russia to completely exit US Treasury holdings? Then the only option would
be to create more money in US Dollar. It would lead to hyperinflation. China owns more U.S.
government debt than any other foreign country and reducing those holdings would be only in the case
of worsening trade negotiations. Bond markets were jolted last year when China officials recommended
slowing or halting purchases.

Value of precious metals have to go up at some point as every government is trying to keep their
currencies weak so that they do not suffer from trade imbalance, so the opportunity is looking at an
alternative fiat currency. BITCOIN (Crypto Currency) is one such example where the money poured into
big time and historical bubble was created. It is also an example of bubble burst which fell from 19000
levels to almost 3000. There shall be domino effect of bubble burst in US Treasury Bonds and Crypto
Currency, simultaneously weakening USD then money will flow into hard assets like Crude Oil, Gold,
Silver, Copper, and such other hard commodities. Gold and silver are such precious metals where
historically at the times when there is no confidence in the economy or systemic financial collapse, they
are the saviors of wealth. Once everybody starts realizing the importance of precious metals to protect
the wealth from depletion due to imminent rising inflation, that will be the time Gold and Silver will
explode while we shall experience the gigantic US debt collapse may be near to US elections by the end
of 2020.

Gold exchange standard was adopted under Bretton Woods Agreement after World War II. There are
many other instances in the history for adopting Gold exchange standard. The gold exchange standard
usually does not involve the circulation of gold coins. The main feature of the gold exchange standard is
that the government guarantees a fixed exchange rate to the currency of another country that uses a
gold standard (unit or bullion), regardless of what type of notes or coins are used as a means of
exchange. This creates a de facto gold standard, where the value of the means of exchange has a fixed
external value in terms of gold that is independent of the inherent value of the means of exchange itself.
The advocates of MMT would reject Gold exchange standard because it will set exchange standard for
the currency between the countries and money printing shall lead to instant devaluation. USA is still the
largest holder of Gold and also custodian to foreign nations. Silver is the lower denomination of Gold
where historically it was the most common bullion used for transactions. Frequency of transactions and
flow of Silver in the economy was more persistent than Gold which was being used only for high value
transactions. There is imminent threat to USD as world reserve currency which shall diminish gradually
as Russia and China are ramping up Gold purchases. Once the desired level of Gold reserves are
achieved by these two nations then precious metals prices should go up skyrocketing.
There would be a period where anomaly can be witnessed to see US Dollar and Gold would go up in
tandem. Money pouring in to buy USD for investing in US Treasury and US stock markets, at the same
time realizing currency war in the world, demand for Gold shall be there. Indian citizens are the biggest
hoarders of Gold which could be approximately 27,000 tons out of total Gold ever mined at 187,200
tons. World Gold Council estimates that all the Gold ever mined totals 187,200 tons and at the price of
USD 1300 per troy ounce, the total value of Gold would be approximately USD 7.8 trillion.

Major Holders of Gold in the world are as follows: (as per World Gold Council)
USA 8133 tons
Germany 3374 tons
IMF 2814 tons (major contributor of International Monetary Fund – IMF – is USA)
Italy 2451 tons
France 2436 tons
Russia 2119 tons
China 1864 tons
Switzerland 1040 tons
Japan 765 tons
Netherland 612 tons
India 607 tons (ranks 11th)

For six consecutive years the Russian Central Bank has been the largest purchaser of gold, increasing its
holdings by 224 tons in 2017 and overtaking China to hold the fifth spot. In 2017 Russia bought Gold in
an effort to diversify away from the U.S. dollar, as its relationship with the West has grown chilly. To
raise the cash for these purchases, Russia sold a huge percentage of its U.S. Treasuries. As global debt
continues to skyrocket, central banks might want to keep gold in their respective home ground, as it
historically has performed well during times of economic downturn and geopolitical uncertainty.
Netherland, Romania and Germany had recently repatriated Gold back from USA to their own home
vaults. England, France, Switzerland and USA are the countries which hold Gold in their vaults for other
countries and high networth individuals also. In the last few months, countries like India, Turkey, Russia,
China, Kazakhstan and Qatar started adding more Gold to their vaults. The legendary investors like Jim
Rogers, Marc Faber, Ray Dalio, James Rickards, George Soros and Peter Schiff, are buying or holding
Gold as their investment strategy. German citizens started adding up their gold buying in the aftermath
of the financial crisis of 2008 but have stepped up their Gold buying habits since then due to concerns
over the devaluation of the Euro. Because of that, more German retail investors own gold than
government bonds.

Higher commodity prices and inflation in the economy generally augur well for fewer countries like
India, China and Brazil because government gets increased revenue by way of indirect taxes. The other
part of the economy is not matured enough to offset the lower or falling commodity prices so the
economy is affected badly when commodity prices go down. India produces and mines almost every
commodity except small amount of crude oil which had been always a problem for the country. The
performance of Indian stock markets had always been good when prices of commodities go up. The
increased revenue is spent on capital expenditure by the government, which in turn increase money
supply in the economy. It also brings disparity in rich and poor. It is acceptable phenomenon in the
emerging economies with injustice to poor citizens. BRICS nations are going to outperform the western
stock markets in coming years due to inflationary environment and better sovereign debt management
by some nations.

The financial year 2020, shall be flushed with money and limited opportunities to invest, which would
result into inflating commodity prices, eventually leading to hyper-inflation in most of the economies of
the world. Situation will be vulnerable where adverse news shall keep on flowing during the year as well
as bull-run in commodities. Coming 2 years would bring more political crisis, geo-political problems
would arise, change to high interest rates, collapse of US treasury bonds, nation debt crisis, may be war
and any other new crisis in a new form shall emerge where the time shall tell. In scenario like this once
again safe haven would be Gold, silver and other physical hard assets.

Stock markets would rise irrespective of knowing facts about crisis in the coming future that is how
irrational exuberance occurs at the peak of prices and gives birth to new BEAR market. So, the explained
theory can be applied to sector of the economy, stock markets or any other asset classes having its own
definition of fundamental analysis. The notion is that if there is an economic collapse and paper money
becomes obsolete, gold will retain value. Currency is promissory note form of money of any country and
money is anything that can be exchanged for buying things, making gold the ultimate form of money
during an economic crisis.

“Logic itself is illogical as logic changes with growing rationality to irrationality.”

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By Ankur Sharda released on 1 June, 2019