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October 10, 2021

Global supply chain breakdown: A self-inflicted crisis

Back in the first few weeks of the covid lockdowns, reports of shortages and empty supermarket shelves in some of the world’s richest nations quickly started to accumulate. Politicians and institutional figures all insisted this phenomenon would be short-lived and tried to reassure the public that everything was under control.

They blamed it all on panic buying and logis- tics problems that would be easy and quick to overcome. Indeed, it didn’t take long for the situation to normalize. Soon, consumers found well-stocked shelves again at their local stores, which arguably created a false sense of security in the minds of most citi- zens.Nevertheless, the prolonged lockdowns and the unprecedented restrictions on business activity and normal trade flow, the reckless “relief” packages, and the fiscal interventions created cracks in the global supply chain that ran much deeper than anyone could have imagined at the start of the pandemic. As a result, the entire world is today facing a crisis like no other, a truly perfect storm that is already wreaking havoc with essential indus- tries and threatening the global economic outlook.

Central planning and the “butterfly effect”

Those of us who understand basic economic principles and remember the lessons of the past, have already known for decades that centrally planned economies are doomed to fail. There are countless historical examples from different nations and different periods that clearly support this point, but this year, we saw it demon- strated simultaneously on a global scale.

The consequences of most governments’ handling of the covid crisis are as dire as they are irreversible, at least not in time to spare most ordinary citizens from serious financial hardship.

Over the last few months, we’ve been see- ing more and more headlines and reports of shortages of all kinds, as well as sky- rocketing prices in different corners of the market. From gas prices and housing, to used cars and basic food supplies, prices have spiked and they keep climbing in most advanced economies. All these inci- dents might appear unrelated at first glance, but their true triggers can be traced back to the same causes: ill-consid- ered and shortsighted government interventions.

For example, the record-high prices that can be seen in the used car market in the US might seem absurd, but they are merely the predicable outcome of fundamental economic forces. Automakers have been struggling for over a year to produce enough new vehicles to meet the current demand levels, causing buyers to opt for used cars instead. The global automotive industry is expected to lose $210 billion in revenue in 2021, according to consulting firm AlixPartners. These losses are largely due to semiconductor chip shortages that emerged from the severe disruptions to global trade and to a labor market that took a beating as a direct result of the business closures and beefed up unem- ployment benefits that disincentivized productive work. The ongoing “chipset famine”, along with high costs for global freight, heavily impacted electronics too with global smart- phone sales falling by 6% over the last quarter.Skyrocketing food prices also have a rather straight- forward explanation. Factory shutdowns, border closures, and travel bans, mostly enforced without any cross-border coordination or foresight for that matter, quickly translated into unprecedented labor shortages for food processing plants and a lack of seasonal workers for produce harvesting. Eventually, this all culminated in the industry-wide problems we see today all over the world, from empty supermarket shelves and meat shortages in the UK, to closed fast food restaurants in the US and skyrocketing prices for essential staples like rice and edible oils in South Asia.

“Revenge of the old economy”

While the impact of government interventions has seriously affected almost all areas of the global economy, the most concerning and consequential damage was inflicted upon the energy sector. Given that energy lies at the core of the world economy and it is an essential element for the production of most other goods and services, there are serious concerns on the rise that a crisis in this sector can easily lead to a significant slowdown in the global recovery, or even trigger a full blown recession, as it has done in the past.

In recent weeks, gas, coal and electricity prices have all climbed to record levels. As the International Energy Agency (IEA) highlights, “Natural gas prices have seen the biggest increase, with Euro- pean and Asian benchmark prices hitting an all-time record last week – around ten times their level a year ago. US month-ahead natural gas prices have more than tripled since October 2020 to reach their highest level since 2008. International coal prices are around five times their level a year ago, and coal power plants in China and India, the world’s two largest coal consumers, have very low stocks ahead of the winter season.”

