Trust is a wonderful thing. It is something we all rely on in our lives, and without it would be chaos. We trust others will drive to the road rules, we trust the lights will turn on when we flick the switch. We trust that banks will pay out our deposits. We trust governments will maintain the integrity of our currency.
This is perhaps the most crucial. We trust that central banks and governments will look after our best interests, and that we can exchange the money we have for goods and services we require. What happens when that trust is broken?
Recently, you will have all watched the goings on in the United States and Europe with the banking crisis. It is a perilously difficult time for all governments. If they hold and let banks and businesses fail, we are sure to have a major financial, credit and business crisis. If they bail them out, what does that mean for inflation and the inherent value of those currencies.
We argue and discuss this often in the office. Those that know me know that I am a supporter of free market economics, and therefore allowing some of these institutions to fail. I say this, though, with a MAJOR level of trepidation. Similar to anyone that has done a bungee jump, until it pulls on you, the tension settles and you stop falling, there is a pit in your stomach and panic of inevitable doom.
I am often challenged, however, and some believe that the bailouts and funds made available are a necessity. That the trust in our financial institutions is paramount, and without those we would have anarchy. Bailing them out, however, not only brings about issues with inflation but also raises the ever present spectre of Moral Hazard.
What is the answer?
I don’t know.
Similar to religion, however, I have faith in the free markets. I believe that if we continue on a path of support for these organisations, we will undermine the value and faith in the currency. We may be more comfortable with the security of our funds in the bank, but unsure of their worth.
The cost of living crisis
Over the last 40 years, governments around the world have slowly betrayed our trust and inflated away our ability to rely on the value of a dollar and ability to secure all the goods and services we require. At first, this was slow and unnoticeable, a bit here and a bit there. Currencies only devalued a little at first, but over the last 15 years things have ramped right up with the GFC and Covid stimulus.
The result today is price increases across the board. The widespread and persistent inflation we are facing is a result of the money printing and stimulus over the last 3 years and likely some hangover from that beforehand. For a while, this inflation was more or less contained in asset prices (homes, share markets etc.) but it is now well and truly entrenched in consumer goods.
My personal view is that if we allow inflation to persist that we are in for a long and rocky road. Inflation is really a tax to the middle and lower classes. The value of their true wealth falls and they struggle to keep up with the costs of living. The wealthy are insulated from this with larger holdings of assets that enjoy price increases and the devaluation of the debt they hold (after all, if a dollar today falls in value so does the value of that debt!). The road also likely ends with more pain, after all – you can only kick the can so far.
A rock and a hard place
A wash out and allowance of the free market to correct the current cycle will be painful and hard for us all, however, it will bring us to a stable base and equilibrium to allow for future growth and success. There will be real value to currency and therefore time and goods.
I have said a few times now, I think we are currently between a rock and a hard place and unfortunately there (in the short term) may only be a bad and a really bad option – not necessarily a good and bad one.
This brings us back to the question of trust. Do I trust the governments and central banks around the world to do the right thing and stomp out inflation, correct the bubble that has been inflated and return us to a solid and stable base?
No I don’t.
Watch this space, in my next blog, I will write about what I think is in store for the next 12 months.
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