Trust: The Biggest Casualty of 2008

There is a commodity not traded on any exchange, not measurable in dollars, immune to the effects of supply and demand, once present in many global markets, but now all but extinct. With the closing of 2008, the commodity with the grimmest prospects of recovery is trust.

From the laughable devaluation of the U.S. dollar through hyper-printing to the destruction of all the post-1933 regulations designed to thwart unregulated and over-leveraged gambling and lending, even school children are expressing their absence of trust in the adult world. While the mainstream media occupies itself with causes and solutions that are short-sighted and just plain wrong, we’ve got to focus on this profound tragedy and develop a game plan for its restoration.

Despite the anti-regulation rhetoric of the new Obama economic team, it would behoove the rest of us to understand categorically that the investment banking industry’s sole interest is its own enrichment, and it will continue to act immorally and illegally (when it can get away with it) to achieve that goal.

Underlying the destroyed trust and the confidence that naturally accompanies it in world economics is the absolute destruction of trust in the number one unit of trade throughout the world, the U.S. dollar. Debasing the integrity of the global reserve currency through the unbridled and reckless expansion of it will cause its continuing decline in 2009, and demand for U.S. Treasuries and U.S. denominated assets will decline as we step into a hyper-inflationary future.

China holds the largest position outside of the United States in U.S. T-bills, and is also a regular participant in the financings of major financial institutions such as the Fannie and the Freddie. It is caught in the unenviable position of being forced to prop up the value of the U.S. dollar or risk undermining the value of its own huge USD holdings by abandoning it. The United States, in a persistent commitment to feckless and immoral business relationships with its creditors, understands this and confidently continues to undermine its own currency.

The time is quickly approaching when a new global reserve currency will replace the U.S. dollar, and contrary to the flawed wisdom of mainstream economists, an gold-pegged currency is not only feasible, it is perfect. It is astounding how many of these academic economists think that a global gold standard means that the available money supply is limited by the amount of gold in central bank vaults. If gold were merely allowed to trade absent the manipulative influences of the futures market and gold leasing and hedging operations, it would act as a natural barometer of the health of currency because in the simplest terms, how much gold you can buy with a given currency would be a direct reflection of that currency’s purchasing power relative to others. It is this market differential (and this same force is the “free market” force espoused superficially in so many modern economic tomes) that acts as a gold standard.

Unfortunately though, our nation’s ability to trust any currency, government bond issue, blue-chip stock, mutual fund, bank bond, or ETF is severely impaired by the general destruction of trust caused by the actions of Mssrs. Bush, Paulson, Madoff, Lay and Skilling, Blagojevich, Hsu, Black and a seemingly endless supply of other “pillars” of our communities.

Over Christmas, my nephew who seems to have evolved an abnormally keen interest in matters political for one so young (he’s 6) has embarked on the line of reasoning whose franchise is concentrated on the question “why”. Why did Bernie Madoff steal all those people’s money? Why doesn’t the government give all that money to the people instead of banks? Why don’t the banks lend people money anymore? Why isn’t George Bush isn’t arrested for lying repeatedly to the American people?

I listen to my brother explain things in a most diplomatic fashion designed to preserve the boy’s natural faith in the goodness of people and the importance of acting honestly in dealings with others, then watch as the apparent contradictions register in mischievous expressions on the youngster’s face. What else are you going to do?

Imagine: “Son…it's important that you understand that people who spend their lives making money as their primary occupation will generally lie and cheat and steal their way to their objective, and so you really must replace that charming yet naïve trust of yours with a healthy cynicism and mistrust that will better aid you in dealing with your fellow man.”

The thought is sickening. Yet if the truth were to be told in this day and age, that is precisely the approach one might be compelled to take.

The promise of Barack Obama appears to be diminishing rapidly as scandal follows blunder in his yet-to-be inaugurated administration. With the appointment of Summers, Rubin and Volcker to his economic advisory team, Obama sends a clear message that he will delegate the oversight of economics to a team of failed and corrupt academic yes men.

With his invitation to tele-evengelist Rick Warren to deliver the invocation, he confirms a populist approach the demonstrates both a dearth of experience and a puppy’s requirement for approval.

And most disappointingly, his commitment to spend billions of imaginary dollars on infrastructure projects to buy popularity and temporary jobs will compound the spiraling value of the dollar and add impetus for its demise as the reserve currency of the world.

