Destroying the young with permanent bailouts

Why aren’t young people protesting against bailouts?

Younger adults are usually pretty quick to protest injustices, but they’re strangely quiet on financial rescues. Few of them seem able to join the dots and see that bailouts are clobbering them hardest.

#1. The British economy is currently in a state of permanent government bailout. After spending all the money it raises in taxes our government prints £15 of new money per working person, per day, which it injects into the economy as public sector wages. The amount of cash in our system increases daily by about £300 million, as does the debt of the British government. If the tap were turned off we would sink into depression and most of our banks would fail amid a whirl of default and collapsing asset prices. That might be a bad thing, as most people think, or a good thing. It depends on whether you already own some of those assets, or whether you don’t, but would like to one day.

#2. That daily money torrent prevents a collapse, at least for the moment. The cash swirls around for a bit, stimulating a little demand, before settling permanently in the bank accounts of wealth accumulators – both individuals and companies. There is nowhere else for it to go.

#3. Years ago, before this continuous pumping of new money, banks had less investable cash. They had less scope to lend it badly, and more motivation to seek the highest return by finding productive outlets for the limited amount of savings available. They sought out talented, ambitious people, who would have a long career in front of them, sufficient to pay back a loan – with interest. Credit found its way to the proto-entrepreneurs who would start and drive each new generation of businesses.

#4. But with the modern money tap stuck in the ‘on’ position a sort of natural selection has favoured a less productive type of entrepreneur – typified by the property developer – who uses money to acquire non-productive, rentable assets, and leaves someone else to get on with the tedious business of producing something. The wonder of workless income and capital gains has always spawned the search for rent and capital growth. But it used to be much riskier, because market forces usually kept prices in check with sharp periodic corrections. There used not to be £300 million pounds of new cash settling daily into the hands of wealth accumulators, and propping up the values of their assets.

#5. Regular price corrections, and liquidations of overextended risk-takers, and their banks, used to redistribute property away from rent seekers, and offer opportunity to people who were productive. This was the market at work, regulating itself, and oscillating in favour of the young and the productive instead of the old, rich, and un-productive. It brought asset prices back to levels which permitted sensible buying at sensible prices, and the sensible lending to support it. That is not a bad re-allocation of capital, and it required no special rules.

#6. But then a political shift created an idea which is very beguiling – that ‘innocent’ depositors should never lose money. This meant that banks should be guaranteed by central government, no matter how poorly they had chosen their borrowers.

#7. This scheme is – like most kinds of government protection – superficially attractive. But it turns out to be very bad news for the young. It has the effect of refusing to allow the price of assets to fall, so the bad lending decisions made by bankers are never exposed to insolvency, the marketplace is never cleansed by liquidation, and the re-allocation of capital to productive youth never occurs. Eventually credit is only available to people who are already asset-rich, and the gap between poor and rich grows wider.

#8. Nowadays at thirty, and forty, you are forced to stay on in your salaried role, paying inflated housing rent, and avoiding inflated commercial rent. Because of newly indestructible wealth any shops, factories and land which used to have a capital value equivalent to 1,000 days of your labour now cost 4,000 days of it. That four-fold multiplier turns a sensible risk for a young buyer into a dangerous one for both the buyer and his bank. It’s no wonder younger people see the ‘market’ as their enemy.

#9. Meanwhile the banks are swelling with all the cancers which develop in state-run enterprises. They are no longer effective intermediaries for capital because what they borrow at 1% they distribute at 8%. They have become hopelessly inefficient at their core function. Instead they are supported by government money to provide – like corrupt governments – an increasingly politicised service while distributing almost the entire benefit handed out by government to their own staff. And as that pernicious drift to self-serving bureaucracy continues we see government feeling forced to intervene again, to correct the monster it has created, and direct banks to lend for political rather than business gain.

So where credit used to flow naturally to real business people with credible and productive plans, the government now mandates the distribution of silly little sums to politically correct but frequently un-creditworthy borrowers. Our bankers now spend their time rubber-stamping government guaranteed lending decisions to offer £2,000 of credit to a college leaver whose willingness to seek £2,000 via credit marks them as a poor risk in the first place, but whose competence at form-filling defines them as a lending prospect not to be discriminated against.