The roots of the present crisis can be traced back to regulatory actions and government interference that started to corrupt and distort market dynamics long before the covid crisis ever emerged. Green energy initiatives, a premature and poorly thought out transition to renewables, as well as unrealistic emissions targets and heavy regulatory burdens, put serious pressure on oil and gas producers which quickly led to underinvestment and eventually to lower supply levels.

However, when the pandemic hit, these pressures mounted, not just on producers, but on almost all participants in the energy market. Disruptions plagued the entire supply chain for months, output had to be reduced, and maintenance work had to be postponed due to the lockdowns and the shutdowns. As the recovery began, freight rates skyrocketed and extensive labor shortages also contributed to the supply crunch.

As the situation stands today, the “green revolution” that many nations tried to set in motion through aggressive legislation and market interference is already backfiring. The energy crisis in China and Europe is a prime example of this. Blackouts and power cuts in the world's second-largest economy have severely affected production levels and cut GDP forecasts, while legitimate fears of a prolonged crisis have already clouded the global growth outlook. In recent weeks, sales of candles skyrocketed as millions of households went without power, while hospitals, food refrigeration and even telecommunications have also been affected by the government- mandated electricity rationing.

Meanwhile, Beijing has already backtracked on its recently announced plans to reach carbon neutrality by 2060, which led to the country reducing its domestic coal production, despite the fact that the nation still depends on it for over 70% of its electric- ity. As gas prices surged and thermal coal keeps hit ting record highs, the Chinese government implemented a complete policy U-turn, ordering more than 70 mines to increase annual output capacity by nearly 100 million tonnes.

The EU also finds itself in a similar bind. Brussels’ ambitions for Europe to become the global green champion led to a hasty transition away from tradi- tional power sources which left member states almost entirely dependent on imports, with nearly 90% of the Union’s natural gas coming from outside the bloc. As the present energy crunch escalated and gas prices soared, the switch back to highly pol- luting coal became unavoidable. This put the brakes on the EU’s green transition agenda, which clearly did not account for the impact all these policies would have on the resilience of the region’s power systems or on the average household’s energy bills. This lack of foresight has led to a spike in energy poverty. According to a recent study by the Euro- pean Trade Union Confederation, 15% of the EU’s working poor, almost 3 million workers, cannot afford to turn on their heating, while the total number of people that will not be able to heat their homes this winter is set to rise even higher.

Implications for investors, savers and ordinary citizens

Many industry leaders and rational, non-partisan economists sounded the alarm very early on, warning against the lockdowns and all the restrictions to normal business and production operations, but their voices were largely ignored both by the political leadership and by the public. Until a few months ago, it was relatively easy to shrug off these concerns. For most consumers, nothing really changed, apart from some sporadic incidents of “out of stock” items or slightly longer delivery times for their online shopping orders. There was no reason to suspect that the global supply chain had suffered any significant damage, even though it was already running on fumes. However, now that the problems are undeniable and directly impacting the average citi- zen, politicians in most advanced economies are forced to respond.

So far, the solutions that have been presented seem to be based on the same approach that caused this crisis in the first place, namely the misguided idea that the extremely complex machine that is the global economy can simply be turned off and on again on a whim. Also, policies such as energy price caps and direct subsidies in the EU or orders to keep key ports open 24/7 in the US can provide some short term relief at best, but will do little to fix the real, underlying damage.

Of course, the most direct and obvious effects of the supply chain breakdown are already hitting the average western household. The significant increases in food prices and electricity bills are forcing countless low-income families to choose between the two, and the situation will only get worse as winter sets in. Shortages of raw materials, like plastics, metals, glass, and electronics, have resulted in a lack of basic medical equipment that is plaguing US hospitals, forcing some facilities to ration care. Meanwhile, the staffing squeeze that has paralyzed many private businesses is also affecting more and more public services that taxpaying citi- zens rely on, including education, policing and infrastructure maintenance.

However, the risks are quickly mounting for savers and investors as well. The global supply chain crisis, the energy crunch, and the consequences of the record-breaking monetary and fiscal relief packages have created the ideal conditions for a wave of sus- tained inflation. While central bankers and policy-makers tried to dismiss these fears earlier this year and described the CPI increases as “transitory”, their assurances that everything is under control now appear less and less credible. Combined with ultra-low interest rates for pensioners, savers and long- term investors, this could have catastrophic effects.

