NOVEMBER 2011                                                                                                               

Debt is Trust


Trust remains the key underpinning for currency valuations. However, trust is currently in very short supply indeed and this is having a knock on effect on a number of assets and currencies. Angela Merkel must now weigh up the consequences of betraying the German people’s trust.

David Graeber has recently  published a book entitled Debt: The First 5,000 Years. The title is fairly self-explanatory and I will not give a synopsis as I have not finished it yet; however, it is certainly worth reading. I mention this book as what he writes is very relevant to the current situation and allows a follow-on thought to the recent market comment on Greece. The key sentence I have just read (and which I slightly paraphrase here) is:


“The value of a unit of currency is the measure of ones trust in other human beings”


This is an absolutely fundamental statement and helps me, at least, to consider currency levels and the national interests behind them.

Trust Intact 
All reliable currencies exhibit three trusty criteria: a store of value; a unit of account; and a method of payment. There are a number of currencies that share these three conditions such as the Swiss Franc, the Norwegian Krona, the Singapore Dollar, the Canadian Dollar and the Japanese Yen. The various nations’ politicians may have followed policies which have historically caused upset in their voting populus, however, in relation to their currency they have opted for long term trust.  For example Japan has never threatened their savers with a massive currency devaluation.  The trust of other human beings has remained unquestioned - currencies have remained dependable.

What about us?
Turning to the UK and the USA we find a different situation and a ‘work in progress’. In both countries the process of losing the ‘store of value’ and the creation of inflation has started. The hope is that growth will come via such reflation and bail them out, but this is now looking less likely as more and more reflation is required.

How can this be? The British love their currency surely? It has, after all, a picture of the Queen on it - to many in the UK and the Commonwealth the ultimate symbol of trust. History has shown that she has taken a few punches and is about to take some more. The UK is once again stepping onto a path of high inflation, low interest rates and currency devaluation - a real triple whammy - however, this was always likely to be the solution chosen, both in the UK and USA.


Merkel’s dilemma
Now consider poor Angela. The currency of her youth would certainly be on the list of ‘trustable’ currencies earlier in the article. However, she is now tied in with Nicolas (or his successor), Silvio (or his successor - done), Jose Luis (or his successor). They have all lost the trust of their populations and are now turning to her for her to do the ‘decent‘ thing and let the printing presses of the ECB start turning.

Germany has a phobia of printing presses. They last faced this horror in the 1920s, which led to the rise of Nazism and a very painful and recent period of history. However, she has already stated that countries with the same currency do not go to war with each other - so she has boxed herself into a very difficult corner. Will she allow printing and the loss of the store of value? I think she has to, as you cannot separate printing presses from social policy, which is another word for sovereign taxation – hence more European integration, and implicitly more ECB printing.


In Whom do We Trust

What does this mean for an investor? Certainly look to your liabilities and your underlying currency position to see if you could or should diversify into some ‘trustable’ currencies. Certainly look for assets and sectors that have historically kept up with inflation. All debt is not equal, but all debt is based on trust, turning an obligation into a specific sum of currency, which is measurable by the three aforementioned criteria.  At the very least we can guess whom to trust. 

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