Government intervention has suppressed the price of credit, inflated asset prices, and directed ever larger sums of credit to the already-rich. It has made a mockery of what was previously a credit market. We rarely see markets operating any more; we see government regulating and dictating supply and price. The reason free choice through the market is not now working well is because previous interventions have broken the ability of free choice to apply its regulatory magic. So government blames the market, rather than their own clumsy manipulation of it, and they stack interventions one on top of the other trying to tame the beast of their creation. But that just makes it bigger and uglier than before.

Wouldn’t it be wonderful to hear a new generation demanding the market be allowed to function properly? Wouldn’t it be wonderful if a couple of million people under thirty finally got the fact that, far from being their oppressor, the unspoiled market is by far and away the best method of delivering practical democracy, freedom, choice and both individual and collective advancement?

Ten times a day or so, each of us chooses how our personal resources are deployed. In Britain the marketplace can thus count half a billion trivially small votes cast by 50 million people daily. The sum total of our economic votes grows the things we approve of and consigns the things we disapprove of to the dustbin. This is how we protect and promote minorities; by allowing smallness to be adequately supported by a small and enthusiastic constituency. It is the mechanism of the market which supports specialisation, diversity, choice, liberty and – let’s not forget – efficiency. Government simply cannot compare.

But it can certainly obstruct.

Every time the government takes a pound of tax from you it re-directs it into a state run intervention which will never be tested by your freedom to choose. If you are a middle-income earner, already more than half your income is now taken from you and dropped into inefficient and ill-considered government schemes. You – meanwhile – are reduced to subsistence; because it is impossible for you to save. You can neither accumulate capital nor vote your money toward your own preferred minority interest, because the government takes all your discretionary spend from you for its officially righteous, publicly endorsed projects.

The government took responsibility for our after-school club. It is now overstaffed and half-empty, because they put it in the wrong place, and with state-assured funding there is no market vote forcing it to re-locate to where willing customers would pay to fill it up.

The nearest sports ground is 4 miles away, put there by a non-sports-playing bureaucrat to stimulate a run-down area which is too poor to support any jobs because the return on employment (and the cost of living) are below the government’s minimum wage. That’s why – instead of supporting low cost services delivered with low overheads – the area has become a complete job desert and a demand void.

There, the local pub closed for the last time last month. Government taxes a business premises at 5 times the rate of a private residence – mainly because the business has no quintennial vote. The market on the other hand used to count the pub’s vote too, because its demand automatically allocated resources to things which served the business, like local staff. But that ability to vote by paying for the things it needed was eliminated by government imposing tax rise after tax rise on its premises (business rates), on its staff (Employers’ National Insurance), on its product (sin taxes), or on anything else which does not get experienced directly by significant numbers of voters.

So jobs are lost and choices are removed. And soon the pub will be a local eyesore, and that’s because of another intervention. You can’t just buy it, fix it up, and live there. You need a change of use licence, which won’t be granted because the owner has to pay the five-fold elevated council business rates on the property until it’s condemned – a process which forces the landlord to pay while ‘encouraging’ its drift into ruin. So it’ll be dragging down the neighbourhood for years.

Everywhere you look government interventions stifle our choices in free exchange and trade. We’ve forgotten that democracy is not centred on a quintennial popularity contest at election time. Real democracy is about organising things so that as far as is possible those 500 million daily economic choices of free people cause society to re-shape itself according to what people want. It is through the private decisions of un-regulated free exchange and trade, with its self-adjusting expansions and contractions, that government of the people, by the people, and for the people is properly implemented. The market is where you vote.

Oh dear. Having set out to explain that deposit protection is not benign I find I have wandered a little off topic. I seem to have ended where I so often end these days, feeling increasingly desperate and wondering why people cannot see it. We are falling into the oppressive command economy, where all property, price and process are government business, and where nothing happens except slowly, and inefficiently, with explicit government approval.

