Trust and the System

Tue, Sep 24, 2013 - 8:26am

At this very moment there are legions of analysts, bank executives, traders, government policy coordinators and data gatherers working as a part of the complex machinery of the modern super-state. At the behest of those at the top of the public and private leadership hierarchy, these people work daily to craft, calibrate, and adjust the economic-political-media environment. Whether it is a mid-level functionary at the Bureau of Labor Statistics being told to "adjust" certain criteria so that the unemployment rate will provide a suitably positive headline for the media to tout prior to an upcoming election, or a desk trader being told to dump 2,000 contracts into a thinly-traded market at 2:00 am to keep the price of the primary "store of value alternative to the US Dollar" under control, all of these specialists have their role to play within the most complex operational system human being have ever created- the modern economy.

The problem with all this comes from the contradictions inherent between what those trying to control the system want to achieve (and hence order these specialists to carry out) and the constraints that reality enforces on such operations, especially the fundamental laws of economics. Without getting into too much detail, suffice it to say that when you have "X" as your goal, but achieving "X" necessarily causes "Y" to happen and “Y” directly undermines your goals, then you have a contradiction. The primary solution to this, it seems, is to lie. Artificially cause "Y" not to happen, or simply lie and pretend that "Y" isn't happening, and you are then free to ignore the contradictions achieve your goal "X". Or so the theory goes.

The reality is that it's not so simple as merely "X" variable and "Y" result. The modern economy is a massively elaborate and complex entity, so much so that the variables and relationships involved probably number in the millions and are beyond the ability of any single individual to identify, let alone to understand and perfectly control. As more and more aspects of the system require “adjusting”, the need to mislead becomes acute. The lies required to hide the contradictions and maintain control over the system become obvious and threadbare as time passes. Whether it is the lie that unemployment is only around seven percent (when labor participation rate is just 63%, the lowest ever recorded) or the lie that inflation is only around 2 % per year (when people see the costs of food, gasoline, clothing, and other necessities of life double in just a few short years), people inevitably begin to notice that reality does not match up to what they are being told. The big lies and small lies slowly take their toll and what is undermined, ultimately, is trust.

"So what?" you might ask, "So people slowly but surely realize they are being lied to or occasionally cheated, what is the big deal with this?" Well, the big deal is simply that, at the core of it, the modern economy relies on trust to function. When you destroy trust you destroy the foundation of the entire system and you undermine its ability to perform its most basic, existential functions. This, I suspect, is not something that the central planners, media spinmeisters, and their legions of bureaucrats have accounted for. Someday, they may well wish they had.

Trust in a Market Economy

A state-level society can only exist when there is a very high division of labor; that is, when the majority of the working population are specialists in one particular job. The reason for this is that by having most individuals do one small but highly specialized job, through practice and repetition they become quite skilled at that task, far more skilled and effective than someone who merely dabbles occasionally at it. People become, and train to become, professionals- and over time through many different people doing many different jobs at a high level of skill, tremendous efficiencies are possible. The surplus thus created spurs productivity and ultimately raises the standard of living over time.

The key to this type of system, however, is that all of the various parts of a complex society must function together so well that individuals are free to specialize. One cannot train to be a specialist in maintaining power lines, for example, if they do not have a reasonable expectation they will be able to purchase food, clothing, medicine, housing, etc. (all of which must be produced by many other skilled specialists in different fields) with the wages they earn. In other words, the foundation of a functioning state-level society is trust; the core belief of the citizenry that the rest of society will function well enough to produce all the necessities of life that the specialist, by definition, cannot produce for himself. Without this trust, there can be no division of labor, and hence no efficiencies resulting from highly skilled specialization, In other words, without a strong underlying degree of trust in the system, the central attributes that allow such a system to function are undermined or lost.

Trust in Finance, Tax, and Currency

We don’t usually think about it in these terms, but trust is the single key ingredient allowing the advanced architecture of the world’s financial system to function. People have to trust in the stability of the currency, have to trust that laws protecting investors will be enforced, and have to trust that when they purchase something with their hard-earned capital that instrument (a stock or bond or fund) is exactly what it purports to be. They have to trust that when they participate in the system they do so under equal protection of law. Indeed, the only reason they will put their hard-earned saving into retirement funds or ETF’s or Bond funds is that they trust all of these aspects of the system. When trust is undermined in any of these areas, whether it is MF Global illegally trading with and losing client funds (a 1.5 billion dollar crime for which not a single person has faced charges, let alone done jail time) or virtually every major bank in the US committing serial mortgage fraud, then at some point people become aware that they are not really market participants themselves, they are merely morsels waiting to be gobbled up by some "too big to jail" entity. When this realization comes, the only rational decision left to them is to withdraw from participating in the market. Obviously, without participants there literally is no market, and hence no market economy.

