Public Finance

On Wars, Interest Rates, Oil Prices, and Gold On Wars, Interest Rates, Oil Prices, and Gold by Shanmuganathan N March 26, 2026 Indian Liberals, Public Finance, World Economy The last few weeks have been “different” to say the least. Just to list a few obvious ones: The US and Israel made an unprovoked attack on Iran. By the admissions of Trump’s own staff, Iran did not pose any material threat to the US at this point. More importantly, this escalation occurred while negotiations between the US and Iran were ongoing. The Straits of Hormuz have been closed, choking off nearly 20% of the world’s oil supply. In addition, there has been extensive damage inflicted by Israel to the South Pars gas field – the largest gas field in the world, which is jointly operated by Iran and Qatar. Extensive damage to countries that had US military bases, such as Bahrain, Qatar, Kuwait, the UAE, and Saudi Arabia. The invincibility of the US Army’s defence systems has pretty much been laid threadbare by Iran, so much so that even the mainstream media is speculating about the end of the Petrodollar. All these events should have caused gold prices to skyrocket and perhaps even cross $6,000/oz, and yet, what we witnessed, was the exact opposite. Gold plummeted to just above $4,000/oz. Higher oil prices and the much higher-than-anticipated PPI (for Feb 2026, which came in at a monthly 0.7%) were the supposed triggers behind gold’s plunge. That, of course, is an extremely bizarre and almost child-like economic explanation for what happened. The antidotes follow. I. Wars and Higher Gold Prices The prevailing notion that wars cause gold prices to spike is indeed correct. For the wrong reasons, though. It is not for reasons that people buy gold during times of uncertainty, as is almost always parroted. Wars are almost always financed through monetary inflation, and this leads to higher gold prices to account for the increased currency in circulation. The best example of this is the two world wars; here are the facts. The accumulated US National debt between 1789 and 1945, over the 156 years, was about $259 billion. Out of this $259 billion, $243 was incurred during the 10 years of the two world wars. Or nearly 94% of the National debt was accumulated during 10 years, and the remaining $16 billion took 146 years. Wars and monetary inflation are indeed conjoined twins. This was true even under the Fed-managed “Gold Exchange Standard”. What hope is there under a completely fiat system!   The current war with Iran is indeed going to be a very expensive one for the US economy. The Pentagon has requested $200 billion in emergency funding for the Iran war, which has lasted just over six weeks (including the June 2025 conflict), while the ongoing Ukraine war, which has lasted for more than 4 years, has incurred less than $180 billion. The Iran conflict is going to lead to an explosion in the National debt, even by the loose standards that Trump has set for himself. This is not going to be without consequences, and we should not be surprised by double-digit price inflation by mid to late 2026. And hence we will witness substantially higher gold prices later this year. Perhaps even well above $6,000/oz.   II. Oil Prices and Gold: The rationale peddled is that rising oil prices divert money from gold and hence gold and oil prices are inversely correlated. I suppose many of the algo trades happen using the above logic, and hence we have indeed seen this negative correlation over the last couple of weeks. The above hypothesis, notwithstanding its seeming accuracy for the fleeting moment, would indeed be a correct one if and only if the supply of money and debt were held constant. But we do know that both are expanding, and hence the above rationale is faulty. The closest comparison to what is happening today would be the stagflationary 1970’s. The difference is that the decade ahead will be worse, both in terms of the depth of the recession and the extent of price inflation, than the 1970s. During that period, while gold moved from $35 to $850/oz, oil prices (WTI spot) also increased from $3 to nearly $40/barrel. As shown, both moved in unison due to monetary inflation manifesting as price inflation. III. Interest Rates and Gold PricesOf all the misperceptions floating around in the world of finance and economics, this one takes the cake. Here is the rationale peddled almost on a daily basis – high price inflation would imply a higher or, at the very least, static Fed funds rate. This higher interest rate is good for the US dollar and hence bad for gold. Forget Economics. Anybody with access to a phone and basic literacy skills would know that the above is patently incorrect. The above rationale has been valid for only 4 out of the last 55 years. The reason is that what matters is the real interest rate (the yield after adjusting for price inflation), and not nominal interest rate movements. Given current price inflation trends, a PPI of 0.7% in Feb 2026 (before the Iran war, which has nearly doubled crude oil prices) indicates that the US will need a double-digit interest rate just to break even with price inflation. Given the quantum of National debt, the US cannot even afford a 5% interest rate, let alone a double-digit one. Therefore, the US Fed will keep the real Fed funds rate negative for the foreseeable future, implying substantially higher gold prices in the years ahead. Looking Ahead Given below is a summary of what’s likely to happen to interest rates, gold, and oil prices over the next 2 to 3 years. This assumes a continuation of the current trend of annual deficits of $2 to $2.5 trillion and no major new wars. Of course, the bubbles have started to burst, and all indications are that the credit bubble and Housing