Even as I finish writing, the public voice of intelligence – BBC radio’s Today program – spits out the word ‘un-regulated’ with its standard contemporary implication of cheating and shoddiness. They too have fallen completely into the trap.

This article was previously published at


How to fix financial services regulation

As I was reading of yet another spectacular mismatch between bank managers’ competence and their remuneration, and this time at JP Morgan no less, I realized there is a simple solution which really could be implemented.

Make the cost of regulation zero – or very nearly – for unlimited liability partnerships. Then let judicious self-interest, exercised by the partners themselves, do the rest.

My father was what they now call an ‘investment banker’. His firm got it wrong by expanding business into the 1970s’ slump, and when it went wrong the Official Assignee took everything he owned. That was in the days when partners had joint and several liability, which meant that all the top management of a firm were personally liable for the entire debts of their business.

Joint and several liability quickly weeded out the incompetents, the gamblers and the unlucky (my poor old Dad, I like to think). It made managers look very carefully at their colleagues’ strategies, and concentrated everyone’s efforts on controlling risks, rather than seeking bonus-building nominal profits.

The approach was discarded in 1986 after 150 years of pretty effective operation. It wasn’t perfect (what is?) but we were all very stupid to think we could do better by replacing the natural damper of direct personal liability with a combination of salaried and bonused managers, and sixty thousand pages of regulations.

I realised this morning that official regulation of financial services has become so onerous and so unsuccessful at loss prevention that joint and several liability could easily be re-introduced. All it would need would be a subsidiary arm of the regulator, set up exclusively for the regulation of investment businesses run by unlimited liability partnerships.

Lots of reputable financial professionals do not get big bonuses, because they work competently in the low-risk, low-return areas of the industry. Yet within the regulated sphere of financial services, there are so many complex rules that even these firms have to employ more compliance officers than accountants, while at the same time funding the wretchedly unfair Financial Services Compensation Scheme in the UK, or Federal Deposit Insurance Corp. in the US – which is a bit like being forced to pay for the car insurance of your drunken neighbour.

They should be given the choice of submitting to financial services, or choosing a simpler system, where they put up as collateral their house, their car, their holidays and their children’s school fees, and – within reason – are left to get on with managing their business risks as they see fit.

Making management collectively liable for their mistakes has lots of benefits.

  1. Size – Because partners all want to be able to understand their whole business it encourages smaller and less systemically dangerous organisations – ones which are not ‘too big to fail’
  2. Growth and competition – It encourages business formation, something which has ground to a halt now because of the huge cost of setting up a compliant organisation;
  3. Attention to detail – It forces revenue generators to be more critical about risks, rather than leaving it to formulae which pass the rules and get boxes ticked, but do not work in practice;
  4. Liability – It encourages senior management stability and accountability, and suppresses the job merry-go-round whereby careers advance by sweeping problems temporarily out of sight and quickly changing jobs;
  5. Rewards – It directly links remuneration to risk, as well as to performance;
  6. Clawback – It keeps all prior remuneration still in the compensation pot, to be reclaimed in the event of future investor losses.

Our experiment with rulebooks, regulators and salaried managers has been a bit of a disaster. Maybe a partial return to the old ways is not such a bad idea.

A version of this article was previously published at on the 14th of May.


A modest proposal

A gold sovereign coin is within the UK tax authority’s definition of investment gold. But would a new one pass the tests of fairness which government rightly demands of the investment industry?

Probably not. It retails from the Royal Mint for £495 on a day when its gold content is worth £244.78. Sovereign gold costs more than twice its real value. It is a wonder they can sell sovereigns at all, but they can, because of a tax anomaly. There is no capital gains tax on legal tender, and the sovereign — worth £244.78 in gold — has a nonsense legal tender value of £1. The tax status of a sovereign rests on your infrequently exercised right to pay with one in Poundland.

This is not the only tax anomaly around gold investment. Long-term owners of real gold see a rising apparent value but devaluation flatters to deceive, and they end up paying capital gains tax on inflation. Meanwhile, here we are in the midst of a financial crisis caused by derivatives, yet, amazingly, the most common gold derivative — the spread bet — is tax free. It is a strange distortion which encourages leverage, disadvantages the dull business of saving, eliminates potential government revenue and is probably acting against the long-term national interest.