When trust in currency is lost, people choose to withdraw from storing their saved value in that currency, as much as possible. Contrary to popular misconception, hyperinflation is not simply ‘lots of inflation’. Rather it is a psychological phenomenon whereby people lose faith in the currency (ceasing to believe that it will store the value they have earned) and thus they try to get their wealth out of that currency as quickly as possible and into tangible items that will store value better. The Weimar Republic was merely one of 31 nations during the twentieth century to learn what happens when the citizenry no longer trusts the currency they issue.

Additionally, the tax system -the only means of revenue for government- is largely dependent on voluntary compliance, requiring that the vast majority of citizens (who, in bulk, cannot be checked or investigated by a limited number of tax officials) to honestly record and pay what they owe. The citizenry must voluntarily choose to follow the law, as they are far too numerous to be policed or forced to comply with the law in any real way. When trust in a fairly administered tax system is lost, people may no longer feel compelled to voluntarily comply with laws that they can often skirt with a little effort. A fine example of this is Greece, where the government is truly desperate for revenues but it is estimated that 1/3rd to ½ of the overall economy is an off-books “grey market” economy operating under the radar and not paying any taxes whatsoever. I read a comment once from someone who lived and worked in Greece for many years that “For most Greeks I have known, tax avoidance is akin to a national pastime”. Failure to treat everyone equally ultimately caused people to no longer trust the system and to realize that paying taxes was a sucker’s game. The loss of trust in this one institution cripples Greece and its entire economy to this day, a stark lesson in why the current IRS scandal may have more profound long-term consequences than might be apparent at first glance.

Consequences and actions

For these reasons and more, trust is the very foundation of our present system. I find it puzzling that the loss of trust in basic institutions (financial, governmental, legal, etc) is treated so cavalierly today. In areas as diverse as trading and interest rate manipulations, hypothecation and re-hypothecation of investor funds, “too big to jail” mortgage fraud, devaluation of the currency, and of course the obvious deceit of various government actors, it seems that trust is being eroded at nearly every turn. I suspect that, aside from rising cynicism, most folks have not really realized the broader significance of what a loss of trust in these things means for the system as a whole.

When enough people cease to trust financial markets and withdraw their savings, those markets will fail. When trust in currency is lost, people invest in gold and silver, and when enough people cease to trust the currency to hold their stored value we call this hyperinflation (a psychological phenomenon since the viability of a fiat currency rests ultimately on the faith of its users). When trust in the system as a whole is lost, people look to survive outside of the system, and take steps to produce their own food, see to their own security, etc. In short, they turn their productive effort away from a participatory “I will specialize in this one thing and use my wages to buy everything else that I need but do not produce myself” type of strategy and turn instead towards a generalist “I will produce essentials myself” strategy. Without mass participation, however, the division of labor economic system cannot function.

Given all this, I find the rise of the prepping phenomenon to be very, very interesting. At the core of it, this phenomenon represents a growing mistrust in the ability of the modern nation state to perform its most basic and vital function- ensuring the conditions that allow for a specialization of labor.

Think about the central aspects of prepping- from home food production or storage, to personal security and defense of property, to off-grid living, to stacking items for barter… each represents the individual taking responsibility at home for specialist functions that normally would be done by others, or by the state itself, in a functioning society. Under normal conditions, the specialists of law enforcement provide for a secure and safe society and ensure the conditions under which personal property is protected - the prepper may not trust this will always be the case and hence might choose to arm themselves. Normally, food production and distribution specialists (from farmers to store owners) participate in a system which allows citizens to purchase food for their families without ever growing a single vegetable on their own- the prepper may not trust this system will always function as it has in the past. The prepper may not trust that the financial system will preserve their capital, or that laws will be fairly enforced to ensure they are not preyed on by well-connected market participants, or that the currency may not always be a viable store of value- so they stack PM’s and invest in productive farmland and other tangible assets. In short, preppers no longer trust that they can rely on the system to perform its many traditional roles indefinitely. They are voluntarily moving from the role of wage-labor specialist to generalist, to the degree they are able. They are doing so because, at the heart of the matter, they no longer trust that state-level society will always successfully perform its basic functions under all conditions.

Is this a rational approach for people to take? That depends on whether or not you believe the institutions of the state, the employees of the state, and the economic and financial infrastructure of the state, have earned your trust through their actions. If you feel they have, then there is no need to do much of anything. If you feel they haven’t… well, you might want to prepare accordingly.

About the Author


Sep 25, 2013 - 12:25pm

Spartacus Rex

One more thing, the case Lewis v USA contains some very interesting information to glean. Layer upon layer, line upon line, precept upon precept.

Sep 25, 2013 - 1:59pm

Just One More

incredibly well written essay here in Turdville.

Well done pining


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