Who Killed the Dollar – Xi Jinping OR Paul Samuelson? Who Killed the Dollar – Xi Jinping OR Paul Samuelson? by Shanmuganathan N March 19, 2026 Indian Liberals, Public Finance, World Economy “Is Killing” might be more appropriate than “Killed”. But in the larger context of history, how do you refer to something that has lost more than 99% of its value? The US Dollar, as measured against real money, i.e., gold, has indeed lost more than 99% of its purchasing power since 1971. Only in the context of academic circles with non-Austrian Economists or when measured against other fiat currencies would the dollar be considered “strong”. Even against other good currencies, the US Dollar has lost substantial purchasing power since 1971, e.g., more than 80% against the Swiss Franc and more than 50% against the Japanese Yen. In any case, it is only a matter of a few more years before the impending demise of the US Dollar becomes obvious to everybody, and the phrase “Not worth a Continental” becomes almost as applicable to the US Dollar. Let me start with the answer to the title – it is Paul Samuelson, and this should be no surprise to the regular reader of my columns. While I have used names, I am really referring to the Chinese Juggernaut Economy (for Xi Jinping), and Neo-Keynesian Economics (for Paul Samuelson), and the names are really proxies for the institutions/ideas they represent. Most readers may not be aware that Neo-Keynesian economics gained traction only since the 1960’s, when the idea that “a little deficit spending” may smooth out the business cycle. Till such time, balanced budgets were the norm, and in fact, the US Government ran a surplus for a few years during the 1950’s when it paid down the National debt. For example, the US National debt witnessed a modest decline during 1952, 1956, and 1957. For the decade as a whole, between 1950 and 1960, the US National debt witnessed a 11% increase, compared with the nearly 30% increase between 1960 and 1970. Not coincidentally, Paul Samuelson served as an economic advisor to John F. Kennedy (1961-63) when this line of thought germinated in the US administration. The shift from “a little deficit spending is good” to “deficits do not matter” was foreseeable under democratic politics. The Neo-Keynesian economists gave it the necessary intellectual cover, albeit a terribly flawed one. What is the Neo-Keynesian Ideology? This is the most pervasive economic ideology that is taught in most Universities (perhaps more than 99%) across the world. Two other Economic Schools of thought – Marxism and the Chicago School / Monetarists – are either discredited entirely (Marxism), or reluctantly embraced Keynesian Economics (“We are all Keynesians now” – Milton Friedman, 1965). The latter, perhaps, resulted from two factors: a lack of grounding in sound economic principles and the fear of becoming irrelevant in a domain dominated by the state. The one little-heard-of and even less discussed school of thought in the media that has stood its ground against Keynesian economics is the Austrian School of Economics. It is best to define the framework of the Austrian School of Economics before we venture into Neo-Keynesian economics. It is just easier to understand the con when the truth is clear. We will describe both these schools of thought in terms of the four operating tenets of the State: Money, Scope of Government, Role in Economic Growth, and Role in a Recession. Defining Tenets of the Austrian School of Economics Money: Money is a commodity that is chosen by the Free Markets as the Medium of Exchange. Or, in other words, the Gold Standard. There is almost no role for a Central Bank as the quantity of money is decided by the markets. The interest rate is also set by the free markets through the supply and demand for money, as with all other goods and services. Perpetual trade deficits are non-existent as the settlement happens through the actual flow of gold from the deficit countries to the surplus countries. This creates a self-adjusting mechanism in which the outflow of gold reduces the money supply, thereby lowering costs and enhancing competitiveness. Read More …

A Global Currency Crisis in 2026? A Global Currency Crisis in 2026? by Shanmuganathan N December 12, 2025 Indian Liberals, Public Finance, World Economy Let me start with an “AI” summary of the article, since that’s the most likely step for readers. The US Federal Reserve, through its ultra-loose monetary policies, has inflated a series of asset bubbles – AI Bubble, Housing Bubble (HB) 2.0, and the Bond Bubble – and the bursting of these bubbles is very likely to start in 2026. The bursting of the asset bubbles would push the US Economy into an Inflationary Depression that would eventually be called “The Greater Depression”. Price inflation will be higher than the US experience during the stagflationary 1970s (near 15% at its peak), while the contraction in GDP will rival that of “The Great Depression” of 1929 to 1946. Notwithstanding the similarities to the 2008 GFC (Global Financial Crisis) in terms of the underlying causative factors and the response of the US Government/Federal