The Trust that Created the Greatest Credit Boom in History is Gone

The issue of trust has been on my mind this week.

The news this week that a friend was having an extramarital affair raised the question of ‘trust issues’. Will their soon-to-be former partner ever be able to trust another man?

If a bridge of trust cannot be built, there’ll never be progress in any future relationships.

Elvis Presley’s Suspicious Minds tells us what fate awaits a relationship when suspicion replaces trust:

Why can’t you see?
What you’re doing to me
When you don’t believe a word I say?

We can’t go on together
With suspicious minds
And we can’t build our dreams
On suspicious minds…

We can’t build our dreams without trust.

Trust is the foundation of our society.

If we don’t trust the banks to open the doors tomorrow, then we’ll find somewhere else to store our cash.

If we don’t trust the insurance company to honour its policy, why bother having insurance at all?

If we don’t trust the legal system to protect our property rights, guess what? We stop buying property.

As a society, we’ve made progress due to trust.

In the financial world, trust is continually being tested.

The recent Parliamentary Banking Inquiry was a public display of contrition from the Big Four banks — we’re sorry for providing poor financial advice to our clients; we’re sorry for not paying your CommInsure claims; we’re sorry for doing dodgy loans; we’re sorry for ramming high interest credit cards down the throats of people who can’t afford them.

The parliamentary farce had one objective — to maintain trust.

The untrustworthy politicians got to pretend they actually cared about us — while they milk their parliamentary perks for all they can and do grubby favours for their union mates and political insiders.

The equally untrustworthy bankers hung their heads in mock shame and pinky-promised to bring an end to the culture of systemic greed and fee gouging.

Yeah right…

‘Trust us’ was the message the two most untrustworthy institutions on Earth were trying to convey.

Another week…another rigged market is exposed.

The allegation this time is that the gold price has been the plaything of a few banks.

The Australian reported on 14 October 2016:

An Australian academic’s discovery of global gold price collusion has sparked a looming US trial in which four of the world’s major banks are being sued for up to $1 billion over claims they rigged the price of the precious metal at the expense of investors over a decade.

Barclays, Bank of Nova Scotia, HSBC and Société Générale have all been ordered to stand trial in the US for colluding to rig the price of gold.

Deutsche Bank was also accused of being in on the game, but good old DB settled the case against them in April. In an interesting twist, ‘the poacher has turned gamekeeper’, and Deutsche Bank is providing assistance to the plaintiffs in their claims against the other four banks.

It seems the banks can’t even trust each other.

Speaking of Deutsche Bank and fines, it’s taken eight years, but the final tally is in on how much the banks have paid for their fraudulent activities and toxic investments that resulted in the 2008 financial crisis.

The headline of the International Business Times article says it all: ‘How Much Did Banks Pay For The 2008 Financial Crisis? Fines And Settlements Of Over $160 Billion In Past 8 Years’.

That’s a lot of money, but nowhere near as much as the profits they’ve made (and bonuses paid), courtesy of the financial backing provided by taxpayers.

We then had the Libor (London inter-bank lending rate) scandal.

The culprits, in tampering with the rate that affects all of us, were Barclays Bank, JP Morgan, Swiss bank UBS, Royal Bank of Scotland and, again, our old mate Deutsche Bank.

They’ve all been fined by financial regulators for their roles in the Libor scam.

Over the past decade, banks have hardly covered themselves in glory. We need them, but I for one do not trust them.

This week we had the two most untrustworthy people money can buy slugging it out in the second US presidential debate. The policy debate went something like this: ‘You were taped talking about touching up women’…followed up with this riposte: ‘Your husband has actually touched up women’.

Compared to Clinton and Trump, Turnbull and Shorten come across as Thatcher and Kennedy. That’s how bad and sad the situation in the US has become.

One way or another, the US is going to put its trust in either a totally corrupt dynasty, or an egotistical buffoon who makes Kevin Rudd look like the Dalai Lama.

Trust is in short supply these days.

Politicians and bankers, by their actions, are easy targets to distrust. When another scandal erupts, it’ll be a case of ‘what’s new?’

The real trust issue I have is with the institution that cloaks itself in respectability — the central bank.

When their deceit and deception is exposed, they’ll be vilified far more than any banker or politician. We’ve been conditioned to expect that sort of behaviour from them, but not the central banker. These bookish-looking economic PhDs came across as trustworthy and all-knowing. The saviours of the world.

They told us everything was OK; the economy was improving. We borrowed money because they made it so cheap. We invested our retirement savings in shares because they assured us they had our backs. We trusted them.

The central bankers of the world have, in unison, implemented a policy framework that attempts to solve a debt problem with more debt.

Asset prices have been goosed up — with cheap and plentiful money — to create the illusion that everything is under control.

But, behind the doctored economic data and hollow assurances of central bankers, there is another story playing out.

The social mood is changing and, with it, so, too, is the economic activity that underpins corporate profits and government revenues.

A recent Gallup poll in the US shows that since the events of 2008/09, nearly two-thirds of Americans prefer savings over spending — in a country where 70% of GDP consists of consumption, this is a big deal.

consumer consumption

Source: Gallup
[Click to enlarge]

What the Gallup survey identified is that the change in attitude spans across all age brackets.

attitude spans

Source: Gallup
[Click to enlarge]

With consumers preferring to save rather than spend, it represents a marked turnaround from the heady days of debt-funded consumption that underpinned economic growth.

The change in social mood is impacting the bottom line of governments.

On 22 September 2016, the Rockefeller Institute (the public policy research arm of the State University of New York) release a paper titled: ‘Poor Performance in State Tax Revenues: Weak Growth in the First Quarter, Declines in the Second Quarter’.

Here’s an extract from the paper (emphasis mine):

According to preliminary data, state tax revenues declined by 2.1 percent in the second quarter of 2016. Declines were widespread, affecting about half of the states. Those declines came at a time when most states had already adopted 2017 budgets. They may leave many 2017 state budgets with holes to fix.

Growth was also weak in state sales tax collections, which increased by 2.4 percent in the first quarter of 2016, a slowdown from the 3.6 percent average for the four previous quarters. Most of the weakness in sales tax collections was caused by slow growth in taxable consumption.

Most states forecast weak income tax and sales tax revenue growth in fiscal 2017.

“The outlook for state budgets in the 2016–17 state fiscal year, which began on July 1st in forty-six states, remains gloomy.”

Tax receipts always provide a more accurate reading about what’s happening in the real economy.

The debt-funded consumption model the central bankers so desperately want to recreate is behind us.

They know this, so the data is fudged to make it look like unemployment is falling, economic activity is improving, pension funds can meet their obligations, and corporate earnings are healthy.

It is all a lie. The social mood that created the greatest credit boom in history has turned 180 degrees.

Saving and paying down debt dooms the central bankers’ economic growth model to failure.

When this lie is exposed in the most public of market collapses, the anger towards central bankers will be palpable.

Trust issues?

No, I trust them, but not in the way most people do.

I trust them to stuff it up. I trust them to blame it on a ‘black swan’ event. I trust them to squirm their way out of a congressional inquiry. I trust them to land a plum job on Wall Street (what remains of it). And, finally, I trust them to not give a damn about the pawns in their ill-fated experiment to play lady and master over the global economy and financial markets.


Vern Gowdie,
For Markets and Money

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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