Disaster Is Coming…So I Bought These Coins From the U.K. Mint

I bought a bunch of silver coins this week. Brooksley Born made me do it. 

Unless you’re related to Brooksley, it’s understandable that you would not recognize the name. Back in the late ’90s, she headed the Commodity Futures Trading Commission (CFTC), the U.S. regulatory agency that oversees futures and derivatives and various investments that Warren Buffet once called “financial weapons of mass destruction.” 

Well, when Brooksley took over the CFTC, she came across a shocking reality: A corner of the commodities market known as Over the Counter commodities were basically unregulated. This corner included “derivatives,” a gargantuan pool of assets that only those trading them knew about. In fact, government regulators largely had no idea this trading was even taking place. 

Brooksley realized disaster was afoot. 

She was particularly worried that Wall Street banks were selling these timebombs to customers who did not comprehend the risks that they were taking on. So, Brooksley set out to impose regulations, to prosecute what she saw as bank fraud, and to protect investors from the explosions she knew were coming. 

Alas, Alan Greenspan, chairman of the Federal Reserve at the time, dismissed Brooksley’s worry and noted that banks and institutional investors were sophisticated enough to “regulate themselves.” Financial-industry lobbyists rose up in revolt against the CFTC. 

Born ultimately resigned. 

And eight years later, a form of derivative called “credit default swaps” exploded in spectacular fashion—a financial Hindenburg that took down the U.S. housing market, collapsed the 164-year old Wall Street giant known as Lehman Brothers, and destroyed economies from Iceland to Ireland to Greece. 

Per usual, the Federal Reserve was dead wrong, and the world suffered. 

I tell you this because it’s Brooksley’s warning all those years ago that still rings loudly in my ears.  

I was a writer at The Wall Street Journal at that time, and I remember reading about this stuff back in that era. It was a go-go time on Wall Street. No one wanted some super-soaker raining on the parade. And everyone thought (decidedly wrongly) that Greenspan and the Fed could do no wrong because they’d engineered such a grand party in the stock and bond market of the 1990s. 

Well, I’m here to tell you that the Fed is infinitely fallible. That’s a fact proven time and time again. 

Just before the Greenspan-inspired Great Recession, the Fed’s balance sheet held just under $1 trillion in assets. The Fed uses its balance sheet to push and pull on the economy. When it wants to stimulate the economy, it buys assets and sticks them on its books. Which is why for decades now the Fed has responded to any sniffle and hiccup in the economy or on Wall Street by immediately expanding its balance sheet. 

Today, the Fed’s balance sheet is just over $8.6 trillion. That’s a nearly nine-fold increase over a period in which the U.S. economy grew by just 59%. Moreover, $8.6 trillion means the Fed owns assets equal to 38% of the entire $23 trillion American economy. 

Tell me the U.S. economy has been totally propped up by the Federal Reserve without telling me the U.S. economy has been totally propped up by the Federal Reserve. 

Those numbers are worrying. 

They say that as the Fed shrinks it balance sheet—and it has to—the U.S. economy will face structural changes and weakness. They say that as the Fed sells off its assets (U.S. government debt) the bond market will dive, taking down stocks. They say that Wall Street, which can act like a petulant child at times, has to come to grips with the fact that the Fed won’t be there to prop up prices. 

All of which means we face a rocky rest of this decade. Interest rates will remain elevated. Inflation will remain elevated. And the Fed will have limited tools to address the problem, other than reflating its balance sheet, which will just delay the reckoning and increase the future pain the world economy must deal with. 

Which, in turn, explains this headline from earlier this month:  

Central banks haven’t bought this much gold since 1967. 

Turns out central banks around the world in Q3 increased their gold purchases by a staggering 28%, snapping up some 400 tons of gold in the quarter. Central bankers—primarily in developing economies—are rightly worried that the Western world’s “growth by debt” economic philosophy is doomed, and that the U.S. dollar, despite faux strength at the moment, is a fundamentally flawed currency at this point. 

So, they’ve gone in big on gold to protect themselves from the explosion to come.  

Their message is no different than Brooksley’s message about derivatives all those years ago: A disaster is afoot…though the Fed and most others dismiss that out of hand. 

I don’t dismiss it. 

I have paid much too much attention to the Fed’s blunders. And I know that too much debt and too much free money in the financial system has knock-on effects. They just take time to appear.  

But they’re beginning to appear now as the world grapples with extreme quantities of sovereign debt, all the ongoing impacts on the pandemic, and all the Western central banks trying to figure out how to put toothpaste back into the tube. 

I own a bunch of gold already, so I bought silver instead, since I think it will have a larger move than gold in percentage terms. I bought a bunch of 2023 Britannia 1-ounce silver bullion coins produced by the U.K.’s Royal Mint. They look like this: 

They’re now in storage at my bullion vault in Singapore, along with numerous other silver bullion coins. 

I really hope my need for these coins is wrong…that these coins will simply be nice collectibles I pass along to my kids one day. 

Sadly, I don’t think that’s the case. Instead, I think these coins are going to help preserve my lifestyle when the next financial crisis strikes—likely later this decade—with the U.S. dollar at the center of that storm. 

Brooksley Born was right to sound the alarm in the late 1990s. 

The world’s developing market central banks are right to sound the alarm today.