A Final Word on Inflation and Deflation

A serious bout of inflation is rarely caused by normal business activity, such as commercial bank lending and private debt.

In almost every case that I have studied, a very serious monetary inflation is triggered by excessive government debt obligations, and not private debt, that can no longer be adequately serviced by a productive real economy and domestic taxation.

That unserviceable debt becomes 'monetized' and a serious inflation results. It is a form of debt default.

Devaluation of a currency is a form of inflation which specifically addresses external debt obligations, as well as default on bonds which is a form of selective national bankruptcy.

The reason that the output gap is no sure barrier to this type of inflation is that it ironically serves to feed it in the presence of profligate government spending, since it dampens tax revenues and domestic GDP.

Private debt bubbles, asset bubbles, stock bubbles all seem to be the symptoms, the side effects, of an over easy monetary policy from a central monetary authority. In some instances they have been caused by exogenous events, even in the face of a hard monetary standard, by events such as a precipitous decline of the population from disease, or a sudden influx of a new wealth from discovery, such as the influx of silver and gold to Spain from the New World.

But the notion that banks must always lend to create inflation, or employment must be at robust levels, absolutely flies in the face of all historical experience.

And it does raise the issue, despite his protestations of innocence, impotence, and confusion, that Fed chairman Greenspan and the Federal Reserve itself, owns a unique culpability in the creation of several bubbles, from tech to housing, and the eventual outcome.

Sucks to Your Asmar!

A Bank Holiday on Deck?

We've been hearing the same rumours about embassies buying foreign currencies for their own use as cited here, but have not been able to obtain enough confidence to comment on it before this public disclosure in a major news source.

Harry Schulz apparently thinks a bank holiday is in the offing.

We think that if something decisive like this happens it is more likely related to a de facto devaluation of the dollar, a market break, that would be very brief. The Banks would close in order to allow the markets to stabilize. The occasion is therefore likely to be a major failure of a household name in banking, or perhaps even the failure of the State of California. California is the size of a large national economy.

We struggle with the notion of a dollar devaluation. Against what? A continued weakness seems to be in the cards, with some major event precipitating a break in market confidence.

It is obvious that there is a campaign to undermine Ben Bernanke as the Fed Chairman, coming out of the Obama Administration. Bernanke is not willing to monetize debt as aggressively as Geithner and Summers would prefer.

A 'big event' appears to be more a long shot that a bet, but we'll keep an eye on it. It does explain some of the more obnoxious moves by insiders to grant themselves huge bonuses and sell their personal stock holdings now.

A number of people have asked us to comment on this, in addition to the Japanese bond smuggling story out of Switzerland which we suspected was just related to a private fraud of some sort.

A gradual and orderly devaluation of the Dollar is most probable but some exogenous event could trigger a loss of confidence and a slide which could provoke a bank holiday. A decline of 20 to 25% in the dollar index from here is what technical analysis seems to indicate, but the Dollar Index is hopelessly out of touch with the modern realities of global currency exchange.

We have taken some steps in our personal life to guard against this, but think it is unlikely given what we know today.

MarketWatch
Latest Schultz Shock: a 'bank holiday'
by Peter Brimelow
Jun 24, 2009, 1:35 a.m. EST

NEW YORK (MarketWatch) -- The top-performing letter that predicted the Crash of 2008 now predicts a confiscatory Franklin D. Roosevelt-style "bank holiday." But it's surprisingly sanguine about stocks -- in the (very) short term...

In its current issue, HSL reports rumors that "Some U.S. embassies worldwide are being advised to purchase massive amounts of local currencies; enough to last them a year. Some embassies are being sent enormous amounts of U.S. cash to purchase currencies from those governments, quietly. But not pound sterling. Inside the State Dept., there is a sense of sadness and foreboding that 'something' is about to happen ... within 180 days, but could be 120-150 days."

Yes, yes, it's paranoid. But paranoids have enemies -- and the Crash of 2008 really did happen.

HSL's suspicion: "Another FDR-style 'bank holiday' of indefinite length, perhaps soon, to let the insiders sort out the bank mess, which (despite their rosy propaganda campaign) is getting more out of their control every day. Insiders want to impose new bank rules. Widespread nationalization could result, already underway. It could also lead to a formal U.S. dollar devaluation, as FDR did by revaluing gold (and then confiscating it)."

