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Economics

Printing Money Can’t Replace Real Savings

Between January 1970 and December 2020 on average changes in money supply preceded changes in real economic activity by fourteen months, as depicted by real gross domestic product (GDP). Based on this it is tempting to suggest that a strengthening in…

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This article was originally published by Mises Institute

Between January 1970 and December 2020 on average changes in money supply preceded changes in real economic activity by fourteen months, as depicted by real gross domestic product (GDP). Based on this it is tempting to suggest that a strengthening in the growth rate of money supply will result in the strengthening of real economic growth. Conversely, a weakening in the growth rate of money supply will set in motion a decline in real economic activity.

The relationship between the growth rate of money supply and the growth rate of real GDP presented in the graph above is a display of historical information. But history as such cannot confirm that increases in the money supply growth rate can set in motion real economic growth. According to Ludwig von Mises, in Human Action,

History cannot teach us any general rule, principle, or law. There is no means to abstract from a historical experience a posteriori any theories or theorems concerning human conduct and policies. 

Also, in the The Ultimate Foundation of Economic Science, Mises argued,

What we can "observe" is always only complex phenomena. What economic history, observation, or experience can tell us is facts like these: Over a definite period of the past the miner John in the coal mines of the X company in the village of Y earned p dollars for a working day of n hours. There is no way that would lead from the assemblage of such and similar data to any theory concerning the factors determining the height of wage rates. 

In order to maintain their lives and well-being people require final goods and services and not money as such, which is just the medium of exchange. Money only helps to facilitate trade among individuals— it does not generate any real stuff. According to Rothbard in Man, Economy, and State, 

Money, per se, cannot be consumed and cannot be used directly as a producers' good in the productive process. Money per se is therefore unproductive; it is dead stock and produces nothing.

Paraphrasing Jean-Baptiste Say, Mises wrote,

Commodities, says Say, are ultimately paid for not by money, but by other commodities. Money is merely the commonly used medium of exchange; it plays only an intermediary role. What the seller wants ultimately to receive in exchange for the commodities sold is other commodities.1

Again, being the medium of exchange, money enables the goods and services of one individual to be exchanged for the goods and services of another individual. This means that with the help of money we can exchange something for something else.

When money is generated out of “thin air,” it means that nothing was produced to secure the newly generated money. This means that nothing was exchanged for the newly generated money. Once this money is employed in exchange for goods and services, it sets in motion an exchange of nothing for something. Individuals who are in the possession of the newly generated money can now divert to themselves goods and services without any contribution to the production of these goods and services. What we have here is the so-called money counterfeit effect. A counterfeiter by generating bogus money, which masquerades as money proper, can divert real wealth to himself without any contribution to the pool of real wealth.

The increase in money out of “thin air” sets in motion a process of impoverishment of wealth generators, i.e., those individuals who have contributed to the pool of goods and services. Hence, rather than causing economic growth, the money out of “thin air” is setting in motion the process of economic impoverishment and a weakening in real economic growth.

Money Supply Growth and Economic Busts

For most commentators the arrival of a recession is due to unexpected events, such as the coronavirus pandemic, that push the economy away from a trajectory of stable economic growth. Unexpected events or shocks weaken the economy, so it is held. But a recession is not about the strength of an economy as such but about the liquidation of various nonproductive activities. Here is why. 

As a rule, a recession or an economic bust emerges in response to a decline in the growth rate of money supply. Usually this takes place in response to a tighter monetary stance of the central bank. As a result, various activities that sprang up on the back of the previous strong money growth rate come under pressure. These activities cannot support themselves—they have emerged because of the support that the increase in money supply provided by diverting real wealth to them from wealth generators. Consequently, this weakens wealth generators.

A tighter monetary stance by the central bank, and the consequent decline in the growth rate of money supply, slows down the diversion of real wealth. This in turn undermines various nonproductive undertakings.

A recession, then, is about the liquidation of various nonproductive, i.e., bubble activities, because of the decline in the diversion of real wealth from wealth generators to them. Again, this decline in the diversion emerges once the money supply growth rate slows down or declines.