There are more scandals and acts of fraud and duplicity yet to be uncovered in the upcoming year, and trust will continue to erode in the hearts and minds of average citizens the world over. While 2008 was a year that most would rather forget, 2009 will be worse – more so for the loss of trust.

Comments

[redbaron:]

I certainly agree that trust has been seriously erroded in 2008, but at the same time I also remember that a similar situation existed in October of 1987, when the Dow declined 23% (or so) in one day. At that time my long time friend and broker told me that he had customers that had lost so much trust in the stock market that they would never again invest in stocks. We Americans recovered from that situation to see the Dow move up many fold over the next two decades, and it is my thought that we will recover again from this current situation. When that will happen is a larger question, and I am not wise enough to predict the future.

At the same time, I can see that some of the small cap value stocks that I follow have already doubled from their lows in November, and one or two nearly tripled. One could argue that the recovery is already underway, but there is so much negativism in the press today that I am afraid to try to make that case. A real contrarian would not hesitate to go ahead and make that case, but I will refrain. Regardless, I for one believe that sentiment will recover, and trust restored, at some point soon. When that does happen, no doubt the value stocks I follow will be considerably higher than they are now, and way off their lows in Nov.

Jan 02 10:04 AM

[Jason Rines...:]

Small caps do well at the early stages of recovery. The country has a wealth of entrepenuars that are in do or die mode. Private equity will be paying a visit to the start up and early stage companies as you suggest RedBaron in 2009. That said, I am going to avoid investing in Q1, awaiting the revelations of earnings while seeing what the fiscal policies of Obama and Congress look like.

I do believe you are right, we shall uncover more scandals in the early parts of 2009. The USA is not going to become Africa as pessamists predict, nor shall we have a 15,000 bull market by the end of this year as optimists predict. The truth is somewhere in the middle. I'll repeat my forecast that the next bull market will begin in 2013. How the USA recovers, cuts costs, avoids or not avoids hyperinflation in 2011-2012 is simply a guess. Right now, the economy is deflationary and will largely stay that way in 2009 continuing to shed excesses. I do believe we are 1/2 way through that process.

Jan 02 10:28 AM

[MarvinMBA:]

Obama and his experts are smarter than the author thinks. His appointments reflect the individuals that know previous success and will guide our economy forward as best it can be under the circumstances created by the Bush Administration. MarvinMBA

Jan 02 10:42 AM

[Larry House:]

Dividendmachine, there are certainly risks in MO. There is a governement-backed campaign against their products. Earnings estimates are coming down. Their ability to continue to raise the dividend is in question. There are no "risk-free" investments available. We just have to assess the risk as best we can and see if there is a reasonable chance of success. I have owned MO from time to time, and I am not saying it won't do well, but success is just not a sure thing. I was always told, "Success is never certain; failure is never final." I guess that is why I am still investing in stocks and bonds, although my confidence has been seriously shaken. There are any "sure things" anywhere else either--that offer a resonable return.

Jan 02 11:11 AM

[bobbobwhite:]

Most posters here seem to think that all will return to normal after this economic "inconvenience" has passed. However, the present debacle is not just an inconvenience as it is not something anyone under the age of 85 has any experience in seeing through, and it may well be the end of the American way all of us have known as a result. We have been taught to be perpetually optimistic in the face of everything working against us, as that is the largest part of the unique American attitude toward life that is so different from the way life is seen in so many parts of the world. Which view is more realistic and helpful in the long run? That is in serious question these days as the American way is put to its perhaps most severe test in its short world history.

The concept and reality of trust is based in personal honor, and honor seems to be a rusty leftover from the past for most of our greedy citizens these days in our "buy it now and pay for it later, maybe" society. "Show me the money" has replaced duty, honor, commitment, and persistence in the declining America of today.

PS: At the supermarket yesterday, I saw many typical Americans pay for their groceries with credit cards, but all the Asians paid cash, every single one. Anyone with a functioning brain should see a lesson in that.

Jan 02 11:44 AM

[Jackson Cash:]

Good observation. However, I would argue that trust won't return for a long time.

We still have zero resolve with the financial crisis, over $50TRILLION in assets in tier 3 yet to be actually valued.

What wonk thinks that people want to get slaughtered!

Jan 02 12:11 PM

[TomF75:]

bobbobwhite:

I wouldn't read to much into the paying grocery bills w/ cash. I always buy my groceries & gas w/ a Capital One card get my 2% cash back bonus. Pay the card off in full every month. I am sure many more people do what I do.