There is, however, another risk that lies ahead that many investors and taxpayers often fail to take into account. After all the patchwork fixes and short-term solutions fail, all roads ultimately lead to financial repression. Despite the teachings of Modern Mone- tary Theory, deficits do matter and eventually governments will have to face reality. Already we can see a wider trend towards tax hikes with the US leading the way under President Biden and Europe following suit. In the months and years to come, jurisdictional diversification will play an essential role in most successful investment strategies. This is especially relevant for physical precious metals investors, as their choice of storage location could soon prove as important as their holdings themselves.

Geopolitical risk overview: What to look out for in the year ahead

Over the last year, mainstream headlines and public attention have remained focused on the covid crisis and its ripple effects on the economy and on national politics. This is, of course, justified given that the pandemic is one of the greatest catalysts for change we’ve ever seen in modern history, impacting everything from the way we live and work as individ- ual citizens, to the way the global market functions.

However, as 2021 slowly comes to an end and we start to look ahead for opportunities and risks that will persist into the new year, it is essential to “zoom out” and consider the bigger picture. Geopolitical developments have always played a decisive role in the global economy and even though they largely went under-reported over the last year, there are momentous changes underway in the global power balance that investors should pay close attention to.

The “Afghanistan effect”

While the botched US withdrawal from Afghanistan did attract media interest, the coverage of the developments on the ground was short-lived and rather superficial. The harrowing images of the Taliban takeover, of fallen cities and countless people desperately trying to board the last planes out of Kabul, were shocking to many western citizens, but the real magni- tude of the disaster is even more terrifying. This was only the beginning of what will very likely be a protracted and brutal crisis for the people of Afghanistan and the implications of this regime change are bound to affect the global geopolitical order too.

For one thing, the swiftness of the Taliban takeover, the lack of resistance, and the evacuation chaos was more than just an “embarrassment” for the US, as many mainstream news outlets put it. It sent a much more important signal, to adversar- ies and allies alike, that the superpower maybe doesn’t have the influence it used to, or the capacity to exert and assert it.

Allies paid attention, of course, but many of them had also contributed themselves to this catastrophic outcome. After decades of pursuing a myopic foreign policy strategy and following America’s lead, the organizational mayhem and the lack of coordination that the western powers demonstrated at the end of this “forever war” was not really surprising to those who had been watching the domestic dynamics in Afghanistan shift over the last years. Even after the initial shock of the takeover, the UK and the EU under Germany’s lead- ership have spent the weeks after the fall of Kabul in a kind of diplomatic paralysis, still trying to decide what their official stance should be vis-à-vis the Taliban.

In mid-October, the crisis was extensively discussed in the G20 summit, with members pledging to avert an economic and humanitarian catastrophe and German Chancellor Angela Merkel insisting that the country should not be allowed to "descend into chaos". However, there is still wide- spread confusion over how that will be achieved and how the promised aid will be delivered to the Afghan people, without formally recognizing a Taliban government. In the meantime, the situation on the ground keeps deteriorating. As the BBC reported, “Businesses shut down because their owners fled the country fearing for their lives. Many of those who had jobs haven't received salaries for months. Women who had jobs and supported their families can no longer work and are now entirely dependent on handouts. In Kabul, hundreds of people are still living in the open in tents with harsher winter months fast approaching. Development aid given by foreign countries and agencies to Afghanistan, which helped to put cash into the economy, is all but frozen.”

In sharp contrast to the confusion and indecision of the allies, US adversaries were much quicker to react to the regime change and to seize the opportunities it offered. The “Afghanistan effect” seriously damaged US credibility in the Middle East. Iran, for instance, has already made its intentions clear to fill the power vacuum and to take advantage of the weakened deterrence capability of the US on the nuclear issue or in the region as a whole. According to reports by the International Atomic Energy Agency (IAEA), Tehran is now closer to a nuclear bomb than it has ever been, with some experts esti- mating that it could be just a month away from acquiring enough fissile material, or weapons-grade uranium, for a bomb.