GDP Paints a Misleading Picture

Economic growth presented by government statisticians is in terms of data such as gross domestic product (GDP). The latter indicator is designed along the lines of the Keynesian framework, which equates monetary spending with income. In this thinking, more spending leads to a higher national income and in turn to a higher economic growth.

Following this logic, a tighter monetary stance by the Fed leads to a slower economic growth, while increases in money pumping produce higher economic growth. A stronger growth rate of money supply leads to a stronger pace of expenditure. (In the GDP framework, this results in an increase in overall income in the economy and hence in a higher GDP growth rate.)

In reality, the exact opposite actually takes place—printing more money weakens wealth generators’ ability to grow the economy, while a decline in the money supply growth rate strengthens their ability to grow it. Once the central bank raises the pace of monetary pumping in order to lift the economy from a recession, this arrests the demise of various bubble activities. It also gives rise to new ones.

An outcome of the so-called economic growth in terms of GDP is nothing more than the strengthening of the consumption of wealth and the impoverishment of wealth generators. All this undermines the process of wealth generation and weakens real economic growth. Because of the increase in the money supply growth rate, the erosion in the real wealth formation process is not always portrayed by the GDP data. Once however, the pool of real savings—the heart of economic growth—starts to decline, the real GDP growth rate is likely to follow suit (see discussion on this below).

Real Saving and Economic Growth

At any point in time the number and the size of activities that can be undertaken is determined by the pool of real savings. This pool comprises final consumer goods.2 Note that this pool sustains individuals who are engaged in the enhancement and the increase of the infrastructure. This pool also sustains individuals who are engaged in the production of final consumer goods.

The improved infrastructure permits the increase in the production of intermediate goods, the increase in the production of services, and the increase in final consumer goods. Once an increase in the production of final goods and services happens, this increase can then support a corresponding increase in the demand for final goods and services. Note that one must produce something useful before demanding things.

Observe that this runs contrary to the GDP framework, where the increase in monetary expenditure strengthens the demand for final consumer goods and services, in turn triggering an increase in the supply of these goods and services (i.e., demand creates supply). If, however, the infrastructure is not enhanced and expanded, it will not be possible, all other things being equal, to increase the production of final consumer goods and services and therefore to accommodate the increase in the demand. Hence, an increase in demand will not automatically result in an increase in supply. Because the supply of goods is taken for granted, the GDP framework completely ignores the importance of the various stages of production that precede the emergence of the final consumer goods.

In the real world, it is not enough to have demand for final consumer goods—one must have various intermediate goods that are required in the production of final consumer goods. The intermediate goods are not readily available; they have to be produced.

Observe that individuals, whether in productive or nonproductive activities must have access to real savings in order to sustain their lives and well-being. As long as wealth producers can generate enough real savings to support productive and nonproductive activities, loose monetary policies will appear to be successful.

Over time, however, a situation can emerge as a result of the persistent loose monetary policies where there are not enough wealth generators left and generated real savings are consequently not large enough to support an increase in real economic activity.

Once this happens, the illusion that easy monetary policy can grow an economy is shattered—real economic growth must come under pressure. Even in terms of real GDP, which mirrors monetary changes, it will be difficult to show economic growth. The only reason why real GDP could display a rising growth rate during such an event is that misleading price deflators are employed that understate the true rate of price increases. If the Fed were to accelerate its monetary pumping while the pool of real savings is declining, it runs the risk of further depleting the savings pool.

Those commentators who subscribe to the view that the acceleration in money pumping could revive real economic growth imply that something can be generated from nothing. Printing more money, however, cannot replace real savings. If stimulatory monetary policies could strengthen real economic growth, then world poverty should have been eliminated a long time ago.

  • 1. Ludwig von Mises, Lord Keynes and Say's Law: The Critics of Keynesian Economics, ed. Henry Hazlitt, (Lanham, MD: University Press of America, 1983), p. 316.
  • 2. Real savings is the amount of final consumer goods produced minus the consumption of these goods by those who produce them. Thus, if a baker produces ten loaves of bread and consumes two loaves, his real savings are eight loaves of bread.

