“The top nine most terrifying words in the English Language are: “I’m from the government, and I’m here to help.” Imagine getting elected on that platform today….
And yet, the opposite sentiments were uttered by Ronald Reagan less than 40 years ago, with Margaret Thatcher’s own eloquent version following closely behind a year later:
“I think we’ve been through a period where too many people have been given to understand that if they have a problem, it’s the government’s job to cope with it. ‘I have a problem, I’ll get a grant.’ ‘I’m homeless, the government must house me.’ […]. People have got the entitlements too much in mind, without the obligations. There’s no such thing as entitlement, unless someone has first met an obligation.”
Why is trust in government important?
We now rely on the government for absolutely everything. Every decision, choice, activity, possession and behaviour is controlled by the government in some way.
Therefore, if trust in the government is declining, it becomes a problem for every facet of our lives.
Why has trust in government declined?
It’s not hard to see why we’ve lost faith in our so-called betters. They don’t follow their own rules, which the lockdowns put on display rather nicely. They don’t pay their fair share of taxes – even the chancellor’s own wife makes use of the non-domicile loophole.
The vast civil service was caught out badly by the pandemic too. Hospital wards were empty but for nurses making dance videos, and receiving weekly applause for them: meanwhile, NHS waiting lists ballooned, which could cause death and anguish comparable to the pandemic itself over time.
Most controversial of all were the lockdowns themselves, with Sweden’s lockdown-free approach now vindicated as the pandemic winds down.
But there’s nowhere the government intervenes more than in our financial lives…
Does the government control the stock market?
Investing used to be about analysing financial markets, hunting for well-run companies with good prospects and making good long-term decisions. Today, the stock market has become a political football. And so, governments have tried ever harder to control the stock market and keep share prices high with increasingly bizarre policies.
The theory behind this change is known as the “wealth effect”. It’s the idea that rising share prices make people feel wealthier and therefore spend more, which boosts the economy. Based on this, politicians and central bankers can use the stock market to conduct economic policy.
This theory was the excuse for ridiculously loose monetary policy to try and inflate stock, bond and property markets over the past decade.
In Japan, for example, the central bank created so much money to buy so many shares that it owns about 7% of the Japanese stock market! The Swiss central bank is a major shareholder in American stocks to the tune of $177 billion.
Unfortunately, the wealth effect works both ways. When investment prices fall, people feel poorer and spend less. At this point, politicians and central bankers panic and are forced to control the stock market even more.
This has led to a bizarre phenomenon known as “bad news is good news”. Namely, when the economy publishes disappointing results, it raises the likelihood of a government intervention of some sort to boost the stock market. What follows is a stimulus package, lower interest rates or more quantitative easing (QE) – the 21st century version of money printing.
When central banks and governments intervene like this, it causes the price of investments to rise as money floods in. And, anticipating this reaction from governments and central banks is what makes bad news good news for stock markets. This is evidence of just how powerful governments and central banks have become in controlling the stock market.
Of course, such manipulation can only last so long…
Who does the government borrow money from?
For decades now, people have warned about the impossible state of government finances. And, for decades they were wrong, for the most part. Even in the so called PIIGS of Portugal, Italy, Ireland, Greece and Spain, the sovereign debt crisis was eventually bought under control in 2012… although it flared up again in 2018…
The pandemic only made matters worse, and the problem has finally become rather prescient as a result. The UK government’s interest bill on its debt surged a whopping 80% last year! We now spend more on interest than defence. And, perhaps more importantly, the money spent on interest is not available to be spent on the likes of defence, nor anything else.
But there’s a solution. As part of conducting their ordinary monetary policy, central banks like the Bank of England buy government bonds, which are loans to the government. This injects new money into the economy. However, it also has the side effect of helping to finance the government’s spending.
And so, since the 2008 financial crisis, central banks have become a key source of funding for governments. In the UK, the money is created by the Bank of England and then lent to HM Treasury. During the pandemic, this became more blatant than ever, with the Bank of England governor claiming that “the government would have struggled to fund itself” without the Bank of England’s help.
Can you invest in the government? And should you?
All that interest which the government is paying must be going somewhere. How could you get your share?
Well, when the government borrows money, it does so using something called bonds. These are loans to the government which pay interest to the lender, but they can be bought and sold on the markets like shares. A bond that pays a high rate of interest can be worth more than one that pays a low rate, for example.
But are bonds a good investment? Well, they weren’t in 2021 and the first half of 2022. Government bond prices all around the world crashed as inflation surged. That’s because, during inflationary periods, the only thing worse than holding cash is the promise to be paid cash in the future. By the time the government repays its bond, it’ll be worth even less.
The biggest advantage of government bonds is that they are extremely unlikely to default. The UK government can always get the Bank of England to create the money out of thin air, after all. The biggest disadvantage is that governments can devalue money itself by getting the Bank of England to create more of it – something we call inflation.
Read our inflation survival guide.
How to keep your money safe without trusting the government
For the past few decades, investing in the government’s latest pet project has often paid off. The government heavily supported the property market with tax incentives and subsidies, for example. Similarly, green energy stocks boomed and defence stocks soared when Russia invaded Ukraine.
Of course, these bubbles eventually burst too, as we saw in 2008 for property and 2022 for green tech. But there was money to be made by investing in the government’s favourites.
But this may be coming to an end as inflation limits how much central banks can support markets and government debt begins to overwhelm the budget.
There are investments which actually benefit from governments and central banks mismanaging the economy and financial markets, not to mention their own finances. These are known as hedges, as in “hedge your risks”. When other investments are crashing because the government is mucking up the economy again, these investments should perform well.
The most topical example is cryptocurrencies like bitcoin. Bitcoin offers a monetary system that operates independently from the government’s system. So, if the government system is a mess, then this benefits the alternatives like bitcoin. At least, that’s the theory.
The more traditional option is gold. You can think of gold as the opt-out from the government-controlled financial and monetary system. It performs well as an investment when people want to escape the chaos inside the system.
Gold’s status comes from thousands of years of history during which it performed the role of preserving wealth. You can find out more about gold in our free report on why gold is the #1 asset to own.
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