HSL is still sticking with its 20-year "V" formation forecast, but emphasizes that within the current 10-year downtrend phase there will be rallies that will "last 1-2 years." It attributes its current success to "successfully trading almost daily, especially in commodity stocks (coal/potash/energy/ fertilizer/gold). Take profits constantly and rebuy on mini pullbacks. Prefer non-U.S. dollar companies; many such companies are listed in U.S. & Canada or Australia."

HSL says: "The world is staggering today between stagflation and net deflation right now; it varies widely around globe. Net deflation is a maybe 35% risk, due to toxics and/or deepening depression. Bit more likely, we'll slowly creep up to a dangerous 4.5% inflation on average, medium-term. But the wild card is the currency risk, which has a 50% (?) chance of boiling over and causing literally overnight (i.e. 24 hours) mega inflation in the asset markets."

Nevertheless, in the very short term, HSL's charting leads it to say: "we MAY not get a new bear market decline that many bears are predicting. Likewise, DJIA & S&P500 may build a Head-and Shoulders right shoulder."

HSL's currently recommended allocation:

• 35%-45% Government notes, bills and bonds. (Not U.S.)

• 8%-10% Stocks (non-golds).

• 10%-30% Commodities, via futures, commodity stocks and/or physical assets.

• 35%-45% Gold stocks and bullion.

• 0-5% Bear stock protection via inverse ETFs like ProShares UltraShort QQQ ; ProShares UltraShort Dow30 ("Use to trade/hedge market downturns only.")

The Erosion of the Dollar and the Rise of the East

The outcome of the push for globalization is a severe decline in the median standard of living in the US and an erosion of those individual liberties and freedoms which has made the US somewhat unique on the vast historical sweep of world history.

Few understand this. One cannot be completely sovereign when the push for 'competitiveness' is used to consistently erode the commitment to individual freedom.

David Rockefeller, and Sam Walton, and Bill Gates, looked at the social and economic structure of the People's Republic of China and saw the new American paradigm. Not in the evolution of China to democracy and freedom, but in the subjugation of the United States to huddled masses docilely wearing the yoke of debt subservience to the ruling elite.

Too much speculation in this? The pattern of behaviour of those who promote this canard of globalism is too obvious to ignore.

The banks must be restrained and balance must be restored before a sustained economic recovery can be achieved.


The Korea Herald
'Dollar faces challenge as reserve currency'
Wednesday, June 24, 2009

A leading economist said in Seoul yesterday that the U.S. dollar's supremacy as the world's reserve currency is facing profound challenges as the balance of economic and financial power shifts East amid the current economic crisis.

"There is a slow-burning fuse underneath the dollar," Gerard Lyons, chief economist at Standard Chartered Bank, said in the World Economic Forum.

Underscoring the strengthening role of Asia, Lyons said that the depth of the global downturn drove key emerging economies, such as China and Russia, to cite the possibility of a new global reserve currency.

The forum drew a group of leading figures from business, government and academic circles to discuss Asia's role in helping to overcome the current crisis and shaping a future paradigm for the global system.

"This is not just an economic crisis but also a social crisis," Rajat Nag, managing director-general of the Asian Development Bank in Manila, told participants of the convention, referring to the worsened social conditions stemming from a rise in unemployment. "Asia has to start on a different paradigm," the executive stressed.

He noted that the Asian economy, which enjoyed 9.5 percent growth in 2007, saw the rate fall to 6.3 percent in 2008, while this year it has spiraled further to 3.4 percent. Citing projections of 6 percent growth in 2010 for Asia, excluding Japan, Nag underlined the challenging times ahead.

About 400 of Asia's leading decision-makers from over 35 countries representing various public and private sectors from over 35 countries have gathered for this regional meeting themed "Implications of the Global Economic Crisis for East Asia."

The WEF said the event is designed to facilitate steps toward greater international and regional cooperation. They hope the discussions would inspire a clear direction for building a common agenda for reviving the global economy through new models of growth, technology and corporate practice.

According to the WEF, Asia's share of global GDP and its growing stake in international institutions point to the region's importance in restoring economic growth.

Reflecting the region's importance in rebalancing the international economic dynamics, participants stressed the greater leadership role of Asia's G20 members, as the United States focuses on strengthening trans-Pacific alliances.

