Is anything holding our financial universe together?
Globular Star Cluster. Photo: Skeeze. Source: Pixabay
In 1932 a Dutch astronomer couldn’t account for the movement of the stars given the current measurement of visible mass in the universe. He posited that dark matter must be holding the galaxies together. His hypothesis was confirmed 40 years later by another astronomer making observations about galactic rotation.
In the same way, our economic galaxy appears to be spinning apart, lurching from one crisis to the next. 50 years ago currencies were backed by gold reserves, loans were secured, and central banks had a mandate to “lend freely against good collateral.” Now every major nation has a fiat currency, secured bonds are less common, and central banks are critical supports to the global financial system. There’s nothing tangible holding borrowers to their commitments. For example, it’s estimated that the European Central Bank holds over €130 billion in unsecured deposits in Greek banks—over 5% of its balance sheet.
And it’s not just Greece. Secured bonds in the US have declined from 35% of the bond market to just 25% over the past 25 years, while unsecured government debt has risen by that amount. There’s not as much security serving as financial mass. Our monetary infrastructure is now based on a set of promises and paper agreements. But if those break down, there’s nothing holding it together.
In the “Star Wars” films, Luke was taught to “use the Force”—a mysterious energy field that “binds the galaxy together,”—something a lot like dark matter. But there’s nothing mysterious about our financial system today: trust has become the dark matter of finance.
Douglas R. Tengdin, CFA
Chief Investment Officer