Reserve to the bubbles bursting, the eventual outcomes in terms of the impact on the US Economy as well as the US Dollar would be vastly different. The US Dollar is likely to substantially weaken not only against Gold but also against other currencies. The bubbles referred to above have been in the making for quite a few years now – perhaps even more than a decade. The fact that the bubbles have grown bigger (e.g., HB2.0 as compared to HB1.0 leading up to 2008), newer bubbles (the AI / MAG7) have been inflated, and the stock markets have chugged along steadily without any meaningful correction has only lulled investors into a deep slumber. Perhaps even closer to the stage of coma, as far as the perception of risk is concerned. FDR’s quote, “the only thing to fear is fear itself,” that he made at the very depth of The Great Depression in 1933, might be more applicable to the attitude of the US investor today than at any other point in history. Yet every objective indicator points to bubble valuations across multiple sectors and to the currency on the verge of a precipitous fall, given the prevailing fiscal dominance. What this implies is that US dollar-denominated investments (stocks, bonds, and real estate) are in for a rude awakening in the years ahead, and the Economy itself is headed for a depression that will make the 2008 GFC look like a walk in the park. The Federal Reserve’s De Facto Dual Mandate – The Arsonist and the Fireman. Let us start with the Federal Reserve, the engine of Monetary Inflation, a necessary condition for the formation of asset bubbles. Jim Grant popularized the arsonist-and-fireman analogy, explaining how the Fed ignites bubbles through prolonged artificially low interest rates. When the bubbles eventually meet the pin, the Fed again rushes in with easing – much like the arsonist calling the fire department. We have seen this cycle repeatedly over the last 35 years. The easing cycle during the early 1990s, leading to the NASDAQ/dotcom bubble. Post the Nasdaq burst in March 2000, the Fed again rushed into lowering the interest rates to a then-unprecedented 1% causing the formation of the Housing Bubble 1.0. Post the collapse of the Lehman Brothers in September 2008, the Fed lowered the interest rates to 0% and maintained them around that level for nearly 15 years. Interest rates have never been this low for this long in 4000 years of monetary history. But interest rates are only part of the story in the current easing cycle. A much more potent form of monetary inflation has occurred through an increase in the Fed’s balance sheet via Quantitative Easing (QE), through which the US Fed purchased US Treasuries and Mortgage-Backed Securities. The Fed’s balance sheet, which was less than $1 trillion at the time of the 2008 GFC, would rise more than 6-fold in the subsequent 18 years to more than $6.5 trillion today. The National debt has ballooned during this period as well, i.e., the accumulated US National debt over more than 200 years leading up to 2008 was $10 trillion, while in the subsequent 18 years, the debt has nearly quadrupled to $39 trillion.  If the BBB (Big Beautiful Bill) is indicative, we will witness the National Debt cross $50 trillion before Trump’s second term ends in 2028, even without a significant economic crisis. This combination of reckless fiscal spending, aided by an ever-accommodative monetary policy, has fomented multiple bubbles that dwarf those of the past. All bubbles, eventually, find their pins, and given the enormity of the bubbles today, a tiny prick is all that would be required. The dominoes are lined up. But before proceeding on to the “bubbles”, some questions ought to be asked and answered. We can clearly see the Boom-Bust pattern repeatedly playing out over the last 35 years in the figure above. Surely there must be sound theoretical explanations and ways to prevent these wild swings in economic activity. Why is it that there is a sudden rush to invest in a technology or in a specific asset class amongst a majority of the investing class? The Misesian Theory of the Business Cycle accounts for all of the above questions and more (as explained in the book “The Theory of Money and Credit”). Rothbard’s essay “Economic Depressions: Their Cause and Cure” provides a succinct note of the relevant concepts. Given below is a two-paragraph summary of the Business Cycle Theory. For those not unduly interested in the economic theory, please feel free to skip to the next section. When a central bank artificially sets a low interest rate below the market rate (as determined by the confluence of the supply curve for savings and the demand curve for borrowing), it creates an illusion of greater savings. This ensures that marginal projects are brought online that would otherwise not be funded. However, given that the savings were an illusion, the market demand for the products created by