For the time being, London remains the world centre for professional bullion trading, thanks to its time-zone advantage and its unique infrastructure and expertise. Gold bullion turnover in the London market averages more than $240 billion per day, which is deeper liquidity for buyers and sellers than all but the four most heavily traded currency pairs worldwide. So, in spite of the ill-advised disposal of half the British gold reserve 12 years ago, we remain, for the moment, at the centre of world gold trade.

But we are losing ground. Already the emergence of a Far Eastern kilobar market is attacking the dominance of worldwide 400oz loco London bullion settlement. The increasingly profitable trade is to ship unwanted 400oz bars from London to the Swiss refineries, convert them to kilobars and freight them to Shanghai, where a premium awaits. What drives this trade? It is the relative attraction of real bullion in Asia and the opposite relative attraction of derivatives in London. Tax asymmetry is partly to blame.

Zurich, Hong Kong, Mumbai, Shanghai and Singapore have all detected the UK’s ambivalence to physical metal, and they are jostling for position, building vaults and repatriating reserves from London. They know that financial markets cluster around gold, and that gold markets need deep leasing liquidity, made possible by large stocks. Running the world’s gold market is a big prize, and it is not something which London wants to lose carelessly.

Can we reverse London’s diminishing status? Yes, it is easy, and we can straighten out a number of problems all at once.

Gold investment has once again proved itself in tough times, and gold is about to regain Basel 3 tier 1 capital status, making it very useful to banks. So make private gold deposited at the Bank of England free of capital gains tax. This would dramatically increase the financial firepower of the bank at a time when our commercial banks need support, as might our currency very soon.

Then, to make it sufficiently attractive for private money, enact a right to convert that deposited gold into sovereigns, subject only to seigniorage (coin production tax). If the Royal Mint cannot do this much cheaper than it currently does then break its monopoly, which will quickly eliminate that 100 per cent premium and get a better deal for everyone.

Privately owned gold will then take one of two routes. It will either support the financial strength of the Bank of England and, through this support, our banking system, or it would exit the vaulting system to private possession as a fairly priced gold coin, generating tax revenue where — because of the absurdity of tax-free spread bets — none is currently generated.

Private savers will no longer suffer an iniquitous tax on inflation simply through holding real gold. Their new status would be closer (and fairly so) to tax-exempt pension savers, but their wealth would be both reversing the current bullion stock depletions from London and supporting British financial strength with Basel-approved capital. Pension savings do not do this.

The Treasury would benefit, and London’s primacy in bullion marketplaces would be supported with private, not public, money placed there freely and by investor choice.

Finally, there is also a significant insurance benefit. We do not know if there is a route out of a £1 trillion national debt. Some hope there is; we cannot help thinking otherwise. Suppose we are right: gold will better underpin a future currency system than will betting slips.

So that is consumer choice widened, a level playing field for tax created, a pillar of London’s financial services marketplace supported, increased revenue for the Treasury, increased financial strength for both the central bank and the currency – present and future – and an expensive monopoly broken.

This is our modest proposal.

A version of this proposal first appeared in the Parliamentary Yearbook 2012. This version was published recently at


Cameron chose well

The markets are telling us that there is a painful abscess in Europe, with the Euro at its core.

We believe it is driving Germany and France a little mad, and that they are abusing their European partners as a result. They are about to commit an injustice which will strip away the profound goodwill which they have built up over 50 years, and they risk tearing Europe apart.

All our European friends are today irritated by Britain’s refusal to come with them. Not for the first time we are the odd man out, and being pointed at by the shallowest politicians in Europe. It’s OK. We can live with a little name-calling for the moment, and we look forward to quietly rebuilding our friendships with every one of you in the future. We hope it will be soon, although we fear it may not be.

You are right. Our British financial system contributed – in part – to the mess we are in. But you are wrong as to the reason and the solution.

