In today’s issue:
- How to assassinate President Trump
- Gold is pricing in tighter monetary policy
- Trump is tempting Liz Truss’ fate
The gold price has taken a hit since President-elect Donald Trump won his election. The question is why.
Will Trump solve America’s debt problem? Will he “whip inflation now,” as they used to say in 1974? Will he bring about peace on earth? He’s been hanging around too many Miss Universe contests if he really thinks so…
I think gold markets are signalling something rather familiar is about to happen to the US president. Familiar to European voters, that is. Especially those in the UK, Greece and Italy…
The Bank of England’s coup
On 6 September 2022, Liz Truss came to power promising radical spending and tax cuts. She also wanted to reform the Bank of England, which she very publicly blamed for allowing inflation to reach double digits.
It was a radical agenda that drew the ire of the Bank of England governor, Andrew Bailey. He wanted to remain independent from government interference. And he warned about a debt crisis if the government got its way.
Truss even claims he vetoed her choice of who would lead her Treasury:
“I still resented the fact that I had been obliged to block the chancellor’s preferred candidate at the behest of the bank governor, Andrew Bailey, who warned of an adverse market reaction.”
Those words “adverse market reaction” have come to mean a lot since then. In hindsight, they were not a warning. They were a threat.
Anyway, the leader of the government and the Bank of England were at loggerheads. And the Bank had already claimed one scalp in Truss’ government.
This battle for control was the motive for what happened next.
On 15 September 2022, the media reported that Chancellor Kwasi Kwarteng was planning to reveal an extraordinary mini budget on 23 September.
The day before that mini budget, the Bank of England held its monetary policy meeting. It decided to begin £80 billion of bond sales. It also decided to raise interest rates by half a percentage point to 2.25%, the highest level since November 2008, despite declining GDP.
The change meant the Bank of England would go from buying government bonds in support of government spending during the pandemic to selling government bonds to reduce inflation. It also meant interest rates had soared from pandemic levels.
Not only would the government be left trying to fund itself at higher interest rates, the Bank of England would actively be undermining those efforts by selling its bonds too.
These moves made the UK bond market incredibly fragile by heaping a dangerous load onto the camel’s back. Bonds had already crashed in price over the previous months due to inflation. It would only take one more straw to trigger trouble.
Crucially, the Bank of England did this the day before they knew the mini budget would be released.
The die was cast.
The day democracy died in the UK
The next day, Chancellor Kwasi Kwarteng went ahead and revealed his mini budget on schedule. It laid out an enormous £45 billion tax cut. But failed to provide the corresponding spending cuts.
The bond market cracked. It was too much: the tax cuts, the Bank of England’s bond sales, the cost of energy crisis policies, the mountain of debt accumulated during the pandemic and the Bank of England’s higher interest rates on government debt… the camel’s back broke. The pound plunged. Bond prices crashed, but only a little… at first.
The drop in bond prices triggered a peculiar crisis in the pension system which only worsened the crash. Pension funds, presuming that the Bank of England was backing the bond market, had borrowed money to invest in bonds. When prices fell further than they had considered possible on the Bank of England’s watch, they panicked and began to sell the bonds. This created a self-sustaining plunge.
But here’s the crucial thing to notice: the Bank of England did not intervene in the crash. It failed to prevent the drop. It failed to restore calm to markets by buying bonds as it had in other crises. It was this failure to act that unseated the government.
To be clear, we don’t know if the Bank of England actively sabotaged the government by dumping government bonds onto the market, as it had announced it would begin doing the day before. We don’t know if it contributed to the crash deliberately either.
But we do know there was a deafening silence from the very institution created to manage the national debt and ensure financial stability. You could call it negligence. Or worse.
How to get away with monetary murder
The Bank did eventually intervene to calm markets. Five days later!
On 28 September it announced a new bond buying programme. This was amusing at the time. The Bank went from buying bonds during the pandemic, to selling them for a few days during the budget crisis, and straight back to buying them because of the budget crisis. It also announced a return to selling them again shortly after the budget crisis… which was also reversed.