China at a crossroads

It’s been an intense couple of years for the world’s “challenger” superpower, with its relations with theWest becoming increasingly strained and its domes- tic economic, political and social problems all com- ing together in what could turn out to be a perfect storm. First and foremost, let’s address the elephant in the room: it’s now two years since the first reports of a novel coronavirus emerged in China, and we’re still no closer to getting any official answers about the origins of the virus or seeing anyone held to account for the disastrous mismanagement of the containment efforts at the start of the covid crisis. Both the media and the political establishment in the West appear to be content with all these questions remaining unanswered and from a public image point of view, China has emerged relatively unscathed from this crisis.

And while the pandemic might have failed to make a dent on China’s projected geopolitical strength and its bold-stated ambitions, for those willing to take a closer look, it did bring to light some fundamental weaknesses that the country has quietly been struggling with for years. The impressive economic growth the nation enjoyed over the last decade has not only come to a grinding halt, but it was also revealed to be entirely unsustainable. Despite the government’s efforts to rein in corporate debt, some of the country’s largest companies were still extremely over-leveraged even before the pandemic hit. Many rational economists and analysts have warned of the risks of excessive debt, but it took the Evergrande disaster for most investors and for the rest of the world to pay attention. Today, fears of contagion are spreading fast, as are doubts about Beijing’s fiscal and monetary policy direction, spooking investors and clouding China’s growth outlook.

On the foreign policy front, the country has continued to pursue its goal of extending its sphere of influence and eventually hoping to dethrone the US as the world’s primary superpower. Until fairly recently, the nation appeared to be making solid progress in advancing this agenda, with the Belt and Road initiative and its record-setting investments in Africa and elsewhere in the developing world. Over the last couple of years, however, the Chinese government’s “muscle flexing” in the region and the means that it used to achieve its ends are increas- ingly drawing International criticism. From its aggressive moves in the South China Sea and the maritime incursions against Japan and Taiwan, to its border conflict with India and the forceful takeover of Hong Kong, the country has given multiple reasons to the West to question whether a relationship based on cooperation and constructive diplomacy is a realistic strategic aim.

Overall, it can be argued that China’s strength and global influence could soon be peaking, if it hasn’t already. The competitive advantages that propelled the nation to its position as the greatest emerging economy in modern history are quickly eroding: its demographic profile is deteriorating, its economic engine is sputtering, and its leverage on the global geopolitical arena is starting to fade.

Europe’s “perma-crisis”

Looking at the last decade of European political and economic challenges, one can’t help but marvel at the fact that the EU is still intact. The bloc has been going from one existential crisis to another: from the Eurozone recession and the bail outs to heavily indebted member states, and from Brexit to the spread of populism and secessionism. The covid crisis revived many of the long-standing debates and internal frictions that have plagued the Union for years, but, most pertinently, it planted serious doubts in the minds of countless citizens about the need for and the purpose of the Brussels bureaucracy.

" The internal tensions that are once again threateningthe EU’s cohesion and ultimately its survival run much

deeper that the squabbles that emerged during the covid crisis."

in the minds of countless citizens about the need for and the purpose of the Brussels bureaucracy.The way that the EU leadership botched its pan- demic response served as a wake up call for many Europeans. Already in the first few weeks after the onset of the public health crisis, all the values and the ideals that the Union was supposedly founded upon, like cooperation and open borders, were summarily scrapped. Each member state scrambled to secure medical supplies and equipment for its own citizens, even if that meant stopping other members’ orders in transit and confiscating them. Borders were closed unilaterally and without notice, while the countries hit the hardest, like Italy and Spain, were essentially left to fend for themselves for months. The organizational and planning skills of the Brussels bureaucracy also left much to be desired during the vaccine rollout efforts. The insistence of top officials to centrally plan this operation, instead of allowing each nation to negotiate and secure its own vaccine supplies, soon backfired and resulted in very long delivery delays and wasted vaccines.

