Category: Money

I had the, shall we say, interesting experience of speaking to high school students recently. The part that seemed to genuinely disturb them? The opening discussion about money – specifically, where it really comes from. It’s deeply unsettling for most people, not just teenagers, to confront the reality that currency possesses zero intrinsic value. None. Its worth is entirely, and precariously, built on faith. Your faith. The government’s faith. The faith of every single vendor who accepts it in exchange for something real.

Once upon a time, money had backing, intrinsic worth. You could, in theory, redeem a United States dollar for actual silver or gold. That link is long gone. Today, currency is purely a medium of exchange, devoid of any stored value itself. Your money’s worth is only what you believe it to be, and more critically, what everyone else believes it to be. Just ask anyone trading currencies on global markets what the dollar’s worth is – it fluctuates constantly based on collective belief.

And here’s the truly unnerving part: if a genuine crisis of confidence in the US dollar ever erupts, it won’t matter if you’re penniless or wealthier than Bill Gates. Your money becomes equally worthless – the paper it’s printed on, or digits on a screen. Ask anyone who lived through the Weimar Republic. Citizens burned Deutschmarks for heat because the currency’s value had cratered to nothing. History did not judge the Weimar Republic kindly, nor what followed – a dictatorship led by a man with a scrubby mustache who plunged the world into another World War.

Deconstructing Faith: The Psychology of Currency

Why do we participate in this mass delusion, this shared faith in something intrinsically valueless? Why does a piece of paper command our labor, our resources, our very lives?

Faith in money is a collective construct, a shared hallucination we all agree to. This piece of paper, this digital token, represents value only because we collectively believe it does. Its power is entirely derived from this widespread, often unthinking, belief.

It’s a social contract, tacitly agreed upon by citizens, governments, and businesses. But contracts break. Faith erodes. And unlike physical assets, faith is ephemeral.

Emotions fuel this faith – or shatter it. Confidence, greed, fear, panic – these human emotions directly impact our belief in currency, making its value inherently volatile, subject to psychological tides as much as economic indicators.

History is littered with examples of this fragility. The Weimar Republic is just one stark illustration. Zimbabwe’s hyperinflation, Venezuela’s bolivar collapse – these are not isolated incidents. Currency crises, driven by faith erosion, recur across time and geography, demonstrating a persistent vulnerability in the system. Even the volatile swings of cryptocurrencies, despite their technological veneer, underscore this point: value untethered to intrinsic worth is ultimately a matter of belief, and belief is fickle.

Beyond Currency: Faith in the Systems We Rely On

The unsettling truth of money extends beyond currency itself. Many systems we take for granted, systems essential to modern civilization, operate on similarly precarious foundations of faith.

Consider financial institutions. Banks, stock markets, investment firms – they function on faith in their stability, their competence, their integrity. Lose that faith, and you trigger bank runs, market crashes, systemic financial crises. The entire edifice rests on public confidence.

Look at governments and political systems. Democracies, republics, autocracies – all require a degree of public faith in their legitimacy, their ability to govern effectively, to maintain order, to deliver on promises. Erosion of this faith leads to political instability, social unrest, potentially even societal collapse.

Think about technology and digital infrastructure. The internet, AI, cloud computing – we increasingly place unwavering faith in these complex, often opaque systems. We trust them to function reliably, to operate ethically, to safeguard our data, our lives. Breaches of trust – system failures, data leaks, algorithmic bias, ethical lapses – chip away at this faith, with potentially cascading consequences.

Even brands and market value are, at their core, expressions of faith. Brands are built on consumer belief – faith in their promises, their quality, their values. Market capitalization, that astronomical number assigned to publicly traded companies? It’s largely a measure of collective faith in a company’s future prospects, a sentiment that can evaporate with astonishing speed.

Strategic Realism: Navigating a Faith-Based World

So, what does this unsettling reality mean for those of us operating in the decidedly faith-based world of business and marketing? It demands a shift from naive optimism to strategic realism. It requires building businesses and strategies not just on hope, but on a clear-eyed understanding of the fragile nature of confidence.

Forget simply “building trust.” Focus on inspiring confidence. Confidence is a more robust, less sentimental form of faith. And in a world where faith is inherently shaky, building genuine confidence becomes paramount.