It reminds me of that iconic scene you see in many a Western movie. The rogue cowboy shooting at the feet of the mayor to make him dance. That’s what the Bank of England was doing in the bond market. And Liz Truss and Kwasi Kwarteng were dancing like a pair of puppets in the media each day.
Anyway, the principle that the Bank could decline to intervene during a bond market panic had been established. What happened next made it obvious that the politicians had learned the lesson the Bank of England had dished out.
The first victim
The Bank of England announced that the emergency bond buying program designed to end the mini-budget panic would end on the 14 October. And so Liz Truss fired her mini-budget Chancellor on that very day.
He was the first victim.
A sacrificial lamb provided by the prime minister to show she knew who’s boss – the Bank of England, not the PM.
Here’s how Chancellor Kwasi Kwarteng described it on the Leading podcast with Rory Stewart and Alastair Campbell:
“And what the Bank of England said was, ‘OK, we’ll open this window, so you can borrow the money, and we’ll support you, and we’ll buy back the bonds. But the window will close on 14 October.’ Which was the day I was sacked. Because the Prime Minister was terrified that when the market opened on the Monday the 17th, the Bank wasn’t providing any support and there would’ve been a massive a freefall.”
The UK’s prime minister was so terrified the Bank of England governor would allow the bond market to crash again that that she fired the chancellor of the Exchequer to signal she had given in to the governor.
Adding insult to injury, as soon as the chancellor had been dealt with, the Bank of England announced it planned to delay the restart of bond sales after all. This was Truss’ reward for giving in. She could rest easy that the Bank of England would not undermine the bond market again.
But, like all good crime stories, there was another victim to come. Because, according to the Financial Times, Liz Truss was still secretly plotting to get rid of the Bank of England governor.
He got there first.
The Bank of England governor picks the prime minister, not vice versa, and certainly not you
Within weeks of the bond market meltdown, Liz Truss joined her chancellor on the backbenches thanks to the reputational damage that instability in the bond market had caused.
Who had caused it remains up for debate. But the failure of the Bank of England to prevent it is not. The Bank specifically waited long enough for the political damage to the government to be done. An extraordinary act given the Bank was set up to manage the government’s debt and its mandate includes financial stability.
So we know who holds all the cards, then. The governor of the UK, not the prime minister. And if you think I’m exaggerating, here it is, in black and white, in the Wall Street Journal: “How Britain’s Andrew Bailey Got His Man” and “The Bank of England Chief takes revenge on Prime Minister Truss.”
Revenge? If this were to occur in a developing country, we’d call it a coup. An unelected government bureaucrat manipulating financial markets to undermine a democratic government. And then get rid of its two key leaders.
But, truth be told, it’s not that unusual in Western democracies…
In fact, you could say it’s been the norm since the 2008 financial crisis sent government debt to the moon in parts of Southern Europe. And then the pandemic did the same in most of the rest of the world in 2020.
The question is, will it occur in the US in 2025? Will the Federal Reserve pull the Liz Truss playbook on President Donald Trump?
That is, will it use excessively tight monetary policy to undermine the government in the bond market?
If so, those higher interest rates would undermine the demand for gold… at first. A decent yield on a US government bond is just too enticing for investors looking for a safe heaven. They’ll buy those bonds instead of gold.
Of course, the chaos caused by the Fed sabotaging the US bond market would cause gold to surge eventually. If bonds become a political weapon in the US too, that undermines their investment case. That’s what I would’ve spoken about at the upcoming Gold Summit 2025.
That’s right, we’re hosting the third Gold Summit starting on Monday 9 December. To find out more, and secure your invite, click here.
I’ll be asking one of our guests about the theory that the Fed and President Trump will have a bust-up. And what this would mean for gold.
For now, it seems Trump and Fed Chair Powell have already begun the public display of disaffection that Liz Truss and Andrew Bailey did too. Trump threatened to fire Powell. Powell responded he could not. And so the spat was on.
Trump is playing a dangerous game by taking on the Fed. No European politician has defeated the European Central Bank yet…
Until next time,
Nick Hubble
Editor, Fortune & Freedom
