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 24, 2013 - 11:35am

I agree that Turd's "First!"

is pure manipulation. Another example of high-frequency-turding.

And he's now got more hat tips than Pining's post! Who are these hat-tippers? How much are they being paid?

Shocking behaviour.

Sep 24, 2013 - 11:44am
Sep 24, 2013 - 11:56am

new island

please move along... nothing to see here.

It's just my personal sunk PM stash that decided to resurface for some fresh air.

Sep 24, 2013 - 11:57am


"a system of creating false online reviews for products and services"

I saw a (uk) tv report about this recently. In Asia you can buy reviews, upticks, likes etc for your products and services (that appear on sites such as Facebook, youtube and many other such sites).

There are businesses out there that do just that. Their offices are full of hundreds of manned computers and they add these false positives all day long. You can buy by the hundred, thousand, ten thousand - and I recall the prices are relatively cheap.

Everything that can be corrupted has been. Everything is manipulated, if required.

Sep 24, 2013 - 11:57am

Thanks Hammer

Not an alien then .

Sep 24, 2013 - 12:03pm
Urban Roman
Sep 24, 2013 - 12:06pm

There was this bit of folk

There was this bit of folk wisdom from the end of the Soviet Union:
"We pretend to work, and they pretend to pay us."

It looks like Orlov is correct, and that is more or less where the USSA is headed.

Sep 24, 2013 - 12:13pm

Isn't a false review site...?

...just a form of market manipulation? Totally legal.

Urban Roman
Sep 24, 2013 - 12:15pm

False review site

... but monopolies hate competition. So Holder's gonna have to shut 'em down.

Sep 24, 2013 - 12:23pm

Why did the Andrew Maguire/MaxKeiser

Thread just disappear?

Sep 24, 2013 - 12:29pm

California errors in Unemployment data

About those falsified labor claims data, KNBC 4 News was running an intriguing story yesterday.

In the middle of the night as I was sleeping, it came to me.

During a prior BLSBS data release, the MSMedia stated that the data was incomplete which created the lower claims data (false impression of lower unemployment). At this page (unless they change it), BLS admits to the inconsistencies in their dataset:

Let me pose a question to the board, what would happen to the BLS data if there were "erroneously" reported unemployment claims numbers for California, one of the largest populations in the United States.

Yesterday, KNBC news stated that their newsroom was receiving alot of reports from the community about unemployment checks not being processed by the State of California. KNBC's story has disappeared from their website, though it ran on the telecasts all day. The NBC affiliate in SF still has the story posted with some numbers also provided.

"Tens of thousands of California residents aren't getting their unemployment checks on time because of computer problems at a state agency.

The Employment Development Department said Friday about 185,000 of the nearly 800,000 Californians who receive unemployment benefits have been impacted by problems with the agency's processing system.

About 80,000 of them still haven't gotten their checks."

Late add: This report at Sacramento Bee gives additional numbers:

The problem is significant enough it affected weekly reporting of initial jobless claims by the U.S. Department of Labor. In data released Thursday, the federal government said initial claims in California decreased by 25,412 in the week ending Sept. 7, an unusually steep decline.

While New York, Florida and Pennsylvania submitted comments suggesting claim decreases in their states were due to fewer layoffs in various industries, California attributed the decline to “Labor Day holiday and computer system updates.”

Even before the latest computer problem arose, the employment department had difficulty processing jobless claims. A state audit in November found the state failed to meet federal standards for timeliness in processing claims, taking longer than 40 other states.

Sep 24, 2013 - 1:00pm

Here's Max Keiser's video

Keiser Report: Banksters' God Complex (E501)

Just because the other thread "disappeared"....

These aren't the videos you're looking for...move along...

Sep 24, 2013 - 1:09pm

Very well done!

It all makes perfect sense to someone who's paying attention, but it will take a "911" type event to wake up the masses...