Marketing, in this light, is not just about crafting messages; it’s about managing perceptions and influencing beliefs in a landscape constantly threatened by faith erosion. A deep understanding of market psychology, of how collective belief operates – its volatility, its emotional triggers – becomes essential strategic knowledge.

Building a business in a faith-based economy demands prioritizing genuine robustness, not just superficial hype. Strong fundamentals, ethical operations, real, demonstrable value – these are the pillars of enduring confidence. Hype alone is a house of cards, easily toppled when faith wavers.

Crisis preparedness is not optional; it’s faith insurance. Recognize that crises of confidence are not if but when. Develop robust crisis communication and management plans, not just to mitigate damage, but to actively rebuild faith when, inevitably, it falters.

Transparency is not a virtue; it’s a strategic imperative. In a world of fragile faith, opacity breeds suspicion, erodes confidence. Openness about operations, ethical practices, even mistakes – when handled correctly – can bolster confidence, demonstrating integrity in a world craving authenticity.

Actionable Steps: Building Resilience in the Faith Economy

Navigating this faith-based world requires a strategic shift. Here are actionable steps to build resilience and operate with eyes wide open:

1. Monitor “Confidence Signals,” Not Just Data: Track market sentiment, economic indicators, social media narratives, and customer feedback. Analyze these not just as data points, but as vital indicators of collective confidence in your sector, your brand, and the broader market. Are confidence levels rising, stable, or declining? Why?
2. Stress-Test Your Business Model for “Faith Shocks”: Identify vulnerabilities. Where is your business most susceptible to a sudden loss of confidence? What events, revelations, or systemic shifts could trigger a “faith shock” among your customers, investors, or within your market? Plan for these scenarios proactively.
3. Communicate with Unflinching Honesty and Radical Transparency: Prioritize clear, honest, and consistent communication, especially when facing challenges. Address concerns directly, transparently. Under-promise, over-deliver. Manage expectations with realism, not hyperbole. Authenticity builds confidence; spin destroys it.
4. Focus Ruthlessly on Enduring Value and Unshakeable Ethics: Build your business on a bedrock of genuine value, ethical practices, and long-term sustainability. Substance always trumps style when faith is on the line. Invest in quality, integrity, and responsible operations. These are not just “good things to do”; they are strategic investments in enduring confidence.

The Fragile House of Cards

Money is based only on faith. And that, when you truly grasp it, should unsettle you deeply. Because faith, and trust, are incredibly fragile. Difficult, painstakingly slow to build. Effortlessly, instantly shattered.

And when enough people lose faith – in a currency, in a system, in a brand, in the very structures of our society – the entire house of cards that we call civilization begins to crumble. We live in difficult times. Ignoring the fragility of the faith upon which our world is built is not just naive; it’s strategically suicidal. Build with substance. Operate with integrity. And understand, always, that the foundations are more fragile than we dare to believe.

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“I have been saying for about two years we’re looking at a 1929 kind of event. I think that we are really in trouble in this country. And what you have seen in the last four months is just the beginning of it.”

-Patrick Byrne, Chairman and CEO of Overstock.com, December 2007

“If home prices decline by 30 percent, as one noted economist has said could happen, “We’re all going long apples and boxes to sell them in,” Syron said, invoking an image from the Great Depression.”

– Richard Syron, Freddie Mac CEO in today’s Washington Post

“The current credit crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end. That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities. Very large losses will, no doubt, be taken as a consequence of the crisis.”

– Alan Greenspan

The United States doesn’t -make- anything any more. For the last 5 years, our economy has been driven by increases in asset prices, namely housing. People cashed out equity and spent like crazy, driving the economy forward.

All good things must come to an end, and we’re seeing just the first inning of the housing bubble unwind in a game that’s going extra innings. As prices drop, equity vanishes, and mortgage owners owe more than the property is worth.

Next in line are consumer grade loans – auto defaults are already up, as are student loans, because when the choice is between a roof over your head or a student loan payment, you go with roof every time.

Housing equity can’t be used to pay down those loans any more, so they go red. The next wave after that is credit card defaults, because once you’ve maxed out, you’ve got nothing left and have no way to pay. Discretionary income? No such animal in a recession. Everyone’s paying just to stay afloat and with the basics.