What really happened is that over a period of years the political classes in New York and Europe (including the British) worked together to hold down the cost of credit. Ever since 2001 western politicians suppressed the will of the market to enter into a mild recession. What is this ‘market will’? It is the combined message from a thousand million transactions a day, expressing the free choices of 400 million people. Looming recession is the evidence that free people think it sensible to cut back a bit.

In 2001/2 that’s what western people chose to do. But the politicians wanted them to go on spending. “Put off recession to ensure re-election” said their advisors. How? By making central bank money available cheaply to the banks.

Of course we agree that bankers’ bonuses are a problem which badly needs addressing. But politicians, not bankers, created the febrile and ultimately ruinous deal-making atmosphere of 2004-2006. They skewed the economic landscape by continually releasing funny money from the central banks, and opposing the tendency to mild recession which was the judgement of the market; that means our judgement.

Politicians created a world where the only bankers who could keep their jobs were credit addicts. The villages around London are full of redundant and cautious 60 year old bankers who lost their jobs when their natural risk-aversion allowed credit-fuelled junior banks to win all the business, take them over, and clean out the old guard. Easy, state-sponsored credit found its home under the control of inexperienced and overenthusiastic bankers. They thrived only because politicians had skewed the economic landscape in their favour.

Yes, we can blame ‘the free market’ because those who acquired credit got it freely in trade with a supplier of credit. But to take this line is to wilfully misunderstand what the market is. The market is your freedom to choose. The marketplace is what you get when one billion purchasing decisions are made every day by 400 million individuals who are exercising free choice. The problems occur when people exercise those choices unwisely, which they will certainly do if they are being pushed and shoved into purchasing decisions which suit politicians seeking re-election.

Ever since 2007 the market – that is everyone who has made a choice about it – has been waking up to the deep contradictions within the Euro. Gordon Brown (let’s give him some rare credit) was one of the first. He had understood that no-one was asking the key question of how the Euro could hold together when the weaker nations were bound into union with the extra-ordinary productivity of Germany.

In Europe nothing so simple as an awkward question is allowed to get in the way of government progress. They marched forward regardless, and now the pesky market is expressing the opinion of a billion votes a day that the Euro is going to fail. Why? What went wrong?

This did. The false market in borrowed money which the politicians created back in 2002 made money accessible mostly to people who were a good risk to lenders – which means mostly older, richer people. To begin with they bought houses, which dragged the price up to impossible levels for first time buyers. The money continued to be pumped in by the central banks. Next to bubble was investment assets, and once again it suited those who were already wealthy. Poorer people got to keep their jobs, but investment assets, the bedrock of a retirement income, were becoming ever more expensive, making nice capital profits for richer people but yielding less and less in income. So it was again profiting those who already had money, and condemning hard-working people to a lifetime of slog, crowned with a tiny pension.

Yet whenever the government looked at the numbers there always seemed a risk that if they took their foot of the monetary accelerator the economy would stall; and it would have. So still the money was pumped in, and now bond yields descended to 1.5% as their values bubbled (a bubble which remains un-pricked) and hundreds of billions started accumulating at the banks.

Houses and a comfortable retirement were by now out of reach of hard-working, deserving and particularly younger people. But the enemy was not the free market, still the only practical embodiment of their freedom; the problem was the corruption of the market by monetary politics.

It was the irresponsible and self-serving policy of elected representatives – seeking re-election all over the western world – which is without any doubt the root cause of the explosion of credit which we now have to pay for. Politicians have hoodwinked you if you believe ‘the market’ or ‘the bankers’ are at fault, and you should not be taken in. The market is not a thing you can meaningfully blame. It is simply an expression of a billion private votes cast every day in what appears to both buyer and seller to be sensible and private trade, under the prevailing conditions set by the politicians. The problem was the prevailing conditions set by the politicians, not the mechanism of the market which was, as it always is, simply an expression of the judgement of free people.