Noting that the unprecedented economic crisis offers invaluable lessons, Peter Sands, chairman of the WEF on East Asia and group CEO of Standard Chartered Bank in the United Kingdom, cited the "huge need for coordination in regulation."

"I think it's very important for Asian countries to play a strong role in financial regulation architecture," Sands said, however, noting that proposals for global financial regulations still looked far-fetched.

The executive cited difficulties in striking a balance in tempering excesses of the market and continuing to use markets as a price-setting mechanism. But he also cautioned against too much regulation, stressing that more regulations was not necessary better.

A Postscript on the Question of Inflation and Deflation

First, thanks to the many readers who mailed in a link to the book by Adam Fergusson at the Mises Institute. It is a good read, and free is much more attractive a price than $1,000 which is the price for a hard copy in good condition on Amazon. I purchased my own copy some years ago at a bookstall in Brighton. The online version is available here.

As to the discussion on inflation and deflation, I feel the need to make it clear that that inflation / deflation is a "policy decision" in a fiat currency regime with nothing preordained. In other words, either outcome is possible within a wide range of gradation. Most outcomes in the real world follow a similar pattern, not black and white but many shades of gray.

But not all things are equally possible. "Life is a school of probability."

If the Fed came out tomorrow and raised short term rates to 22% we would see a stronger dollar and the beginnings of a monetary deflation.

This arbitrariness of a fiat currency is intellectually difficult for most people because their domestic money has a natural patina of 'confidence' and objective value to it.

It is an assumption, one of those shorthand beliefs that help us through day to day life without having to intellectualize and analyze every aspect of every decision. It comes from using that currency as a store of wealth and medium of exchange, almost every day of our life (presumably even an American can take a day off shopping occasionally) and assuming that it will hold its value in the short term.

So we tend to invent 'rules' for the creation of money that preclude 'arbitrariness' and help us maintain our assumption set against 'black swan' thinking. When an assumption begins to conflict with the underlying reality it can become a 'prejudice.'

It is this very arbitrariness that is the goal of the central bank and statists whose preference is aggressive financial engineering. The limitation on the Treasury/Fed in a fiat regime is ultimately the value of the dollar and the sovereign debt. While people accept it, they can print it. This is a soft limitation with much more latitude than a hard external standard.

Having added the important caveat of possibility, given that the US is an enormous net debtor, it would be suicidal for the monetary authority to choose deflation as the Japanese did for their own particular reasons. We may experience a brief period of deflation as did the US in the early 1930's in which the money supply actually contracts, but this is much less likely now because the Fed has no external standards with which to contend.

There is a technically possible, rather conspiratorial line of thought that suggests that the wealthy elite who control the central government would opt for deflation in order to enhance their personal cash assets, driving the rest of the US into a form of debt serfdom. The probable response from the public would be in the tradition of the storming of the Bastille or the Winter Palace.

Almost all money issuing entities will choose inflation if they have the option. Sometimes they lose control of the process, the confidence game, and fall into a more serious and pernicious inflation and even hyperinflation. But this is not 'the norm.'

Our own Fed is rather arrogant these days, fully confident they know how to stop inflation given the Volcker experience. This may cause them to fall into a serious policy error on the inflationary side. In many ways our fate is no longer in their hands, but in those of our creditors, such as the Chinese and the Saudis.

Paul Volcker gave the odds of inflation in the current crisis as 99% for, allowing only for a serious policy blunder against it.

I wanted to highlight the Weimar experience to debunk the 'output gap' and the 'bank lending' restraints on the inflationary outcome. Much of what we hear on the financial channels smacks of propaganda, the 'confidence game.'

Yes the Fed faces the headwinds of slack demand and a very low velocity of money, which the Austrians will assert doesn't DO anything, but is rather of the nature of a economic speedometer. Speedometers don't' DO anything either, but their output is certain to be of some interest to the driver and their passengers.

This is less of an issue than one might think, keeping in mind that monetary inflation is the creation of money supply in EXCESS OF DEMAND. As the velocity decreases, so does demand for money, similarly the expansion of credit. So any monetization of existing debt, or government obligations by the Fed, becomes more potent so to speak.

As for the need to create more debt, let us just say that the Fed and Treasury would have yeoman's work to monetize the debt obligations the US already has, which recent estimates put at north of 40 trillions. Even with inflation at their backs, the government will be pressing the default button, selectively but surely, in the coming years.

