A Further Erosion of Trust

As someone who has regularly aired concerns over the current global economic situation, I am unable to forecast with any degree of confidence either the timing or the catalyst for an eventual acceptance that FIAT currencies no longer provide reliable stores of value. Trust in the US administration by both foes and former friends has hardly been enhanced by President Trump’s sketchily justified attacks on Iran under the effective white flag of active nuclear negotiations, nor by the torpedoing of a ship off Sri Lanka transiting home after participating in training exercises hosted by the Indian navy. India had convened naval assets from 74 countries for a March exercise, and the US navy was one of the other invitees.

In 2024, Professor Jiang Xueqin, the Yale educated Canadian podcaster, made three predictions - that Trump would win the election, that America would attack Iran and that they would lose. Two out of three so far. Whatever the outcome, the Trump administration proved ill prepared for the unintended but predictable consequences of what was supposed to be a swift and one-sided war. Even a temporary closure of the Straits of Hormuz has far reaching consequences, not limited to a block on 20% of the world’s oil and natural gas supplies. Almost as important is the threat to supplies of fertiliser, an essential bi-product of liquified natural gas. Much of the Gulf’s food supply also arrives by ship, and any threat to Saudi Arabia’s desalination infrastructure would also add to the systemic risks facing the region. All very worrying, but a mere distraction from longer term risks facing Western economies.

Even absent these additional inflationary energy supply pressures and the high cost to US taxpayers from the attacks on Iran, an inevitable reset looms as Americans are already living far beyond their means. There is no political way out of the country’s debt spiral without inflation. The US dollar will continue to lose purchasing power, and the final objective must now be to avoid hyperinflation. In other words, having lost 99% of its purchasing power in a little over a century, the dollar must be prevented from losing the majority of its remaining value within a much shorter period. Realistically there seems little chance that either Americans or Europeans can retain the value of their social security benefits, which must inevitably be cut. This is the reality, but the worst case scenario would be that the real value of such benefits falls precipitously along with the currency’s purchasing power. This is the outcome that politicians must prevent.

A deliverable solution to the threat of accelerating inflation would be to give everyone an equivalent haircut, and not just the recipients of welfare payments and state pensions. This would include bond holders, who should not expect to receive 100 cents for dollars invested in Treasury bonds while the middle classes suffer serious cuts in the value of social security, pensions and medicare. Investors took a risk in lending money to a clearly bankrupt US Government, and if the government cannot pay, then their debt must surely be downgraded. However, the most serious threat must be to the Ponzi schemes that masquerade as state pensions. 

Neither side of the Atlantic has put aside money for investment to provide pensioners with incomes in retirement - it is current and future generations of taxpayers that are expected to fund pensions. Private or company pensions are paid with money that has been earned and invested, so recipients are only getting back what has been paid in. Not so with state pensions where contributions were spent on various government priorities long ago. Instead, these state pensions are paid with new money borrowed or extracted from today’s taxpayers who themselves rely on future generations of workers to pay their pension entitlements when the time comes. This cannot work. When these schemes started there were several workers paying taxes to fund each pensioner. Now is very different: the ratio is closer to two tax payers for each pensioner, potentially moving towards one. You cannot have one or even two taxpayers responsible for funding one pensioner while supporting their own families. So instead of raising taxes, in the US these liabilities are effectively paid for by printing money.

Does mainstream America understand the ramifications? Of course not. The reason that America’s consumption based economy works is the dollar’s status as the world’s reserve currency. This allows the US to export dollars and receive goods. An annual trade deficit over $1 trillion demonstrates America’s ability to import goods paid for with printed currency. In effect, zero resources are required to import $1 trillion of goods that the rest of the world employs considerable resources to manufacture. As the requirement for dollars diminishes alongside trust in the currency, US trade must, by definition, be moved towards balance. Logic dictates that this eventually means that $1 trillion of imported merchandise disappears from the shelves, and with insufficient domestic alternatives, scarcity pushes up prices for American consumers unless or until manufacturing can be ‘on-shored’ at competitive prices.

Exporters to the US in receipt of printed dollars have traditionally lent these dollars back, buying Treasuries and other US dollar debt instruments. One must therefore assume that eventually the US will no longer receive either the manufactured goods or the credit required to keep this process running, causing interest and consumer credit rates to rise. Unemployment inevitably follows and with it the further erosion of consumer demand. When you take away the demand and so many of the underlying products upon which the service economy is based, what is left? Less on the shelves and fewer stores, shop workers and delivery drivers. 

Eventually America will be forced to rebuild a self-sufficient economy. If Americans want to consume, they will need to produce, and if Americans wish to borrow, someone else in America needs to have saved. The world’s manufacturing capabilities and savings will no longer be available to be exchanged for freshly printed dollars, and the US will be forced to return to the period in its history when it was an exporting and a creditor nation. Unfortunately, this process is not easily achieved under a form of government that requires voter consent - and with it, the requirement to hide inconvenient truths from electorates. The eventual choice will lie between smaller government, lower taxes and fewer regulations or full blown socialism. If the electorate blames it all on freedom and capitalism, the risk is that they will elect a government that exercises complete control over the economy. Pretty scary for wealthier Americans, perhaps less so for the struggling middle classes.

The actions of President Trump further erode trust in the US and demand for the printed dollars that allow the country to maintain huge internal and external deficits. Of course, the irony is that the potential outcomes outlined above are claimed as the specific objectives of Trump’s tariffs. In common with his Iranian adventure, we return to the likelihood of unintended consequences that result from a sketchy understanding of fiscal realities. Not least who actually pays for inflationary tariffs.

About the author 

Jo Welman had a career in the City spanning 45 years and worked in a wide variety of financial sectors. After graduating from Exeter University in 1979 with a degree in economics, Jo spent ten years at Baring Asset Management where he managed a range of UK and US pension funds and unit trusts, investing across multiple sectors including bonds, international equities, commercial and residential property and private equity.

In 1989 Jo became Managing Director of merchant bank Rea Brothers’ institutional and private wealth investment management division. Over the following decade Jo launched a series of specialist investment trusts and funds in a variety of industry and property sectors, before forming a joint venture with reinsurance broker Benfields (now Aon Benfield) and raising one of the first limited liability corporate capital vehicles for the Lloyds insurance market in 1993. As part of his long-standing involvement in the insurance industry, Jo co-founded the Benfield Re-Insurance Investment Trust plc (Brit) in 1995. Following the sale of Rea to Close Brothers in 1999 Jo became Chairman of Brit Insurance Holdings Plc and in 2001, in partnership with Brit and Benfields, he co-founded specialist asset management firm, EPIC Investment Partners (EPIC).

Jo continues to provide corporate finance and investment advice to entrepreneurs and private investors. He sits on the board as a non-executive director of ARK Syndicate Underwriting.

“Feet up by the pool”

Jo does not receive any remuneration for his EPIC commentary. Instead, EPIC is pleased to promote the latest edition of his book “Feet up by the pool”.

Profits from sales of the book go to The Money Charity, a charity that shares Jo’s objective to help fill in some of the worrying gaps in the school curriculum. These omissions leave many young adults lacking in the financial awareness that they need to survive in a world where they will rely on their own savings if they are ever to stop working. Even if they earn the right to a full State Pension, today this amount hardly covers council tax and utility bills, and so they need to save and build up a sum of capital amounting to around twenty times their desired retirement income. A frightening number.

As Jo eloquently says, “If we can do our bit to raise awareness of the impending UK saving and pensions crisis, the exercise will have been worthwhile.”