All this plays out over the next 3 years. Mortgages are unwinding now, but subprime goes nuclear in March 2008 with the largest wave of rate resets yet, 65 billion worth, and stays at that level for 6 months. Defaults typically occur in 30 days of a rate reset; some borrowers don’t even make a payment.

Expect secondary loan (car, student loan, etc.) default rates to hit the wall shortly after the mortgage ones, and credit cards even sooner as the source of last resort financing, because the people who are in trouble are living lifestyles beyond their means.

Scared yet?

While I’m not a certified financial planner or anything, I’m going to give this piece of advice. If your money is in a place that is not insured, move it to an insured place. Insurance means FDIC coverage for up to100,000 of cash per account. Money market funds are discovering they’re tainted with bad mortgage debt. Municipal bonds are finding out their guarantors overextended.

Anyone who promises a fix for this situation that isn’t “we have to ride this out” either has something to sell you or is running for office. Don’t believe them. This financial crisis took years to make and it will take years to unmake.

The Contagion Spreads

If you want to talk viral, let’s talk about the disease of debt that’s spreading. What started out as a portfolio of subprime mortgages going bad is rapidly spreading to any financial sector that touches any form of credit or debt.

Last week, First Marblehead (ticker: FMD), one of my company’s partners, registered a half price haircut on its stock as their student loan portfolio was downgraded. Turns out that defaults may be higher than thought, and FMD might be forced to buy back bad loans.

What does this have to do with the mortgage crisis? Two things. First, securitization depends on available credit and liquidity, and the markets have neither in great supply right now. Second, on the consumer side, my gut instinct tells me a lot of people were paying their student loan bills with home equity. Now that the housing ATM is closed for business for the foreseeable near-term future, expect credit card and student loan defaults to rise precipitously. We’re going to do our best to help people avoid default, but there’s only so much you can do.

It’s getting ugly out there, folks. Cash is king now and will reign supreme in 2008.

If you have debt, and you have the capacity to eliminate it, eliminate it as soon as you can.

Debt is your enemy in uncertain economic times.

With the recent events surrounding imported products from China, such as cough syrup, stationery, childrens’ toys tainted with lead or coma-inducing drugs, mislabeled fish, fish treated with malachite and other cancer-causing drugs, tainted beef, bad radial tires, leukemia drugs, toxic pet food, breakaway hammocks, electrocuting palm tree decor, Craftsman electric saws with flying blades, and deadly toothpaste, it’s no wonder that people are a little leery of Chinese imports. Over lunch, a coworker and I were discussing why the Made in the USA folks aren’t capitalizing on this chain of events to promote US-made goods, and the reason may be…

… well, nothing’s made here any more, not in significant quantities and not with sourced materials. Even the Made in the USA trade group and NAFTA have rather relaxed guidelines about what Made in the USA must mean:

“Made in the USA” products need a content consisting of 51% or more of domestically produced or manufactured parts, labor and or value-added content or any combination thereof.

Thus, even if a toy was manufactured in the USA, if the leaded paint used on the toy was of Chinese origin, the product would still qualify for a Made in the USA label.

The unfortunate reality is that in the quest for the lowest possible prices at all costs, we’ve effectively outsourced virtually every part of the supply chain, and to countries (not just China) who have varying standards of quality and safety, not to mention labor laws. Unfortunately, buying American is harder than ever.

Don’t even think about American icon Hershey Chocolate for this holiday season. From Forbes.com:

In February, Hershey announced a major restructuring designed to cut costs and excess production capacity in the United States and Canada, while expanding in Mexico, China and India, where labor is cheaper and Hershey hopes to sell more candy.

Since then, Hershey has announced it will close six U.S. and Canadian plants and cut more than 3,000 workers in the two countries, including up to 900 at its hometown plants. It has plans to shift more production to contractors and a new plant it is building in Monterrey, Mexico.

On Thursday, it said production is underway in China through a joint venture with South Korea’s Lotte Confectionery Co. and its joint venture in India with Godrej Industries Ltd. is up and running.

Perhaps we’ll see a resurgence this holiday season of small craftsman goods – things made not only in the USA, but made by your own hands. It’s the only way to be sure of a product’s origins. Just make sure you make the components, too.

Jim Cramer’s not known for subtlety, but this was a whopper.

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