Gold’s Price Rise – Three Perspectives Gold’s Price Rise – Three Perspectives by Shanmuganathan N November 14, 2025 Indian Liberals, Public Finance, World Economy Gold’s rise over the last couple of years has been meteoric to say the least. While the media has largely overlooked the move, there have been occasional discussions on why the uncertainty surrounding Trump’s tariffs and geopolitics has led to a rise in gold prices. These narratives overlook the massive tectonic shift underneath from an economic perspective. Unless one views the events with knowledge of Austrian Economics, forecasters will likely miss the action that lies ahead. If one were to go by the US Government numbers (propaganda would be a better word – but that’s a discussion for another day), gold’s rise makes no sense – the US GDP growth is hitting nearly 4%, price inflation is on the decline, and US unemployment is near all-time lows. If this were truly the case, gold prices should not have doubled to over $4,000/oz in the last two years. However, let us return to the numbers later. Let me begin with an overview of the three prevailing perspectives on gold: Keynes’s Barbaric Relic, the Neo-Keynesians, and the Austrian Economists. I. KEYNES’S “BARBARIC RELIC” John Maynard Keynes, wrote “The General Theory of Employment, Interest and Money”, in 1936 and referred to gold as a Barbaric Relic in his thesis. In one form or another, Keynesian economics has been widely adopted and built upon over the subsequent decades, far exceeding the wildest dreams Keynes might have had. So much so that it would be (almost) appropriate to say, “We are all Keynesians now” – a quote attributed to Milton Friedman. Keynes suggested, in his work, among other things, the use of fiscal and monetary policy to manage business cycles extensively. From a Monetary policy perspective, the idea was to lower the interest rate during a recession to stimulate business activity and to increase the interest rate when price inflation is too high. How many times would we have heard this simplistic, and in fact naïve explanation, over the last few decades by Central Bankers, Economists, and commentators? From a fiscal perspective, Keynes’s suggestion was to run deficits during a recession and to use the surplus during the good times to pay down the deficits. Needless to add, once an intellectual justification (albeit a flawed one) was provided in favour of deficits, Governments never have the incentives to balance the budgets. For the record, the US Federal Government has not had a single year of budget surplus since 1971 (not an “accounting surplus”, but viewed as a decrease in the National debt).   But what has gold got to do with the above fiscal and monetary stimulus? As Greenspan wrote in Gold and Economic Freedom, “Deficit spending is simply a scheme for the hidden confiscation of wealth. Gold stands in the way of this insidious process”. Suffice it to state at this juncture that Gold limits the deficits as well as the manipulation of interest rates. The total accumulated National Debt of the US government between 1789 and 1971 was less than $400 billion. In contrast, the US has run a higher deficit every quarter for the entirety of this decade so far, with the pace of addition only increasing over time. Gold is an insurmountable barrier to even a very rudimentary implementation of Keynesian ideas of fiscal and monetary stimulus. Classifying it as a barbaric relic was a very self-serving argument for Keynes. However, in some sense, I find a commonality between Keynesians who call gold a barbaric relic and some Austrian economists who refer to Bitcoin as fool’s gold. In much the same way, the former believes gold’s price will crash in the years ahead, I think Bitcoin and other unbacked crypto prices will crash. Perhaps alongside the AI bubble bursting. With one difference in the above commonality, the key distinction between gold and bitcoin is that the latter has no non-monetary utility (i.e., Desirability in the D3C2 table below), a very fundamental requirement of qualifying as money. Barbaric Relic Summary: It would be tempting to term this as “Buffett Blindspot,” especially given the number of his followers who have used his observations on gold to classify it as a useless asset. Buffett’s views are, however, far more nuanced than that. While one doesn’t have to be Buffett to recognize that Gold has far outpaced the DJIA since Aug 1971 (a 115-fold return for gold as compared to a 55-fold return in the DJIA), I suspect nothing short of hyperinflation in the US dollar will eradicate the blind spot of this crowd II. THE NEO-KEYNESIAN ECONOMISTS A nagging piece of evidence against the Barbaric Relic Theory has been the rise in gold prices over the decades. While it could be ignored/dismissed as the proponents of Keynesian Economics do, most Neo-Keynesians find it convenient to attribute non-monetary reasons to explain away surging gold prices.  The reasons for the justification date back to 1968, when the U.S. Senate Committee on Banking and Currency held hearings on legislation to eliminate the gold cover, i.e., the legal requirement that a fractional 25% of the issued Federal Reserve Notes (i.e., the paper U.S. dollar) be backed by gold. Parallel to the Senate hearings, the House also conducted similar hearings, with the Chairman Wright Patman declaring that “the US Dollar is stronger than Gold”. The Treasury members, Federal Reserve officials, and noted Economists (including Milton Friedman) argued in favour of the bill, terming it a pro-dollar move. In reality, it was the final straw in abandoning the Gold Exchange Standard, and Nixon’s closing of the Gold Window in 1971 was a foregone conclusion after the 1968 vote in favour of removing the Gold Cover. The 1971 removal of the Gold-Dollar exchange rate was a historic move whose significance will be recognized in the years ahead. However, at the time, many officials/economists argued that it was the Bretton Woods agreement and the US Dollar that