A breakdown in trust

Trust is of crucial importance to society. Not to overstate the point, but if trust begins to crumble then society also starts to breakdown.

According to the Chinese philosopher Confucius, three things were necessary for governance: weapons, food, and trust. If a ruler is unable to obtain all three things, he should first give up weapons, then food, and finally trust. Without trust there can be no government at all.

Lack of trust is a tax on our economic, social, political and personal relationships. It slows us down and adds costs. “Trust, but verify”, said US President Reagan in response to negotiations with the Soviets. We have to trust, but spending too much time and energy verifying adds a heavy toll.

As the financial crisis began to intensify just over a decade ago it was trust in our financial institutions that dropped like a stone. Long queues formed as deposit holders eagerly waited to withdraw as much as they could from the bank lest anything bad should happen…

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Fast forward to the present day and concern over the spread of COVID-19 has resulted in a breakdown in trust in the physical economy: whether essential goods will be there in the shops when we need them and even in each other – aka ‘social distancing’.

As supply chains bifurcate this breakdown is likely to get worse. First Asia, now Europe and the US, next it will probably be south America. Countries are gradually closing their borders (arguably the horse has already bolted) in a bid to stem the flow of the virus.

Across Europe the impact on agriculture and food markets is becoming more tangible as more reports of grain truck movements stalling because of border closures and truckers unwilling/unable to deliver grains across the continent come to light. Concerns about supplies are becoming more fraught.

The symbol for this current breakdown in trust in supply chains is the humble toilet roll. An essential, non-perishable good with little downside to hoarding, supermarket shelves have been stripped bare of the quilted and not so square quilted tabs of tissue.

In the financial crisis a healthy cash balance under the mattress was a personal symbol of protection against the breakdown of the financial system. A measure of wealth has changed.

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The breakdown in trust may have another act in store. Precious metal dealers in Europe are reporting strong demand for physical gold and silver. And not just physical metal stored in a financial institution, actual physical coins and bars that you store in a private safe.

Precious metal dealers in Europe are reporting that premiums for physical metal over spot gold and silver have jumped to around 10% from parity normally. Meanwhile, stocks of physical metal – just like shelves previously laden with toilet rolls – are empty.

As central banks inject trillions of $’s into the financial system’s intravenous over coming days, demand for protection against the debasement and breakdown in trust of fiat currency is likely to surge.

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