Sep 24, 2013 - 1:15pm


Good to see you feeling ok and back in the mix!

The BLS stuff I was referring to in the post was the Sept 2012 report- last one for big headlines before the election, and the most important baseline for many voters still deciding. There were all sorts of internal contradictions and tomfoolery to get the number below 8%, and if I remember correctly it included a novel component where "phone surveys" were included and produced the 60k additional needed to get the # to 7.9. When asked about this inventive new approach, the BLS could not produce any records of numbers they called, names, or anything else to prove they actually 'found' those new jobs. But hey- great headline just in time, so mission accomplished!

Spartacus Rex
Sep 24, 2013 - 2:20pm

@ Pining / Level of awareness

As always another great post Pining! Perhaps the level of awareness of QE would be greater if more people actually watched this hilarious video from nearly three years ago:

Quantitative Easing Explained
Sep 24, 2013 - 3:37pm

@John Galt re: Cortlands . . .

In my neck of the woods, we buy from a local, small orchard. Paid $10/bushel for 2nds (pies, sauce, cider) and $10 per half-bushel for 1sts. Supposed to be a bumper crop this year, so shop around . . .

Sep 24, 2013 - 4:47pm

And the BIGGEST LIE,...

Is almost universal with all, errr, almost all of our favourite pundits...Well, not Turd of course!

But all those super bulls who promote mining shares in the face of a hyperinflation, bail-in risks, hypothecations and illegal naked shorting.... Did I mention increase risk of nationalizations and increasing political instabilities in numerous countries..and from SRSrocco's point of view EROI problems?

If on the one hand our favourite and most bullish pundits are telling all and sundry to get out of the system; almost in the next paragraph (if not the next sentence) they all tell us how well the shares are going to behave....

If you believe a bail-in is inevitable, why are you still investing in shares? Why are you buying on the COMEX and the LBMA?

Just asking,...

Because I really do not like logical disconnects. And this area just glares!!!



Sep 24, 2013 - 4:55pm

John L. Lewis, Plaintiff/appellant, v. United States of America

On July 27, 1979, appellant John Lewis was injured by a vehicle owned and operated by the Los Angeles branch of the Federal Reserve Bank of San Francisco. Lewis brought this action in district court alleging jurisdiction under the Federal Tort Claims Act (the Act), 28 U.S.C. § 1346(b). The United States moved to dismiss for lack of subject matter jurisdiction. The district court dismissed, holding that the Federal Reserve Bank is not a federal agency within the meaning of the Act and that the court therefore lacked subject matter jurisdiction. We affirm.....

......For these reasons we hold that the Reserve Banks are not federal agencies for purposes of the Federal Tort Claims Act and we affirm the judgment of the district court.

Lots of info in the via link.

silver66 Nana
Sep 24, 2013 - 5:10pm

Link by Nana

Thanks Nana

great link


P.S. have you done any work on A4V

Sep 24, 2013 - 5:15pm


Accepted For value.

Have read about it and watch a few videos on it.

Sep 24, 2013 - 5:26pm

Nana- excellent link

I was particularly interested in this, from part 14:

14 Finally, the Banks are empowered to sue and be sued in their own name. 12 U.S.C. § 341. They carry their own liability insurance and typically process and handle their own claims


John Galt ancientmoney
Sep 24, 2013 - 9:13pm

Thanks ancient

Yes, apples are far more abundant this year thank last. The pricing you have makes far more sense.

Sep 24, 2013 - 9:22pm

Honesty and Trust

Hmmm? Must be something in the air today about [lack of] trust?

This was on Lew

"Dishonesty, lying and cheating are not treated with the right amount of opprobrium in today’s society. To gain an appreciation for the significance of honesty and trust, consider what our day-to-day lives would be like if we couldn’t trust anyone. When we purchase a bottle of 100 pills from our pharmacist, how many of us bother to count the pills? We pull in to a gasoline station and pay $35 for 10 gallons of gasoline. How do we know for sure whether we in fact received 10 gallons instead of 9 3/4? You pay $7 for a 1-pound package of filet mignon. Do you ever independently verify that you in fact received 1 pound? In each of those cases, and thousands more, we simply trust the seller."...