However, the internal tensions that are once again threatening the EU’s cohesion and ultimately its survival run much deeper that the squabbles that emerged during the covid crisis. For decades, the future direction of the bloc has been fiercely disputed and there is a very wide rift between members that wish to push for further integration and centralization and those who insist that national sovereignty must be respected. This core question always arises in times of turmoil, as we most recently saw during the last recession and the 2015 immigration crisis. And while its success record has not been entirely impeccable, not after the UK broke away from the EU, Germany, the de facto leader of the bloc, has been the glue that kept it together. Through its economic dominance and its political leverage, the country managed to further its EU-centric agenda, to build consensus, and to negotiate compromises among member states.

Now, this era might very possibly be coming to an end. With the departure of Angela Merkel, combined with the structural damage that the nation’s economy has suffered over the last year and a half, Germany’s ability to continue leading and uniting the bloc is in legitimate doubt. As the outgoing Chancellor herself warned, "it is getting harder and harder" to find compromises between EU members on con- tentious issues like immigration and the rule of law.

Investment implications

Given the complexity of current geopolitical dynamics, it can be hard to predict what the precise impact of a crisis on any of the above mentioned fronts would mean for investors. What we can tell for sure, however, is that a tectonic shift is underway and the global power balance is changing fast.

What is also clear is that geopolitical developments can directly impact the individual investor’s portfolio and the average household’s finances. A great example of this is the ongoing energy crisis that is hitting Europe particularly hard. After years of pushing for a unified approach to fighting climate change and for a European “Green Deal”, the EU leadership introduced regulations and heavily interfered with market dynamics, which resulted in a premature transition away from traditional energy sources that left member states dependent on imports and extremely vulnerable to market volatility. The diplomatic tensions and the strategy that Brussels adopted to deal with the “Russian threat” also con- tributed to the end-result we see today, namely countless European households unable to heat their homes this winter.

Another important risk that investors should take into account going forward is the potential accumulative impact that geopolitical tensions could have on the global supply chain that is already at breaking point. At the moment, we’re seeing skyrocketing prices and shortages of all kinds even though most nations are still willing to trade with each other. If trade relations collapse on top of the already collapsing global trade infrastructure, the probability of another recession would most assuredly soar, especially if this threatened the energy market or other commodities that form the basis of the world economy.

Currencies are also very likely to be affected by these geopolitical shifts. The euro, for example, appears to be the most vulnerable at this point, should the relations between member states continue to deteriorate or if the inflationary wave that is already sweeping the Eurozone persists and further fuels public discontent and secessionist sentiments. As for the USD, the covid crisis and China’s failure to credibly challenge its world reserve currency status (at least, so far), might have given the greenback a new lease on life, but it is unlikely to last long. In the short- and mid-term, investors’ trust in the dollar will probably hold, but the fundamental weaknesses of the US economy and the country’s unsustainable fis- cal and monetary policies will ultimately corrode it. In fact, the same can be said for most, if not all, fiat currencies, especially in light of the meteoric rise of their crypto challengers. Bitcoin’s gains over the past year sent a strong message to investors, while the almost exponential institutional and public adop- tion rates of crypto assets in general strongly sup- port a bullish outlook for the future of the nascent asset class.

All in all, given the multitude of risks that lurk ahead and the heightened uncertainty that is likely to persist in the following months, it is hard to imagine any successful investment strategy and any resilient portfolio without a precious metals allocation.

Throughout the covid crisis, gold and silver once again proved that they can still be relied upon to serve as robust hedge and a safe haven in times of economic turmoil and market upheaval. Bearing in mind the present geopolitical challenges, combined with a stalled global economic recovery and inflationary pressures on the rise, there are plenty of good reasons for optimism among precious metals investors.

The Nixon Shock: The shot on gold heard around the world

“I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and condi- tions determined to be in the interest of monetary stability and in the best inter- ests of the United States.”~ Richard M. Nixon.

