By Eric Peters, CIO of One River Asset Management
Trust. It’s at the root of the financial system. “In God We Trust” is written on every piece of US dollar paper. It’s symbolic at this stage. Symbolic of periods of time where trust was eroded by crisis. Like the US civil war and the War of 1812. The motto of “in God is our trust” cut out the monarchy middleman, the innovation of being republican – loyalists trusted the monarchy as their intermediary to God. It only appeared formally in the US Coinage Act of 1864 and became a national motto during yet another crisis period in 1956 during the Cold War.
For central bankers managing fiat currencies, trust/faith are not static. So, bankers must actively respond to markets, the public, and, in the case of the US, foreign governments who embrace the dollar as an anchor. Trust is in highest demand during periods of uncertainty as everyone hunts for stability – not only financial stability but transparency and consistency in the implementation of rights. Trust in the US dollar as a reserve asset centers on faith in the rule of law. No one wants to see the rules of the game changed midstream.
The US has been at the epicenter of the world’s financial circle of trust since 1944. Then, in yet another crisis, world leaders anchored to the dollar in Bretton Woods, NH. It was a pivot away from the British pound and would take decades to reach maturity. Through a series of crises in the past three decades, the US dollar reigned supreme. Demand for dollars was never greater than in the 2008 GFC; international payments in the US dollar is now at a record high; even in crypto, the digital US dollar is the most successful use-case.
When our politicians and policymakers take trust for granted, they erode the pillars of its foundation – integrity, reliability, honesty, and transparency. No reserve currency has lost and regained its status, and for good reason – trust is easily lost and hard to maintain, let alone regained. It is almost also surely asking too much of the US to be the only global trust watchdog. The costs are shouldered by a disappearing middle class. For reserve currency nations resource constraint is the kryptonite of global trust, and as it slips away, inflation manifests.
Markets shine in moments such as those we see today, sending signals for leaders to ignore at their peril. The US dollar is not the only refuge in periods when trust in global politics and policy is in decline. In times of extreme angst, as fear spreads, what we seek above all else is certainty; not interest rates, earnings, or promises. Resources, like energy, offer shelter in such times. But storing energy is hard. So, for most gold becomes the vessel of choice; others now find refuge in digital assets with engineered scarcity.