Economics

Weekly Market Pulse: Perception vs Reality

It was the best of times, it was the worst of times… Charles Dickens, A Tale of Two Cities   Some see the cup as half empty. Some see the cup as half…

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It was the best of times, it was the worst of times…

Charles Dickens, A Tale of Two Cities

 

Some see the cup as half empty. Some see the cup as half full. I see the cup as too large.

George Carlin

 

The quote from Dickens above is one that just about everyone knows even if they don’t know where it comes from or haven’t read the book. But, as the ellipsis at the end indicates, there is quite a bit more to the line than the part everyone remembers.

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way – in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.

The book is set during the French Revolution but it does a pretty good job of describing our current condition. How you see the world is a function of your circumstances, some of which you control and many of which you don’t. There has never been one America, one that everyone perceives the same, but it certainly seems that today there are more versions of it than there have been in the past. This is true within a lot of spheres but maybe none so much as the economic one. COVID has made the divide between rich and poor, blue collar and white collar, that much more stark. There is the America of work from home and there is the America of essential workers. There is the America of shareholders and homeowners and there is the America of paycheck to paycheck. Or, increasingly during COVID, from stimulus payment to stimulus payment or unemployment check to unemployment check. The economy is in a very different state depending on your position in this hierarchy. For those of us who are able to keep doing our jobs from our spare bedroom, the last 18 months has, for many, been a boom time. For those in service businesses that were victims of the shutdowns, the last 18 months has been a time of high anxiety.

In truth, for many Americans the high anxiety is not new. COVID merely accelerated trends that were already in place. Economic growth is ultimately about two things: workforce growth and productivity growth. Both have been weak for at least a decade and really quite a bit longer. The workforce has grown pretty steadily but the participation rate has been in decline for two decades. It did stop falling for a period from about 2016 to 2020 and had even started to rise again but COVID brought that short term trend to an end.

This, almost by itself, is why US economic growth has been unsatisfying for so long. This is also the genesis of today’s “labor shortage”. We can see the effect weekly in jobless claims which recently dropped below 300k for the first time since the arrival of COVID. I heard someone say a few weeks ago, when the weekly total was 335k, that it was improving but still “elevated”. I’ve been doing this a long time and I’m getting old but my memory has not failed yet and that just didn’t seem right to me. So, I checked the history and indeed a level of 335k is actually pretty average even during the boom of the late 90s. In fact, since 1980 there have been 384 weeks with claims less than 300k and only 25.5% of them happened prior to 2014. There have been 247 weeks with claims less than 275k but only 3.6% of them happened before 2014. And there have been 162 weeks with less than 250k and none of them happened before 2014. That tells me that employers have been very reluctant to fire workers for a long time before COVID and the only reason I can think of for that is that they fear they can’t replace them.

Why is this happening? That is a question with many answers – it isn’t just one thing and I don’t think you can say that all of it is “bad”. Baby  boomers retiring is not something that is bad (in most cases) and that is certainly part of this. Some portion of this, especially since the onset of COVID, is about couples reassessing their life and deciding that the cost of a two income household is actually pretty high in ways that aren’t all economic. Some portion of it is due to the opioid epidemic (although I don’t think that is as large a part as is commonly believed). Some of it is due to an increase in the time people spend in collage; 13.1% of the population has a masters degree up from 8.6% in 2000. There is also an anger – call it wealth inequality or elite snobbery or envy or just a sense of fairness, it’s all the same – that manifests itself in the political arena. The election of Donald Trump and the popularity of Bernie Sanders and socialism at the same time are merely two sides of the same populist coin. Both sides of the political aisle recognize that the average American worker is angry and increasingly adopting a Johnny Paycheck attitude toward their employers. Where they differ is in the solutions – although in some areas there seems little difference. The divide between Bernie Sanders’ and Donald Trump’s views on immigration is not discernible to the naked eye. And there is a reason you’ve seen almost no change in trade policy since the election of Joe Biden.

