Ned Naylor-Leyland: US Fed tapering is an illusion

The optimism pervading stock markets over the summer months would suggest investors, for the moment at least, believe tapering is a topic best reserved for another day. Despite the increasing column inches devoted to it, my own view is that it will not happen. Tapering is an illusion, intended to act as a guide for investors, rather than a trigger for material action. Let’s be honest, meaningfully reducing US$4.5 trillion of US central bank debt is a task of Herculean proportions.

And yet leading authorities have been commenting on the consequences of central bank actions for some time now. William White, former chief of the Bank for International Settlements, and therefore no lightweight on such matters, has been repeatedly warning of mounting debts, and more importantly, governments’ inability to pay them. ‘Debt jubilees have been going on for 5,000 years, as far back as the Sumerians,’ he opined.

The solution to today’s decaying monetary system?

But if tapering isn’t on the agenda, what is the alternative? And where, exactly, could the catalyst for a complete overhaul of the current, decaying monetary system come from?

Look East, not West. Pressure to move away from a monetary system, with US dollar dominance at its epicentre, is already evident in the Middle East and China. Trade deals are being successfully transacted without any need for the greenback. Witness the ‘oil for gold swap’ undertaken by Iran and India of late, with Turkey acting as the intermediary broker. Note too, moves by the Russian central bank opening its first overseas office in Beijing in an attempt to phase in a gold-backed trade standard.

Authorities in China have long been uneasy about relying on the dollar for the majority of their international trade, not to mention the declining value of their estimated US$1 trillion holding of US Treasuries. The Shanghai Gold Exchange, founded in 2002, is the largest physical bullion market in the world, and is thriving in its role as a major facilitator of trading gold futures outside of the US dollar.

Surely, here is the ready solution, if ever there was one, to the monumental problem that the current, dollar-based global financial system is on the verge of collapse? Here, in my view, are the very beginnings of the solution that will surely lead to the inevitable restructuring of today’s fiat currencies.

Long-term implications for gold

The implications of putting gold at the very centre of the monetary system, I believe, are hugely positive for the long-term trends in the gold price. Creditor nations, those countries having to fund the liabilities of the debt-burdened West, have come to realise that gold is the one true liability-free money. Individuals are coming to the same conclusion. There is no counterparty risk, and that’s hugely important in a world where debt is building up at an alarming rate.

But while the East will increasingly turn to gold as its medium of exchange for international trade, Western central banks, paralysed by their debt issuance, will never be able to do so. At best, all that can be hoped for is a restructuring of currencies. It’s a complete fallacy to think that the actions of President Trump alone will make America great again. The only mechanism which could restore the US to its former glory, in my humble opinion, is the abolition of the current central banking system with a return to sound money. Radical? You bet your bottom dollar it is.

History repeating itself?

‘It will become obvious in the next recession’, commented White, ‘that many of [today’s] debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something’.

The most pressing question for today’s investor is how are we going to deal with the current debt splurge? History tells us using gold at the heart of a monetary system has been done many times before. Isn’t it time history repeated itself?

Ned Naylor-Leyland is manager of the Old Mutual Gold & Silver fund