But still easy money aggregates to richer people, not poorer ones, and we had ended up with an enormous pile of their savings. It had already bought houses, and investments, and still more kept on coming. Eventually vast quantities accumulated at banks, and for want of remaining opportunities it was lent to underfunded governments. As it turned out this was extremely unwise, because those governments are now threatened by default. That always looked possible, because none of them could keep up with German economic growth.

Bad lending happens from time to time. Usually it means the creditors lose their money, and gain some wisdom. Only this time some of the creditors – particularly Germany and France – don’t want to lose their money. Rather than see their banks suffer they want to force two or three generations of Greeks, Irish, Portuguese, Italians, Spanish and Belgians to pay, pay, pay. Germany and France lent stupidly to your father, yet you become the indentured slave.

That should never be how bad money-lending is resolved. The lender should take the hit when the borrower cannot repay; it helps to focus his mind before he lends. In Britain we got rid of inter-generational debt servitude 200 years ago, and it is not progress to return to it.

But default now would be particularly bad for German and French banks, so our European friends are deluding themselves that what is at fault here is ‘the market’, which is why they are trying to devise ways to tame it. What they want to do is to stop it from making its judgement against the Euro, so that they can follow on with their agenda, controlling first one market, then the other, and always with the officers of Brussels making the decisions which are ordinarily made by people exercising their free market choices. The current European plan is to disenfranchise your judgement upon them by making the financial marketplace somewhere which is too expensive for you to cast a vote, because it will be taxed by them.

Right now they have the financial services market in their sights. If – they reason – they can stop those votes being cast in the marketplace then they can carry on doing what they do (which obviously must be right) and no-one and nothing will hold them to account.

To be fair that is not their conscious intention. They are simply trying to repair a difficult situation of massive debt. But they are failing to make the intellectual connection between free choice and markets. That is a common weakness in governments, and this is what caused David Cameron to be hauled before his Franco-German counterparts and be instructed to accept a tax on financial services.

As it happens in Britain we made the same policy errors as Europe, we created the same mountain of money, we have a similarly bust government, and so we have in one country a microcosm of the entire European mess. But we are going to resolve it in a very different way. We are not going to turn into slaves the subordinates and the children of people who borrowed our money. Nor are we going to take the money explicitly from those who lent it (though perhaps we should). That won’t happen because that would mean our government would go into default, which it will not do while it controls the issue of money. So, instead, we will use a third way.

Our government is going to live with a profound devaluation of Sterling, which will eliminate the government’s own debt without explicit default. In this way it will share the pain of default across all creditors. All savers – even those whose debtors are perfectly solvent – are going to share in setting this thing back on a sustainable course.

At different stages through this process of adjustment we will experience interest rate hikes, currency crises, and sharp inflation, which will continue until twenty five years of savings, and twenty five years of a credit-fuelled house price bubble, have been removed from the system by devaluation. By the time it ends the creditors – taken collectively – will have paid. By then houses will be again affordable by anyone with a half decent job, the bond market bubble will have burst, long standing pension savings will be near worthless, equities will again yield sensible dividends, student loans will have inflated to irrelevance, our freedom to choose our private actions in our marketplace will have been preserved, and Britain will again be a great deal fairer than it currently is. It’s going to be a very unpleasant journey and it looks like we are making it alone.

In Europe many will doubtless laugh quietly as all this happens to us. But they will have no reason to hate us for our problems, which will be wholly independent of theirs. Besides, they will probably be too busy hating each other. The creation of the Euro has caused 1,000 years of carefully constructed and often hard fought mutual independence to be sacrificed on the altar of monetary union. We think that Europe’s political class is making a monumental error in holding on to it because it carries all their political credibility. Their resulting policy is to enslave half of Europe, and to kill the messenger – the financial market. This happens to be the section of the European economy which we in the UK have specialised in, while we have been buying German cars, and French aeroplanes. So let’s be clear, David Cameron did not have much of a choice.