It is ironic too that the provision of fiscal largesse during COVID may have finally pushed the economy to a tipping point. With help wanted signs everywhere, labor appears to have finally gained the upper hand. 10,000 workers went on strike at Deere last week and 1400 are out at Kellogg. There may or may not be an intentional work slowdown/sickout going on at Southwest Airlines. 32.000 nurses are considering a strike against Kaiser Permanente. American Airline pilots are picketing in Miami. A strike was barely averted in Hollywood by backstage workers after they got basically everything they asked for. It isn’t just union workers either as the Quits rate proved last week. I’ve written in the past about the surge in new business formations since the onset of COVID and that is part of this too. There’s a lot going on in the labor market right now and how it impacts the economy is almost impossible to say. At this point rising prices are eating up wage gains but that may not last and if it doesn’t then workers gains may turn into profit margin losses. Or it may be the spur for investments that improve productivity. Companies aren’t racing to perfect self-driving vehicles because they’ll be safer. They’re doing it because truck drivers are expensive and Uber drivers want health insurance.

Productivity growth has also been weak but the change is less dramatic than in the labor market. Since 2000 annual productivity growth has averaged 1.9% down from 2.7% from 1995 to 2000, a period of high investment and innovation. That doesn’t seem like a big change but compounded over many years it has an impact. I think a better way to look at productivity growth is through investment in capital goods. Core capital goods (ex-defense and ex-transportation) show why productivity growth has stalled:

Core capital goods orders peaked in 2000 and didn’t exceed that peak for over 20 years. As you can see though, orders have recently broken through that old top. This may be the most important economic development in two decades.

I included the George Carlin quote above because it describes how I, as an investor, have to think about the economy. I am a pragmatist and have no expectations as to how things will unfold in the future. I don’t know why people are quitting their jobs and not taking jobs that are available. I assume there is some wage level where workforce participation would rise again but I don’t know what that level is other than to say that it is higher than what is being offered today (and it certainly isn’t just about wages). I would also say that if that wage level is so high that businesses can’t stay profitable when paying it, they will do something else, they will substitute capital for labor, they will find ways to operate with fewer employees. Which may be why core capital goods orders are running higher right now. But I don’t know that and to be a good investor I can’t make assumptions. It is what it is.

This problem of perception versus reality is important for investors. Your reality does not necessarily bear on how the economy is perceived by the majority. Even objective reality doesn’t really matter for the markets in the short run – which can be a lot longer than you think. Markets tell us how the majority perceives it, not necessarily its real condition today. We have to invest based on that perception, not on reality, until we believe the gap between the two is so large that the current perception becomes untenable and has to shift to something new. And we need to understand that it is often the perception that creates the reality, the markets that shape the economy rather than the other way round.

At Alhambra, it is Jeff Snider’s job to describe the objective reality of the economy – how it really is. He is, however, human and so his perception of the economy is skewed by his own experiences and relationships. But he knows that and I know that and I think he does a pretty good job of describing the way things really are. We don’t always agree on how he describes it, the language he uses, but in general I think he gets a lot more right than most of the people in our business trying to decipher the myriad human relationships that create an economy. But the reality he describes does not always align with how we invest. It is at turning points, when the gap between Jeff’s reality and the market’s perception get too wide, that his research bears most on our investment choices.

Right now, the dominant narrative in markets is about inflation. Jeff and I agree that what is happening today is not real inflation (a monetary phenomenon) but rather rising prices that are a result of the supply side nature of the last recession. And in particular it is a condition created by government intervention, as first the Trump administration and now the Biden administration applied demand side government solutions to a – mostly – supply side problem. In short, the real problem right now is not actually supply but rather that demand is excessive due to the largesse of government “stimulus” (there are exceptions to that such as semiconductors). It was certainly necessary to support those who were truly hurt by the pandemic shutdowns. Service workers who were put out of work by government diktat certainly deserved a helping hand from that government. But the payments to those who didn’t need it – and that was and continues to be (child tax credits) a large cohort – were unnecessary, counterproductive and now hurting those who actually needed assistance. Rising prices hurt the poorest among us the most.

But the fact that today’s rising prices are from fiscal and not monetary excess is largely irrelevant to the markets and to individuals dealing with them. Investors are reacting to the “inflation” just as they would if it were driven by monetary factors. They are buying commodities, TIPS and other assets they perceive will protect them from it. And in doing so, they change markets in ways that can affect the nature of the future economy. As an investor it doesn’t matter if commodities are rising for the “wrong” reason. What matters is that they are and if you aren’t allocated there you’re missing a source of return for your portfolio. It also doesn’t really matter whether some individual commodity isn’t participating in the rally or if the general commodity indexes are rising mostly because of energy. Investors aren’t focused on whether platinum or iron ore is going up. They are focused on “commodities”, on the idea that in inflationary times “commodities” go up and they want to own them.