While I was celebrating my 50th birthday this year in early August, the world was remembering another 50th anniversary of what is often referred to as the Nixon Shock, the infamous speech where then U.S. President, Richard M. Nixon, sounded the death knell for the Bretton Woods system.

The Nixon Shock is a reference to economic policies the U.S. President instituted at that time, marking the end of the “gold window” and severing the last link between the US dollar and any real asset. Speaking on television on Sunday evening, August 15, 1971, Richard Nixon announced his New Economic Policy, a program he and his inner circle of economic advisers had secretly devised at Camp David. The plan was “to create a new prosperity without war.” The plan was a “shock” in that Nixon sprung it on everyone, without warning, blindsiding US allies in Europe and Asia.

It marked the beginning of the end of the Bretton Woods system that had been established at the end of World War II. The Bretton Woods Agreement, negotiated in 1944 by delegates of some 44 countries, had been developed with the goal of creating stability and predictability for global commerce. It was meant to create an efficient foreign-exchange system, prevent currency devaluations, and promote world economic growth. It called for the US dollar to be pegged to gold at $35 an ounce, and then for all other currencies to be pegged to the US dollar.

Back in August, mainstream media and financial press writers extensively covered the anniversary of the Nixon Shock and elaborated on the relevant historical and geopolitical context of the time. However, it is still interesting to look at the wider impact of the shock 50 years on, especially as a reminder of how important it is to have gold in your portfolio.

Nixon’s actions basically paved the way for 50 years of fiat currencies being backed only by trust in governments and central banks. This trust in the government’s ability to effectively manage money has deeply eroded since the financial crisis in 2008, and after the aftermath of the covid crisis, it certainly doesn’t look like it will get better any time soon.

Furthermore, the closure of the gold window also went on to weaken the links between monetary stability and plain-and-simple fiscal common sense, the consequences of which we are facing today. Governments and central bankers continue to roll out free money and quantitative easing carte blanche, with nary a debt or fiscal consolidation strategy anywhere to be seen on the horizon. Non-sensical ideas like those propagated by Modern Monetary Theorists would never have been taken seriously under a gold standard system: Deficits and debts do matter, if you can’t simply print your way out of them.

One can also argue that by de-linking gold and paper currencies or sovereign legal tender paved the way for the war on cash, as digital currencies continue to be the way of the future. If today’s money was still backed by gold, the digital transition wouldn’t be as worrying a move as it is presently. Of course, privacy or financial freedom concerns might have persisted, but we wouldn’t have to worry about the huge risks that come with total state control over the currency and its boundless ability to manipulate it.

In any case, the lack of trust in governments and central banks, the seemingly endless money print- ing, the risks of inflation, the open question of who will hold and control the world reserve currency (and what that currency will look like), are all essen- tial arguments that continue to support the invest- ment case for physical gold. After all, gold has, is, and always will be money. It will serve as a reliable hedge against crises on many fronts, just as it has done countless times in the past. It will continue to represent stability. It may even serve as a better option to holding cash in a negative-interest rate period like the one we’re living through.

In a perfect world, currencies would still be linked to gold. However, can anyone really say with absolute certainty that this would have prevented all of the monetary and fiscal disasters we’ve seen in recent decades? I’ve worked in the BFI Capital group for nearly 20 years now, and I remember the investor disappointment when we had to tell people the Swiss Franc wasn’t linked to gold. Many would prefer that it still was, but could the Swiss economy really survive if the nation’s central bank was the only one to tie its hands behind its back, when every country around us can just print money at will? There’s a compelling case to be made for both sides and the argument rages on until this day.

In many ways, I think one really has to look at the Nixon Shock objectively, taking into consideration the particular circumstances and the challenges that the US, and the world, was facing in 1971. It can cer- tainly be argued that Nixon did it mainly as a way to ensure a second term, yet it could be that a bold move was needed to move the US and the global economy away from yesterday and into the future.Gold went from $35/oz in 1971 to as high as $2,060 in August 2020. If only I could have convinced my parents to buy gold when I was born!