In summary then, the proposed Franco-German policy is built on the lie that it is the market which is the cause of the problem. We think their policy is dangerously brutal to European debtors, that it is unfair to Britain, and that it transgresses the existing treaties whose laws were designed to stop governments doing exactly what the leaders of France and Germany now want – which is to suppress the rest of Europe into servitude. We think it will end in deep loathing of Franco-German power, and destroy the one part of Europe which we wanted to join, and which can be saved if we stick to the existing treaties. That is the single market. To us it is a single market of free choices which guarantees the freedom and the prosperity of our continent, yet that is what is being destroyed in an effort to cling on to the Euro.

Contrary to popular belief most of the British love Europe and the Europeans. But we also love our free market and the way it exposes the vanities of overreaching politicians. Last week Germany and France forced David Cameron to choose between the two, and he chose well.

This article was previously published at


The Economist’s Perfectly Useless Gold

Would you – or China – rather own gold 8 years from now, or US Treasury bonds…?

ON THE LETTERS’ page of The Economist last week, Nils Sandberg from Cambridge University’s Judge Business School presented a common argument against gold’s current value.

According to him, gold is in bubble territory because it has few industrial uses. Disproving Mr Sandberg’s thesis is childishly simple.

  • Take one £20 note out of your wallet;
  • Consider the industrial applications of the paper it is printed on;
  • Now burn it.

Well, why didn’t you? After all, its value – according to Mr Sandberg’s thesis – rests on the paper’s usefulness in industrial processes.

Nevertheless it’s still interesting to understand why gold (like £20 notes) is valued above its manufacturing relevance. Unsurprisingly the answer lies in marginal utility.

Gold offers humanity one exceptionally useful property; it has an extraordinarily stable stock. There are 166,000 tonnes of the stuff above ground – worth about $8 trillion (£5 trillion) – of which about 88% is held as a value store of sorts, in jewellery (52%) and bullion (36%). The stock is growing by about 1.5% a year, from the combined efforts of all the world’s miners.

It is because gold is each of (i) geologically rare, (ii) elemental (i.e. incapable of being manufactured) and (iii) industrially useless, that it has this reliable stock quantity. Nothing else can do it; not silver, which is 80 times more common in the ground, nor platinum, which is far too useful as a catalyst to offer stock stability.

Reliable scarcity is the key property savers require of money, which otherwise fails to store value. But of course we don’t need gold to deliver reliable scarcity, we can usually create that reliable scarcity artificially, as we do with our modern currencies.

Now the marginal utility explanation. When new currency is too freely issued reliable scarcity becomes under-supplied, and savers go in search of it. Having seen artificial reliable scarcity fail in one currency, the promise of it in another is unconvincing, so they turn to natural reliable scarcity, and demand for it increases dramatically as governments print money. This is what drives gold up.

Mr Sandberg is right though, that gold will eventually go down again, when currencies’ artificial scarcity once more becomes reliable, and when those currencies start to generate a yield. But in the meantime it looks irrationally optimistic to hope that the US government – faced with a $21 trillion debt – will not print more and more money.

The question, therefore, is whether the savers who own $100 trillion of dated debt instruments in the bond markets will take fright at continuing money printing policies of the US and other governments. That $100 trillion of dated debt has already started running down the clock. It is shifting to the short end, where it behaves more and more like cash. Maybe its holders will demand cash (as is their right) at its redemption. The sums involved would swamp the $15 trillion of cash and near-term deposit instruments currently in issue.

People who choose to buy gold are increasingly aware of this possibility. We don’t know whether the Dollar, the Euro, the Yen and the Pound (all of which have started a debt market drift to the short end) will ultimately go into the currency death spiral. We are just mindful that it is the usual destiny of currencies driven by political expedience toward the printing press. It looks like a possibility at least.

To finish with here’s the brainteaser which the Chinese are currently wrestling with. Now that you know the US debt profile is slowly shifting to the short end, and represents about six times the currency in issue, you are required to choose today something to own in 2020. What would you (or China) rather have – a tenth of the US Treasury’s paper bond debts, or five times its very large gold reserve?

At current market prices these two are worth about the same. But in the intervening 8 years, the US government has budgeted to issue $8 trillion net of its own bonds, representing an increase in the stock of 57%. A further $1 trillion of gold will be mined worldwide, an increase in the global stock of 12%.

This article was previously published at