Tuesday, July 30, 2013

Counterfeiting Trust

We are fast approaching the moment when the value of the counterfeit trust, the counterfeit assets and the counterfeit promises are revealed as fakes.

The heart of any con is winning the trust of the mark, and the heart of counterfeiting is persuading the mark that a facsimile of value is real. Counterfeiting is one con among many, but its terrible beauty lies in the durability of the con: just as counterfeit paper currency can continue to pass as authentic money from one mark to the next, counterfeit assets can be traded until the very moment the con is revealed and trust is lost.

Understood in this way, what the central banks and governments of the world are really doing is counterfeiting trust: trust that the paper money in your wallet/purse will hold its value in the future, trust that assets presented as zero-risk can be sold for full face value at a later date, and trust that entitlement promises will be paid.

Please forgive the repetition of this chart of the S&P 500 over the past 18 years, but it raises this question: Which do you trust more: the Fed's implicit promise that the stock market will never crash again (because "the Fed has our back"), or that every asset bubble boom is inevitably followed by a bust?

When the Fed creates dollars out of thin air to buy Treasuries or mortgages, it is counterfeiting trust: trust that the Fed can manage inflation so that only 3% of our purchasing power is stolen every year, trust that the Fed's ceaseless support of the banking cartel won't collapse the financial system (again), and ultimately, trust that a centrally managed financial system is stable and a benefit to the real economy.

When the Treasury sells $1 trillion in Treasury bonds, indenturing future taxpayers to the payment of interest essentially forever, it is also counterfeiting trust: trust that the money refunded to the bond holder upon maturation will be worth its current value in purchasing power, trust that the central state can borrow $1 trillion a year (or more) forever with no systemic consequences, and trust that the interest on this Federal debt will never crowd out funding for all the entitlements promised to 317 million citizens.

What happens when trust in the counterfeiters is lost? What happens when the assets presented as zero-risk lose value? What happens when "the Fed has our back" doesn't stop the stock market from careening off the cliff of a global credit crisis, which is another term for a crisis of faith that the system is as stable and resilient as it is presented?

Trust is a fragile creature. It is a most ephemeral yet powerful force. Once lost, it can never be fully regained; it can only be earned back, one step at a time.

We are fast approaching the moment when the value of the counterfeit trust, the counterfeit assets and the counterfeit promises are revealed as fakes. 

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

go to print edition1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

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