The most probable outcome is stagflation, perhaps quite serious IF the economy and financial system is not reformed. This could have the vestiges of a monetary deflation were we not a net importer and net debtor.

This is an important distinction between the US experience and that of Japan whose industrial policy is well known to be in the bureaucratic clutches of MITI and the various kereitsu.

Japan sought to stimulate the economy and avoid deflation while aggressively exporting the fruits of their domestic productivity and consumption to support their long standing industrial policy. One cannot have their natto and eat it too. These were conflicting objectives and resulted in a decades long stagnation. This was a policy blunder of the first order.

So, deflation is possible, but not probable. If people understand that, I will feel that I have done a good job in raising the level of understanding about monetary economics.

But isn't all this debate and too often name-calling amongst the bloggers a distraction from the real problem facing the average person, in the same sense as Paris Hilton, Survivor, big time wrestling, the McLaughlin Group and American Idol?

The banks must be restrained, and the economy brought back into balance, before there can be any sustained recovery.

The Harlot's Progress

Or should that be, The Progress of the Harlots?

Some Common Fallacies About Inflation and Deflation: the Weimar Nightmare in Review

There are several fallacies making the rounds of the economic community, often put forward by pundits on the infomercials for corporate America, and also on the internet among well-meaning but badly informed bloggers.

The first of these monetary fallacies is that 'the output gap will prevent inflation.' The second is that a lack of net bank lending or other 'debt destruction' will require a deflationary outcome. Let's deal with the output gap theory first.

Output gap is the economic measure of the difference between the actual output of an economy and the output it could achieve when it is most efficient, or at full capacity.

The theory is that when GDP underperforms its potential, with unemployment remaining high, there can be no inflation because demand is weak and median wages will be presumably stagnant. This idea comes from neoliberal monetarist economics, and a misunderstanding of the inflationary experience of the 1970s.

The thought is that sustained inflation is due to a 'wage-price' spiral. Higher wages amongst workers cause prices to rise, prompting workers to demand higher wages, thereby fueling inflation. If workers do not have the ability to demand higher wages there can be no inflation.

While this is in part true, it tends to confuse cause and effect.

The cause of a monetary inflation, which is a broadly based inflation across most products and services relatively independent of demand, is often based in a monetary expansion of the currency resulting in a debasement and devaluation.

A monetary expansion is relatively difficult to achieve under an external standard since it must be overt and often deliberative. A gradual inflation is an almost natural outcome under a fiat currency regime because policy-makers can almost never resist the temptation of cheap growth and the personal enrichment that comes with it.

There can be short term non-monetary inflation-deflation cycles that tend to be more product specific in a market that is not under government price controls. But this is not the same as a broad monetary inflation or deflation.

The key difference is the value of the dollar which has little or nothing to do with a business cycle or product demand/supply induced inflation/deflation.

In the modern era the Federal Reserve can increase the money supply independent of demand by the monetization of debt, with the only restrictions on their ability to increase supply being the value of the dollar and the acceptability of US sovereign debt. This requires the acquiescence of the Treasury and the cooperation of at least one major money center bank.

People tend to invent 'rules' about how the money supply is able to increase, and confuse financial wagers and credit with money. This is in part because the average mind rebels at the reality behind modern currency and the ease at which it can be created. Further, people often invent facts to support theories that they embrace in an a priori manner.

In a pure fiat currency regime, the swings between inflation and deflation are almost always the result of policy decisions, with the occasional exogenous shock. A government decides to inflate or strengthen their money supply relative to productivity as a policy decision regarding spending, central bank credit expansions, banking requirements and regulations, among other things.

As a prime example of a rapid inflation despite a severe economic slump, what one might call uber-stagflation, is the Weimar experience.

Since pictures are worth 1000 words, let me be brief by showing you a few important charts.

The basic ingredients of the Weimar experience are...

A high level of official debt issuance relative to economic growth

High unemployment with a slumping real GDP



Wage Stagnation



I should stop here and note that although the statistics at hand involve union workers, in fact unemployment was widespread in the Weimar economy. The saving grace of being in the union was that one was more often able to retain their jobs and some level of nominal wage increases.

Anyone who has read the history of the times knows that unemployment, underemployment and slack demand was rampant, and that hoarding was commonplace as people refused to trade real goods for a rapidly devaluing currency.