Buyer beware: The risks of the “Buy Now, Pay Later” boom

Since the start of the pandemic and the first round of lockdowns, e-commerce predictably took off, as consumers could no longer access most physical stores and turned to online shopping en masse. Around the same time, another trend began to emerge: “Buy Now, Pay Later” (BNPL) services, offering shoppers ways to break down their purchases into small installments, quickly gained momentum, as more and more digital marketplaces and retailers partnered up with BNPL providers and included this payment option in their checkout process.

The idea behind BNPL is really nothing new. It’s similar to traditional layaway plans or installment financing options retailers have always offered to consumers, allowing them to purchase an item even if they don’t have all of the cash on hand. What’s different about this modern, digital reincarnation of this concept is that it is now being widely used for small, everyday purchases, not just for expensive appliances, electronics and other big-ticket items.

In fact, this payment option is now offered by retailers like Target, Walmart and Amazon, and it is even being used for daily grocery shopping. Another notable difference is that BNPL services are usually promoted as “interest free” and they are a lot easier to access. As a recent Fitch report highlighted, “the underwriting process is typically very fast and based on "soft credit checks rather than more thorough vetting required in other forms of credit.”

While the convenience of this new payment option is undeniable, it also entails some serious risks that most consumers fail to take into account. For one thing, the ease of use and the frictionless checkout experience simply doesn’t give buyers enough time to consider their purchasing decisions and it encourages them to spend more, even when that spending is beyond their means. It is also a lot easier to misjudge what they can objectively afford, as the total amount of their pur- chases can seem lower when it is split up into smaller chunks. Tracking their spending becomes more challenging too, as payments are spaced out and automati- cally withdrawn from their accounts over weeks or even months.

Even more worryingly, many consumers fail to realize what they’re really signing up for. The two-click process feels a lot more like any other online shopping experience, instead of the short-term loan application it actually is. And this is where the real danger lies for the majority of buyers who do not stop to read the terms and conditions.

Most BNPL services might indeed be “interest free”, however the conditions that apply to this offering are very strict. Late payment penalties and collection fees vary between providers, but they can accumulate very quickly. Consumers who miss a payment can easily find themselves on the hook for exorbitant amounts even for small purchases and fall in a debt spiral reminiscent of the vicious circle of payday loans.

The lack of credit checks significantly compounds the risks of the BNPL trend. In Australia, the birthplace of some of the most successful BNPL provid- ers, the consequences of the mass adoption of this payment option are already becoming clear. As Kirsty Robson, a financial counsellor with Australia’s National Debt Helpline pointed out, "People we speak to haven't been able to afford rent because they've had too many buy now pay later payments come out of their account, and they haven't been able to afford to buy food. They've been buying their groceries with buy now pay later and then getting stuck in that kind of trap where they use the product for their living essentials and then pay it down and then have to use it for their living essentials again.”

While the trend started in Europe and Australia, it quickly spread to the US, with BNPL companies like Klarna, Affirm and Afterpay attracting huge investor interest and online payment giants like PayPal rushing to get in on the action and roll out their own products. According to a recent survey by LendingTree, one third of consumers have already used this option to finance their purchases and among those, almost two-thirds have used it five or more times.

And yet, estimating the actual risk levels in this new lending market is extremely challenging. Given the different versions of the service and the lack of regulation in this budding industry, measuring the size of the market itself is very difficult, while the absence of uniform reporting standards makes it almost impossible to form a clear idea about overall debt performance. According to the aforementioned Fitch survey, “31% of U.S. respondents have made a late payment or incurred a late fee using BNPL methods”, a figure that should raise concerns given the fact that most BNPL providers "have not set aside large provisions for losses and report minimal bad debt."

Today, the BNPL boom is being hailed by many investors and market analysts as “the future of mil- lennial finance” and the momentum behind the burgeoning industry seems unstoppable. The skyrocketing adoption rates and the potential for global expansion certainly support this bullish view. However, given the very real risks that are embedded in this corner of the lending market, not just to con- sumers but to providers too, the widespread enthusiasm could prove premature and investors could soon regret jumping on the BNPL bandwagon.

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