On Jan 02 11:44 AM bobbobwhite wrote:

> Most posters here seem to think that all will return to normal after
> this economic "inconvenience&amp... has passed. However, the present
> debacle is not just an inconvenience as it is not something anyone
> under the age of 85 has any experience in seeing through, and it
> may well be the end of the American way all of us have known as a
> result. We have been taught to be perpetually optimistic in the face
> of everything working against us, as that is the largest part of
> the unique American attitude toward life that is so different from
> the way life is seen in so many parts of the world. Which view is
> more realistic and helpful in the long run? That is in serious question
> these days as the American way is put to its perhaps most severe
> test in its short world history.
>
> The concept and reality of trust is based in personal honor, and
> honor seems to be a rusty leftover from the past for most of our
> greedy citizens these days in our "buy it now and pay for it later,
> maybe" society. "Show me the money" has replaced duty, honor, commitment,
> and persistence in the declining America of today.
>
> PS: At the supermarket yesterday, I saw many typical Americans pay
> for their groceries with credit cards, but all the Asians paid cash,
> every single one. Anyone with a functioning brain should see a lesson
> in that.

Jan 02 12:27 PM

[SeekingTruth:]

Let's talk about where "Trust " HAS BEEN established, and that is in your logic, your assessments, and your excellent article.
The day that Nancy Pelosi said that Impeachment is "off the table" is the day I left the mainstream of the Demo party and became an Independent.
Fact: Articles of the Constitution are never "off the table" although they can be temporarily ignored or subverted by our cowardly and power mongering politicians, and behind the scenes clandestine powerful exploitive forces and activities..
Trust , and it's more powerful companion, Truth ,are the most powerful forces in the complexities of human existence, and when they are subverted , denied , and distorted, by efforts for personal wealth and power, seriously damaging events ultimately unfold, as we are now enduring, and shall continue to endure for a painfully long time.
ACTION must replace "Hope", and IMPROVEMENTS must replace "Change" if we are ever to make country worth living in again .
Fear and Desperation makes FOOLS of us All !
And this has never been more clearly demonstrated than by the cowardly and desperate acts of our Congress in recent days in caving to the very crooks and forces that got us into this colossal mess in the first place! Hard to build Trust on this foundation.
We must begin to rebuild with loud voices, deliberate and wise action, and a re-establishment of solid, and punitive accountabilty (as necessary) if we are to reclaim our country and reclaim our birthright from these dry and bitter ashes wrought of misadventure , lethargy and gross public inattention compounded by unbridled special interest power and greed.. To do less will guarantee a downward spiral to ultimate mediocrity and yet more loss of freedom, -----------and "TRUST."

Jan 02 12:34 PM

[waf76:]

If the government has to take on the role of restoring trust into the markets then we are in a more dire predicament than imagined. If without their intervention we are doomed by our greed then we deserve it for you reap what you sow. For our leaders should be the best among us, not society's worst. Unless unfortunately they are a reflection of ourselves. The only change you can believe in are things you can control yourself. Day by day Obama's administration will morph into the same old politics we have become accustomed to. Trust will be restored when losses stop being socialized.

Jan 02 12:51 PM

[Phil Trupp:]

If ever there was a year of mass disillusionment, 2008 ranks high. Mr. West is disheartened, embittered, and hurting--and he has every reason to be cynical. Loss of trust is no small thing. It is chronic in nature. Those of us who managed to survive any part of the 1930s never regained trust in the markets or the banks or the predators who run them.

The aftermath of the Great Depression did not bring about a generation of enlightenment. On the contrary, we lurched from one economic debacle to another. Our short spells of prosperity were anomalous. Trust, always timid, peeked over the horizon only to be slammed down once again by ongoing frauds.

The real question, I believe, has to do with our ability to act on what we have learned. The life-altering lessons of the Great Depression--lessons about economic abuse and foolhardiness--are well-known. We have learned about the Madoffs of this world and the species who are inexorably drawn to investment banking, and we have seen that morality has no seat next to greed. And still we repeat the same mistakes, make the same misjudgments, pretend this time will be different.

We learn, but we fail to act in ways that avoid and/or mitigate future disasters. It's like war: Everyone knows the human costs, and yet we seem unable to stop ourselves from committing acts of mass murder. Perhaps our inability to self-correct is programmed into our DNA. Certainly I don't have the answers.

As for what to tell Mr. West's young nephew, I would suggest starting with the truth. It may sting a little, but a dose of truth-as-preventative-... may help restore "honor" and signal to those who have none that we're mad as hell and we're not going to allow them to get away with it any longer.

