In 1971, President Nixon permanently dislodged the USD from the gold standard, ending nearly forty years of global monetary policy in which the USD was equal to a fixed price for gold. In its place, Nixon decided to introduce a floating currency exchange system called Fiat which remains in place today.
There is a lot of hypocrisy in American political history. The Civil War had as much to do with business interests as a desire to end slavery, for example. Or take the Federal Reserve. An entity created to stabilize the consumer economy has created a nation built on debt that only serves the interests of the financial sector.
The Higher the Climb, The Harder the Fall
In my last post, I promised you the answer to what could possibly trigger the most catastrophic financial collapse in modern history. The answer: our broken system.
Here’s the state of the American economy. We have money coming in from the increasing value of the stock market, real estate and other assets while the automation of our workforce has sucked demand and value from our economy — because robots don’t buy things, people do. Meanwhile, the stock market remains on an astoundingly stable upward trajectory with no corrections in sight. Heck, even a potential nuclear war with North Korea had stocks up for the week. Great news, right? To the contrary, this scenario should scare the hell out of you. Why? The vanishing market floor.
Markets tend to correct or decline to a previous high or low. So, when hot stocks periodically fall back to earth, it allows for weary investors to get out of their positions. Take the tech bubble of 2000. A short frenzy occurred, but when Wall Street learned that the valuations for these companies didn’t match performance, the bubble burst. The stocks fell back to their floors, and the market responded accordingly. But if the market just goes up in an extended stable manor, the floor becomes too remote and then unrecognizable.
Margin debt is the perfect example of assets going under water. As asset prices go up, investors complacently add to their positions. Over-valued markets mean loans will be made at these high valuations, backed by artificially high asset prices, which results in increased debt. If asset markets follow the margin debt market when the correction comes, the debt payment will overwhelm future investments which will perpetuate low valuations. The Great Recession will look tame by comparison.
But there are two (and potentially a third) looming problems: logic and The Federal Reserve. Logic tells us that the market will correct. It always has and always will. When it does, people will be holding over-valued assets with no foreseeable floor. The sell-off will be massive as we watch American assets go under water. Recovery would become impossible, which could very well spell the end of America. Our markets will be in ruins and the heavily automated workforce won’t help us mend.
Even if no correction occurs, there’s that Federal Reserve hammer I referenced in the last blog. If markets persist in this way, look for the fed to raise interest rates to challenge the irrational exuberance of the market until investing in bonds becomes attractive enough (say 10 years ~3%). This would be a disaster since this would cause a gigantic shift of money out of stocks and into bonds sending asset prices on a long and painful free fall before it finds a hard floor.
The third problem: what if Russia’s knock-out punch wasn’t electing Donald Trump, but setting America up for The Big Fall? If Russia has been meddling with stock prices, then look for Trump and the republicans to win the midterms elections and sanctions with Russia dropped. Russia could manipulate the Markets for the long time getting Donald Trump elected for a second term. But what happens when super high values are fully debt leveraged and the market finally cracks from Russia bailing or some other externality sets in, the big fall that’s what.
Whether the climb has been caused by a vigorous though irrational market or through a more nefarious reason, we are watching asset prices climb and climb. The danger is still manageable but what if it keeps going? People are celebrating while America gets closer and closer to a precipice of sending the United States on a free fall to economic disaster and the likely loss of global dominance.
One man, Justin Wolfe, sees that the entire economy had been rigged for the wealthy and seeks to change that for good when he runs for President in 2024:
“We must overhaul the Federal Reserve before it ruins America once and for all.” — Justin Wolfe.
“Our economy has become too reliant on the stock market and could bring the end of America as we know it. We need to realize the market has become a Ponzi scheme.” — Justin Wolfe.
“I will do what it takes to make our economy run on hard work, logic and prosperity for all.” — Justin Wolfe