Trust and confidence are supreme in economics and society
The 2008 Financial Recession was an example of Dollar redundancy saving the day. The Federal Reserve replaced the impending losses from bad debt from the Sub Prime Mortgage Crisis that could have collapsed the entire western banking system, by creating even more debt. However, this was debt with a difference.
The Federal Reserve created hundreds of billions of dollars of new debt to cover the default of the bad debt. Debt exchanged for debt. The debt created by the Federal Reserve had a single over-riding feature: it was debt that was trusted by investors and consumers. The debt had the confidence of billions of investors and consumers.
New debt replaced the lack of confidence in the bad debt owned by embattled banks. High confidence exchanged for lack of confidence. Trust exchanged for mistrust. Trust and confidence are the platform for all value in economics. Trust and confidence are the new gold standard.
Now, this new debt provided by investors in US treasury notes and debt instruments, replaced the hundreds of billions of dollars of bad debt that was a millstone tied to western banking and finance. The preceding was at root bad debt held by consumers with their mortgages under water.
The Federal Reserve created new debt value to replace the lost value from the bad debt. The new debt possessed the trust and confidence that the old bad debt lacked. The new debt was a get out of jail free card on the Monopoly Board for banks and businesses in ‘’hot water’’ from the Sub Prime Mortgage Crisis.
The new Dollar debt possessed a high degree of investor trust and confidence. It had the stamp and mark of approval of the Federal Reserve and the US Treasury Department. American Might, in the form of the Federal Reserve and related Federal Agencies, backed the newly created debt and gave it its value.
Investors trusted the new debt. Investors were willing to spend hundreds of billions of dollars to buy the bonds and treasury securities the new debt represented, and that offered a guaranteed return on that debt. Again, trust and confidence ruled.
The new debt came in the form of the hundreds of billions of dollars injected into the US economy to save the banking system and subsequently myriad giant corporations- Quantitative easing. It was cash from investors, domestic and international, entrusted to the Federal Reserve. That cash in turn went into the banking system to save the day after adoption by the Federal Reserve.
Investors who expect a return, own all debt stock. In that equation – the debt to returns matrix – debt is no different from any other product that offers investors and businesses a return or profit. Global debt rests upon trust and confidence in a Dollar produced by the Federal Reserve.
The redundancy value – the ability to absorb shock- of the newly printed Dollars saved the west from economic oblivion. Economic Collapse averted, by injecting these Newly Printed Dollars as shock absorber. This redundancy was essentially confidence and trust in the action of the Federal Reserve from investors and consumers in the form of hundreds of billions of newly minted Dollars. That confidence in the Dollar and its redundancy value saved the day.
Dickson Igwe is an education official in the Virgin Islands. He is also a national sea safety instructor. He writes a national column across media and has authored a story book on the Caribbean: ‘The Adventures of a West Indian Villager’. Dickson is focused on economics articles, and he believes economics holds the answer to the full economic and social development of the Caribbean. He is of both West African and Caribbean heritage. Dickson is married with one son.
