Hey Friends. I hope you are enjoying the arrival of spring, and that my post finds you doing well. Today’s post will present some of my thoughts on money, in light of the long-predicted arrival of inflation.

During my graduate programs, a definition of money in a finance textbook caught my attention. It stated that money is a creation of our minds and exists because of the strength of our faith. The definition made me stop reading abruptly to ponder the striking words. Yes, our currency is purely just paper that has worth as long as we believe it has worth. So, what happens if we stop believing it has value?

With the arrival of inflation and the Fed’s war over the past year to stop it by raising interest rates, we are now starting to see some unusual and concerning activity in the financial realm. There are indications of a rattling of confidence in our money.

About two weeks ago, Silicon Valley Bank (SVB) announced a need to raise capital and within 48 hours, the company was taken over by federal regulators as a run on the bank sent the bank into a death spiral. In response to the SVB event, both gold and cryptocurrencies have gone on a tear. And even though our government tells us that banks are strong and well-capitalized, some large depositors in smaller banks have been transferring money to large banks based on a belief that our government would fully back the large banks more than the smaller ones if push came to shove. I’m also reading that banks have been tightening credit restrictions since SVB’s fall. While this will likely help curb inflation, it also reflects a reaction to the uneasiness among depositors being witnessed currently toward our banking system.

There’s a reason our government measures the confidence of consumers. And there are numerous other attempts to measure confidence toward not just our financial system and economic well-being, but also toward our government institutions. Recall the latter part of the definition of money presented in today’s post, “money exists because of the strength of our faith.”

The loss of confidence in the ability of our money to hold value is the greatest threat to the viability of our financial system. As many problems as our nation faces economically, the worst response society can have is to panic and run for the hills. SVB is an example of a bank that wasn’t on its last leg yet and likely could have survived, but our reserve system of banking assures that if people run for cover suddenly, as with SVB, the panic brings a type of self-fulfilling prophecy.

I don’t want to communicate pessimism. So, let’s put it in perspective. It is good to discuss the hard things because sticking one’s head in the sand surely doesn’t help deal with issues of life that have to be dealt with. And dealing with the financial issues we face won’t be resolved through actions taken from fear but rather from sound consideration. Yes, we have more financial problems than one can stir a stick at but even if these concerns make us “feel” unsure, choosing the path of no confidence is a sure-fire way to bring financial destruction. My own reaction with managing money is to do my best which means do my homework (which definitely means analyze risk via balance sheets), diversify savings (not just with investments in stocks but across assets) and go on about my business.

There will be entities that don’t produce and do fail along the way during any era. But there doesn’t have to be macro financial failure that threatens the welfare of everyone, namely a financial collapse brought on by the kind of fear that produces an unfounded rush to judgment (run on the bank(s)).

See you next time.