Sep 24, 2013 - 11:19pm

Barrick slashes costs, concentrates on mines in America's

Barrick slashes costs to the bone Frik Els | September 24, 2013 Pueblo Viejo, one of five core mines

World number one gold producer Barrick Gold (TSE:ABX) in a presentation to the Denver Gold Forum on Tuesday showed just how much fat is being taken out of the company.

The Toronto-based miner said it has reduced its 2013 guidance for all-in cash costs by a full $100 per ounce and that 75% of this year's production will be mined at a cost of less than $800 an ounce.

That compares to an industry average of $1,200 – $1,300.

Barrick is focusing its efforts on just five core mines, all of them in the Americas.

The mines – Cortez and Goldstrike in Nevada, Veladero in Argentina, Lagunas Norte in Peru and Pueblo Viejo in the Dominican Republic – will generate 60% of the company's output at a cash cost of $700 an ounce.

The presentation also detailed the company's new-found focus on returns for investors and budget discipline – 2013 will see a $2 billion cut to capex and costs across the organization.

The company offloaded three high-cost mines to Gold Fields last month and further "portfolio optimization" is planned.

10 Barrick mines have cash costs exceeding $800 and the likes of its Porgera mine in PNG and Plutonic in Australia among others are being re-evaluated and my be sold.

New life of mine plans are now being based on a gold price of $1,100 as the company adjusts to a lower metal price environment.

The company also provided an update on its troubled Pascua-Lama project straddling the border between Chile and Argentina.

Barrick is cutting capex costs by $1.5 – $1.8 billion at the project which is expected to produce 800-850 Koz and 35 Moz of silver in its first five years at costs estimated to be in the lowest quartile in the industry.

Barrick now expects first ore available from Chile by mid-2016. Subject to permit approvals of course.

Barrick shares on the Toronto big board trended higher on Tuesday, but the $18.5 billion counter is still down 47% for the year.

Sep 25, 2013 - 6:11am

The way of things - -

The failure of the the system isn't really planned consciously by mortal man. It is simply a cyclic event following it's natural course.

Spartacus Rex
Sep 25, 2013 - 9:17am

@ Silver66

"Acceptance For Value" (A4V) is Complete Waste of Time Bull Sh*t! Google it for crying out loud! That Crap is Decades old and every one of those scam artist perpetuators wound up convicted felons.

Spartacus Rex
Sep 25, 2013 - 9:20am

@ Nana & Pining

The 12th District Phederal Reserve Bank is actually incorporated in California. Since the Tort did not occur across State Lines, the USDC did not actually have proper jurisdiction, and John L Lewis made the error by not simply bringing the Complaint /Action (against the Phederal Reserve and NOT the U.S. Gov't.) to the appropriate Superior Court in California which actually was the proper venue and jurisdiction. Simple as that! Remember: "Ignorance of the Law is No Excuse"!

Sep 25, 2013 - 9:44am

NYT -This post really, really needs to be required reading

Any way to turn this into a NYT op-ed? There's a fair amount of wasted space currently being occupied by the likes of Paul Krugman. They could actually print something coherent, a real "inconvenient truth". Well done Pining!

Sep 25, 2013 - 10:58am
Sep 25, 2013 - 11:42am

Spartacus Rex

You know the praise "Ignorance of the law is no excuse" used to stump me, I would think no one can know every law however when you use the word "contract" instead of "law" everything makes sense.

BTW- Acts, codes, statutes, policy, regulations are not laws.

The Constitution is a Contract to keep the Federals confined, Not to keep the people confined.

Sovereign Freeman Gordon Hall Pt 1 of 17 on Contracts, Law, Court, Judgements


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