The issue at the root of the American economy is cheap lending practices. When Nixon ended the gold standard in 1971, it marked the end of limitations on borrowing. Since then, corporations have been able to borrow from banks without any quantitative limitation.
What Does This Mean for the Labor Class?
Corporations would rather have an employee base full of robots and a select few humans to monitor the robots because it saves them money in labor cost.
Borrowing without a maximum limitation means it is easy, and often more affordable, for corporations to invest in automation or Robots Instead of People’s Lives.
It is cheaper to take a loan from a bank to finance the purchase of Artificial Intelligence software than it is to re-train workers or engage in improving work skills.
So the bottom line is that corporations would rather have an employee base full of robots and a select few humans to monitor the robots because it saves them money in labor cost.
You can thank the floating currency system inaugurated by Nixon for this change in the work culture of American corporations because it made technological innovation less expensive to finance which makes it harder for people to earn enough for a decent quality of life.
The changes have been far-reaching already. A feature article in the Digital Journal points out how prevalent AI already is in the manufacturing space.
Accenture, in their report ‘Reworking the Revolution’ found that 75% of millennials were enthusiastic about adopting AI into their work. Do they realize it will cost them all their jobs? It appears not.
From the perspective of a bank, an economy based on debt is exactly what they like. It makes it easy to rake in profits from huge loans to corporations looking to automate their workforce.
The companies, for their part, are confident they will make enough revenue from technological innovation to cover the terms of the debt. The only piece left out of this puzzle is the worker, who finds themselves surplus to requirement.
How Money Works Today
The banking system caters only to the wealthy people and does an excellent job of excluding poor people with their credit rating application process.
The entire loan infrastructure of the American monetary system is rigged against the little guy. Money is printed to help finance a loan. The money can be used right away to invest in some new technology for a business.
Since a loan must be paid back, the only possible recipients for a loan are wealthy people, business owners or CEOs of corporations.
Banks sell loans to individuals to help them finance the purchase of a new house, car, or take on some credit card debt. The only way an individual could get the loan in the first place was if they were deemed financially secure enough to pay back the loan.
That’s the first bulwark banks set-up against ‘risky’ lending practices — i.e. offering money to low-income people who need it most. The banking system caters only to the wealthy people and does an excellent job of excluding poor people with their credit rating application process. After all, banks want to make a profit on their loans.
A Market Economy with No Tethers
When automation comes for your job the wealthy are already very capable of not giving a damn.
The unfortunate reality of our economic system is that there is no incentive for banks to stop making loans to rich people and corporations — even if the end-result is a decrease in jobs due to automation and artificial intelligence.
This is scary since millions of people die every year from poverty. When automation comes for your job the wealthy are already very capable of not giving a damn.
The only solution to this dire circumstance is the complete redesign of the federal reserve. Interest rates must go up to increase the cost of new technologies.
In addition, demand side stimulus must be pursued directly by the federal reserve to increase job creation and the need for workers. Finally, the only way this will happen is by removing bankers from the federal reserve and replacing them with a multidisciplinary panel of experts.
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Was our economic system better before? And how did the bankers get so invested in the Federal Reserve?
History of American Economy
In 1913, the Federal government created the Federal Reserve to stabilize the American economy in history. It was America’s first central bank, and before long it brought major restructuring to the lending laws in the country. Only ten years after it was created, the Feds moved the dollar to a fractional gold reserve, making it far easier to lend more freely.
But was our economic system better before? And how did the bankers get so invested in the Federal Reserve? Here is a brief history of our financial system:
The Lincoln Presidency and Bankruptcy
The northern industrialists did have their way after all, as the ending of slavery produced a cheap labor class looking for work in the free states — exactly the kind of push factory owners needed to meet increasing demand.
During Abraham Lincoln’s reign, America’s national bank went bankrupt. It was due to a number of factors that Lincoln, in some cases, exacerbated.
In the 1860s the Union economy grew as train lines and roads were being constructed farther into the Midwest and the South. These projects required plenty of support from the banks, which were thus not prepared to deal with the economics of an encroaching Civil War.
The merchant class was generally opposed to Lincoln because he supported the abolition of slavery, an industry which was producing huge material profits for a large portion of society at that point.
The northern industrialists did have their way after all, as the ending of slavery produced a cheap labor class looking for work in the free states — exactly the kind of push factory owners needed to meet increasing demand. The industrial revolution flourished and economic growth was consistent for decades.
The End of the Industrial Revolution
JP Morgan personally financed all the outstanding debt that the government owed. In exchange, the government gave up control of the financial system by 1913.
By 1907, the industrial revolution had brought prosperity to whole segments of the population previously living in poverty. However, the government had outspent itself and found itself bankrupt once again. This time it was due to a lack of gold in their reserves, and since the dollar was tied to gold, the government could no longer lend money out to maintain consistent growth. It was at this point that the commercial banks stepped in. JP Morgan personally financed all the outstanding debt that the government owed. In exchange, the government gave up control of the financial system by 1913.
World War I and the Fractional Gold Reserve
Introducing a fractional gold reserve was the major contribution made by the Federal Reserve in its early years-consequences of which are being felt, even today.
In this new monetary environment, the government was powerless to stop the commercial banks from doing as they pleased. The newly formed Federal Reserve was incentivised to increase lending so they moved the dollar to a fractional gold reserve. Previously, the government was only allowed to print currency if they had the full gold amount in their possession.
In a fractional gold reserve system, the fed only needed a small percentage of gold in their possession relative to the amount of money they lend. A period of massive lending began, and tons of paper money was printed to help service loans. Introducing a fractional gold reserve was the major contribution made by the Federal Reserve in its early years-consequences of which are being felt, even today.
Nixon and the Floating Currency Exchange
Nixon decided to remove the gold standard entirely and create a floating exchange rate system.
By the time Nixon took office, the disparity between lending practices and gold reserves was beyond repair. Given the economic fluctuations of the late 1960s, and the impetus to fund the Vietnam War without restraint, Nixon decided to remove the gold standard entirely and create a floating exchange rate system. It was undoubtedly a decision influenced by the demands of the banks, who had always been unhappy with the gold standard — a standard that limited lending opportunities.
A Rigged System Without Enough Controls
The middle class and poor see almost no benefits which can be observed by the wealth disparity emerging in America and all over the world.
The unfortunate downside of the floating exchange system is asset prices such as housing and real estate increase taking up more and more of peoples pay check.
The cost of living has increased tremendously since the 1970s, while wages has remained stagnant. This works for the banks — who make their money from lending to businesses and the wealthy — but for most Americans having to work harder despite the advances in technology it seems almost cruel.
The gold standard provided a top limit to the amount of money that could be printed to fund loans even if it was extremely fractionalized. Today’s limitless lending creates tremendous benefits for banks and the wealthy. The middle class and poor see almost no benefits which can be observed by the wealth disparity emerging in America and all over the world. Therefore, we can say the system is rigged because only a select few benefit from it.
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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