Rapidly Rising Prices Despite Slack Demand and High Unemployment



So much for the wage price spiral and the output gap.

A Booming Stock Market, at Least in Nominal Terms



Booming Price of Precious Metals as a Safe Haven Even While Basic Material Prices Slumped

Notice the plunge in the price of copper as the economy collapsed and gold and silver soared.

If one can obtain a copy, as it is out of print, one of the best descriptions of the German inflation experience is When Money Dies: the Nightmare of the Weimar Collapse by Adam Fergusson. There is a copy of the book available online for free here.

From my own readings in this area, the people who tended to survive the Weimar stagflation the best were those who:
1. Owned independent supplies of essentials including food and shelter and were reasonably self-sufficient.
2. Had savings in foreign currencies that were backed by gold such as the US dollar and the Swiss Franc
3. Possessed precious metals
4. Belonged to a trade union and/or had essential skills or government position which guaranteed a wage
5. Were invested in foreign equity markets, and even in the domestic German stock market for a time

People will argue now that the Fed understands that inflation is caused by perceptions, and that by managing those perceptions inflation can be avoided because even those prices are rising and the currency is being devalued, if they ignore it the inflation cannot reach harmful levels.

This is what I call the "psychosis school" of behavioral economics.

Granted, perception is important, and managing perception may delay outcomes for a period of time. But unless the underlying cause of the problem is remedied during what is at best is an extended interlude, the resulting break in perception will ignite a firestorm of cognitive dissonance, loss of confidence, and social unrest.

In summary, in a purely fiat currency regime a sustained monetary inflation or deflation is an outcome of policy decisions regarding fiscal policy, monetary policy, and economic balance and output.

As long as the government is able to generate debt, deflation is a highly unlikely outcome. And when the government reaches the practical limits of debt creation, the underpinnings of the currency give way and the economy tends to collapse in a stagflationary slump.

There are no predetermined outcomes in a fiat monetary regime. Deflation, stagflation and hyperinflation are not 'normal' but are certainly possible if the central authority is permitted to abuse the real economy and the money supply for protracted periods of time.

What about Japan? Japan is the perfect example of a policy decision made by a fiat currency regime in what was decidedly NOT a free market, but under the de facto control of a highly entrenched bureaucracy, a single political party, and large corporate giants in pursuit of an industrial policy that favored exports and domestic deflation.

The difference between the Japan of the 1980s and the US of today could not be more stark. Choosing a deflationary policy and high interest rates as a debtor nation is economic and political suicide. It would be interesting to see what happens if the US elites try to take that path.

We will know if there is a true monetary deflation in the US because the value of the dollar will start increasing dramatically with regard to other hard assets, other currencies, goods and services, and precious metals and commodities. Prices will decline especially for imports as the dollar gains in purchasing power.

Remember that a true monetary inflation and deflation would only show up over time. Even in the Great Depression in the US, as demand slumped and prices fell, the stage was set for a significant devaluation of the US dollar and a rise in consumer prices well in advance of the eventual recovery of the economy that caused the Fed to tighten prematurely. As I recall the actual contraction in money supply lasted two years. This again highlights was an amazing piece of bad policy that Japan represents in its 'lost decade.'

People embrace beliefs for many motivations. So often I find they are not 'rational' and based on a scientific study of the facts, even on the most cursory level. Fear and greed and prejudice are often motivations that are surprisingly resilient, even in the face of overwhelming evidence against them. Leadership understands this well.

There are often appeals to private judgement. I do not care what you say, this is what I believe, what I think, what I feel. This is appropriate in the supra-natural realm, but in the natural realm there may be private judgement but the facts are public, and the outcomes are well beyond the complete control of the most fully-managed perceptual campaigns, at least so far in human experience.

"The lie can be maintained only for such time as the State can shield the people from the political, economic and or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State." Joseph Goebbels, of the perception modification school of economic thought

What is truth? It is difficult to estimate but not completely out of reach.

Our own view is that a serious stagflation with further devaluation of the US dollar as it is replaced as the world's reserve currency is very likely, after a period of slackening demand and high unemployment. A military conflict is also a probable outcome as countries often go to war when they fail at peace.