There is also an emerging perception, a narrative about economic growth right now, that it is accelerating as the delta variant fades. You can argue that COVID is a hoax or that delta didn’t really have much of an impact or that we’re going to get another wave in winter or whatever you want. But if the majority believes that economic growth is going to accelerate, that’s how they’re going to invest and you’re argument won’t make you a plug nickel. Investors right now are selling gold and buying copper. They aren’t doing that because they think the economy is going to slow. They aren’t selling bonds because they think growth is slowing either. Yes, they aren’t selling TIPS at the same rate as nominal bonds but that makes sense if you are worried about inflation and also think the economy is going to accelerate. We saw this last year when rates rose too; nominal rates initially went up a lot faster than TIPS yields. But eventually TIPS caught up because growth did accelerate. Will we see the same thing again? I don’t know but it certainly isn’t outrageous to think so and a lot of people do.

Our economy, the global economy, is undergoing a profound shift right now. Some of the trends that were in place prior to COVID have accelerated (labor market) and some may be reversing (investment and productivity). I do not believe there is any way to know how these changes will shape our economy and markets in coming years. Periods of economic upheaval like the last twenty years are always disconcerting, disorienting to those going through them. But similar periods in the past have also produced great innovations, big changes to the social and economic fabric of a nation. What those changes are will be revealed by the markets, through the perceptions and actions of investors, long before they are obvious. It’s going to be an interesting time for sure.


The emerging narrative about a Q4 economic acceleration gained some credence last week as the copper/gold ratio rose over 4%. Despite that move, I am not changing our economic environment assessment yet. The current level is about as high as it has been able to get since 2008 and absent a shift to a declining dollar I question whether it can go much higher. I am also skeptical of shifting to rising growth until we see a more decisive move higher in TIPS yields. The emerging economic acceleration narrative is exactly that – still emerging.

 

 

Job openings fell in August but are still historically high. Hires also fell but quits continued to rise. None of this is actually news since we’ve gotten plenty of other data on the labor market since August. But it does confirm what we already believed about the labor market.

The inflation data was wholly unsurprising and added nothing to the ongoing inflation debate.

The retail sales data was a big upside surprise though and will feed the accelerating growth narrative even though an inflation adjusted view isn’t as robust. Consumer sentiment continues to support the slowdown view but the idea that we’re near or entering recession – as some prominent economists speculated last week – seems a bit over the top.

 

We get more housing data this week and it will be interesting to see if there is any pickup. Based on my very unscientific method of talking to realtors and homeowners around the country, the housing market is cooling rapidly.

 

 

Stocks were up last week but the inflation side of the portfolio did even better with real estate and commodities both producing higher returns for the week. Non-US stocks also outperformed as the dollar fell slightly.

Growth took the lead for the week but the trend back to value seems intact.

 

 

Cyclicals and inflation sensitive sectors (real estate, materials) led the way last week.

Please note that I’ve added some new items at the bottom of this chart.

 

 

I have said many times that an investor’s job is not to predict the future but to interpret the present. Predicting the future is impossible but interpreting the present accurately isn’t as easy as it sounds. Today’s debate about inflation and economic growth and labor shortages certainly prove that by my reckoning. Is there a labor shortage? Is this inflation or is it some transitory thing that will fade as fiscal stimulus fades? Are those who had their unemployment benefits run out applying for open jobs? Is economic activity accelerating as delta fades or was the slowdown caused by something else? These are all questions about the state of the economy today, not in the future. And frankly, we don’t have very good answers for them. What markets are doing today, how people react to these things, will impact the outcome. What looks like a supply/demand imbalance causing prices to rise today could shift to something more permanent and monetary if it causes people to lose confidence in the Fed and subsequently the dollar. The long term health of the economy may improve because workers who refuse to work today cause companies to invest in productivity enhancing technology. Perception creates reality. Invest accordingly.

