Bad trust

“Trust in money remains the bedrock of stability. My main message today is simple: the soul of money belongs neither to a big tech nor to an anonymous ledger. The soul of money is trust. And central banks have been and continue to be the institutions best placed to provide trust in the digital age.”

• Agustín Carstens, General Manager of the Bank of International Settlements

“Just trust me harder, bro!”

It’s almost poetic how money printers and ponzi schemesters misunderstand the cause of their downfall. If only those idiots had trusted me more!

In any system where you borrow from Peter to pay Paul — fractional reserve banking, yield farming, rehypothication, Bernie Madoff — you rely on the faith of Peters to remain “solvent.” If incoming Peters don’t expect Paul-sized gains, those Peters won’t deposit their money, and now you can’t afford to pay Pauls anymore.

There’s plenty of “economic” thinking on the role of expectations in inflation. Basically, the story goes, if people expect inflation they’ll ask for raise in pay and try to make purchases sooner, which will in turn cause inflation.

The Federal Reserve is highly focused on inflation expectations, both above and below its 2% “target.” The Federal Reserve wants long-termed expecations “anchored” so that it has the wiggle room to do weird stuff with the money without freaking people out and causing an inflation or deflation spiral.

In a sense, these scammers are right about the cause of their failure. Their scam fell apart because people figured out it was a scam. But their “just trust me harder” solution can only cause more pain the long run. The unwillingness to rethink their prior assumptions and change their strategy when proven wrong only proves how untrustable they truly are.