Weimar was not an anomaly although the level of inflation was indeed legendary. Argentina, post Soviet Russia, and most recently Zimbabwe are all similar examples. Serious Instances of Monetary Inflation Since World War II

There are many, many variables in play here, and policy decisions yet to be made. It is highly discouraging to see Obama's Administration fail so miserably to do the right things, but there is always room for hope, less so today than six months ago however.

Argue and shout grave oaths and wave our hands though we might, we are in God's hands now.

Let's see what happens.

A very special thanks to our friend Bart at Now and Futures who makes these charts, among other things, available on his highly informative web site for public review. If you are not familiar with his work you might do well to view it. We do not always agree, but he demands attention because of the rigor which he applies to his work for which we are grateful, always.

NAVs of Several Precious Metals Funds and ETFs

Goldman Sachs Set for Record Profits, Largest Bonuses Ever

As they say in the States, "in your face."

Or just some 'getting out of town money' ahead of a financial collapse?

The outsized financial sector, with its exorbitant fees, represents a serious tax and a growing threat to the real economy.

We may have, at best, the illusion of a recovery based on the increasing monetary inflation and monetization of debt as shown in the money supply figures, as compared to real GDP growth. Price, Demand and Money Supply

It will be a selective recovery at best, and damaging to the political fabric of the United States. It is a drain on the world economy while the US dollar is the reserve currency.

It is seigniorage on a grand scale, unprecedented tax on productivity not seen since the decline of colonialism, perhaps even feudalism.

Until the financial system is reformed there can be no sustainable recovery.

The Guardian
Goldman to make record bonus payout
Surviving banks accused of undermining stability

Phillip Inman
The Observer
Sunday 21 June 2009

Staff at Goldman Sachs staff can look forward to the biggest bonus payouts in the firm's 140-year history after a spectacular first half of the year, sparking concern that the big investment banks which survived the credit crunch will derail financial regulation reforms.

A lack of competition and a surge in revenues from trading foreign currency, bonds and fixed-income products has sent profits at Goldman Sachs soaring, according to insiders at the firm.

Staff in London were briefed last week on the banking and securities company's prospects and told they could look forward to bumper bonuses if, as predicted, it completed its most profitable year ever. Figures next month detailing the firm's second-quarter earnings are expected to show a further jump in profits. Warren Buffett, who bought $5bn of the company's shares in January, has already made a $1bn gain on his investment.

Goldman is expected to be the biggest winner in the race for revenues that, in 2006, reached £186bn across the entire industry. While this figure is expected to fall to £160bn in 2009, it will be split among a smaller number of firms.

Barclays Capital, Credit Suisse and Deutsche Bank are among the European firms expected to register bumper profits, along with US banks JP Morgan and Morgan Stanley following the near collapse and government rescue of major trading houses including Citigroup, Merrill Lynch, UBS and Royal Bank of Scotland.

In April, Goldman said it would set aside half of its £1.2bn first-quarter profit to reward staff, much of it in bonuses. It is believed to have paid 973 bankers $1m or more last year, while this year's payouts are on track to be the highest for most of the bank's 28,000 staff, including about 5,400 in London.

Critics of the bonus culture in the City said the dominance of a few risk-taking investment banks is undermining the efforts of regulators to stabilise the financial system.

Vince Cable, the Liberal Democrat treasury spokesman, said: "The investment banks more than any other institutions created the culture of excessive leverage, excessive risk and excessive bonuses that led to the downfall of the financial system. Now they are cashing in and the same bonus culture has returned. The result must be that we are being pushed to the edge of another crash."

Goldman Sachs said it reviewed its bonus scheme last year and switched from a system of guaranteed rewards that were paid over three years to variable payments that tied staff to the firm. It told employees last year that profit-related bonuses would be delayed by 12 months.

Until the release of its first quarter profits in April, it seemed inconceivable that a firm owing the US government $10bn would be looking to break all-time records in 2009.

David Williams, an investment banking analyst at Fox Pitt Kelton, said: "This year is shaping up to be the best year ever for investment banks, or at least those that have emerged relatively unscathed from the credit crisis.

"These banks are intermediaries in the bond markets where governments and companies are raising billions of pounds of new money. There is also a lack of competition that means they can charge huge sums for doing business."

Last week, the firm predicted that President Barack Obama's government could issue $3.25tn of debt before September, almost four times last year's sum. Goldman, a prime broker of US government bonds, is expected to make hundreds of millions of dollars in profits from selling and dealing in the bonds.