Joe Calhoun

 

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Economics

For The First Time Since The ’70s, Demographics Support Higher Rates

For The First Time Since The ’70s, Demographics Support Higher Rates

Authored by Bryce Coward via Knowledge Leaders Capital blog,

New projections…

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For The First Time Since The '70s, Demographics Support Higher Rates

Authored by Bryce Coward via Knowledge Leaders Capital blog,

New projections of the labor force growth rate by the US Bureau of Labor Statistics show the US labor force growth accelerating in the 2020s for the first time since the 1970s.

How could this be?

There are two reasons.

More people are working past 65 and the millennial generation is entering the labor force en masse.

Why is this important?

There are lots of reasons, but here are five.

  1. A labor force growing at a faster rate is associated with rising aggregate income and more spending power.

  2. Second, after people enter the labor force and get steady, well-paying jobs, they do things like get married, buy houses, and have kids. All of those things are associated with increased spending.

  3. Third, increased labor force growth implies faster GDP growth.

  4. Fourth, higher aggregate incomes, household formation, and increased spending is associated with firm to higher inflation.

  5. Fifth, all of these things are associated with higher interest rates.

In this first chart below, we can see that population growth (the blue bars) will continue to slow in the 2020s, but labor force growth will actually rise decade-on-decade for the first time since the 1970s.

The rise is due to both the 25-64 age cohort growing relative to the size of the population as well as people over the age of 65 remaining in the labor force for longer.

The BLS estimates that, as a result, trend economic growth will accelerate from 1.5% to closer to 2.5% in the 2020s. This would be the first decade-on-decade increase in growth since the 1990s. At that time, growth accelerated due to productivity gains rather than brute labor force growth.

Not surprisingly, labor force growth is highly correlated with interest rates. The last time labor force growth accelerated was from 1960-1980. Over that period 10-year Treasury yields increased from 6% to 16% as spending increased and inflation surged. Since then 10Y rates fell from 16% to basically 0% as labor force growth deflated and other factors like globalization contributed to outright disinflation. Now, for the first time in 40 years, labor force growth will accelerate for the next several years.

This boomlet in the labor force is likely to coincide with increases in rates, as it did the last time labor force growth picked up. This is to say nothing of deglobalization and climate change mitigation that add incremental pressure to inflation trends.

Tyler Durden Sun, 10/17/2021 - 13:10
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Precious Metals

Russia’s Gold and Currency Reserves Soar to Record-High as Economic Uncertainty and Inflation Accelerate

Russia’s international reserves have soared to unprecedented levels over the past several years, as the country embarks on gold and
The post Russia’s…

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Russia’s international reserves have soared to unprecedented levels over the past several years, as the country embarks on gold and foreign currency investments amid rapidly accelerating inflation and economic uncertainty.

Russia has now ranked fifth in the world in terms of international reserves, after China, Japan, Switzerland, and India. According to the country’s Accounts Chamber, Russia’s international reserves have surpassed $618.2 billion at the beginning of September, after the central bank raised its share of gold in its international reserves to 23.3% in December 2020— up from 7.8% at the beginning of 2014. “This is a historic record. No such figure has been achieved before in the whole existence of the Bank of Russia,” read the analysis.

Not only has Russia accumulated a sizeable amount of gold and foreign currency, the country’s reserves also include special drawing rights (SDRs), which are a form of payment issued from the International Monetary Fund. The Accounts Chamber report revealed that Russia’s SDRs have jumped substantially from $7 billion to $24.6 billion as of August. The international reserves are primarily comprised of highly liquid foreign assets that can be accessed by the Bank of Russia, while government reserves are made up of monetary gold, SDRs, foreign exchange funds, and a reserve position in the IMF.

The latest figures come as Russia’s finance minister on Thursday warned that the world risks succumbing to an unprecedented period of stagflation, as prices continue to rise rapidly while economic output slows. “Inflation is running above target in 14 of the G20 countries already and in many developed nations the scale of inflationary pressure is unprecedented,” he said, as quoted by RT News.


Information for this briefing was found via RT News and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

The post Russia’s Gold and Currency Reserves Soar to Record-High as Economic Uncertainty and Inflation Accelerate appeared first on the deep dive.

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