Jan 02 01:29 PM

[Anthony Alfidi:]

Paul Volcker a yes man? I don't think so. He doesn't have to prove anything to anybody after his victory over inflation in the early 80's. He's a lot more friendly to your idea of using gold as a proxy for currency than anyone else in government.

Jan 02 04:20 PM

[Lilliana:]

What do you expect.?..With a war based on lies and and stupidity and a subsequent loss of nearly 950 Billion dollars paying for it.?
Is there any trust or honesty left left for commerce and business.?

Jan 02 08:11 PM

[henarl:]

Anyone who invests on the basis of trust is a fool. Investing is at best just educated gambling and a healthy cynicism is an asset. True trust is reserved only for ones close friends and family.

Jan 02 11:45 PM

[William Taylor:]

I totally agree. And on top of it all add the "wretched excess" of rampant "I have to have it now or I will not be a great as my neighbor" press for validation and you have a real mess that will not go away. All systems degrade and ours is fast along the way.


On Jan 02 11:44 AM bobbobwhite wrote:

> Most posters here seem to think that all will return to normal after
> this economic "inconvenience&amp... has passed. However, the present
> debacle is not just an inconvenience as it is not something anyone
> under the age of 85 has any experience in seeing through, and it
> may well be the end of the American way all of us have known as a
> result. We have been taught to be perpetually optimistic in the face
> of everything working against us, as that is the largest part of
> the unique American attitude toward life that is so different from
> the way life is seen in so many parts of the world. Which view is
> more realistic and helpful in the long run? That is in serious question
> these days as the American way is put to its perhaps most severe
> test in its short world history.
>
> The concept and reality of trust is based in personal honor, and
> honor seems to be a rusty leftover from the past for most of our
> greedy citizens these days in our "buy it now and pay for it later,
> maybe" society. "Show me the money" has replaced duty, honor, commitment,
> and persistence in the declining America of today.
>
> PS: At the supermarket yesterday, I saw many typical Americans pay
> for their groceries with credit cards, but all the Asians paid cash,
> every single one. Anyone with a functioning brain should see a lesson
> in that.

Jan 03 08:21 AM

[Long Silver...:]

A gold standard via government is not feasible, as it requires those in government office to agree to reign in their free-spending. This will not happen.

What can happen is for the free market to establish its own gold standard. Take a look at Goldmoney.com. It's basically a gold vault backing electronic money tradeable in grams. No fractional reserves. No fiat currency. Just weighted measures of gold.

I think this type of system, if run properly (including careful checks and balances and audits) can provide a free-market gold standard that will run in parallel to the world's fiat currencies.

Governments cannot be trusted. And they will not relinquish their control over the fiat money supply. We can all see that around the world.

What can be trusted and what does not depend on government action, is direct ownership of gold. I prefer holding the metal myself, but if you are looking for a gold standard monetary system, you might study goldmoney.com and systems like it for some ideas.

We need to remember, historically, that money can be strictly a free-market commodity that is not dependent on any government.

Jan 03 01:21 PM

[oldsuretyguy:]

Maybe they paid with debit cards?!


On Jan 02 11:44 AM bobbobwhite wrote:

> Most posters here seem to think that all will return to normal after
> this economic "inconvenience&amp... has passed. However, the present
> debacle is not just an inconvenience as it is not something anyone
> under the age of 85 has any experience in seeing through, and it
> may well be the end of the American way all of us have known as a
> result. We have been taught to be perpetually optimistic in the face
> of everything working against us, as that is the largest part of
> the unique American attitude toward life that is so different from
> the way life is seen in so many parts of the world. Which view is
> more realistic and helpful in the long run? That is in serious question
> these days as the American way is put to its perhaps most severe
> test in its short world history.
>
> The concept and reality of trust is based in personal honor, and
> honor seems to be a rusty leftover from the past for most of our
> greedy citizens these days in our "buy it now and pay for it later,
> maybe" society. "Show me the money" has replaced duty, honor, commitment,
> and persistence in the declining America of today.
>
> PS: At the supermarket yesterday, I saw many typical Americans pay
> for their groceries with credit cards, but all the Asians paid cash,
> every single one. Anyone with a functioning brain should see a lesson
> in that.

Jan 03 01:52 PM

[oldsuretyguy:]

Maybe they paid with Debit Cards??

Jan 03 01:53 PM

[oldsuretyguy:]

Excellent article.

Jan 03 01:54 PM