By Charles Hugh Smith
Gamed speculation — using knowledge of how markets can be pushed to profit those doing the pushing — has long been decried.
Declaring that the unproductive profiteering of greedy speculators will be the death of the Republic goes back to Rome, and in American history, to Alexander Hamilton’s battle in 1791 to pay the speculators who had bought up the new nation’s war bonds for pennies on the dollar full value plus interest.
Gamed speculation — and the cheery presumption that there will always be a liquid market of chumps willing to buy insiders’ pumped-up balloons — inflate and pop bubbles, with devastating consequences not just for the broken speculators…
But also for conventional investors who naively believed “the market” was in fact a market (smirk) rather than a mechanism to enrich those who have the capital and knowledge to engineer profiteering behind the curtain.
An interesting intersection of dynamics has led to the curtain being ripped aside by the democratized speculations of WallStreetBets, a crowdsourced pool of speculative capital which shares many characteristics with online gaming and live-action role playing (LARP).
Only the gains and losses are in real dollars. The fortunes made and lost in GameStop (GME) are very real indeed.
How Dare the Serfs Play Our Game!
Wall Street and the politicos who profiteer as insiders are naturally horrified by both developments:
1. That the curtain of how super-wealthy insiders and their only the wealthy can play entities such as hedge funds have manipulated markets behind the curtain for decades, leading to an unprecedented economic inequality in which the top 10% skim fully 97% of all income from capital. To have their game hijacked by a bunch of young gamers is beyond appalling to the New Nobility, who firmly believe their insider manipulations were the exclusive preserve of their crowd in the castle.
2. Not only are the mechanisms of manipulation now visible to all, an unruly rabble of commoners has ganged together to play their own version of the speculative game of skimming staggering profits from a rigged “market.” How dare they!
No wonder the skimmers and scammers and political refuse that passes for “leadership” in today’s America are shocked, shocked by the open and openly gleeful democratized speculation that (like cryptocurrencies) is enriching the wrong people, i.e. commoners.
It’s as if the debt-serfs, tax donkeys and decapitalized peasants stormed the castle at night and broke open the jewel box and the stash of champagne, and proceeded to swing from the chandeliers, mocking the self-serving privileged who’d been pillaging the nation for decades via their legalized looting.
Where do these developments lead? An interesting question. Unfortunately for Wall Street insiders and their political-scum apologists, we can’t unsee the levers behind the curtain.
The End of the New Nobility?
The insiders can’t put their legalized looting genie back in the bottle, for everyone has seen how “markets” are manipulated to enrich those pulling the levers.
If the political-scum apologists want to end democratized speculation, they’re going to face blowback when they try to protect the rights of the New Nobility to continue manipulating markets to their exclusive advantage.
The rage against the New Nobility’s lock on capital, rigged markets and 97% of all the income generated by capital has been simmering to a boil, and political-scum apologists had best tread carefully.
How do you unrig a rigged speculative market? You don’t. It simply crashes into a putrid sinkhole. Phantom capital vanishes into the thin air from whence it came.
Ponder the similarities of the Cisco Systems speculative frenzy in 2000 and Tesla’s speculative frenzy in 2020.
Dang, the levers of the machinery behind the curtain just broke. The Fed is heading for failure. But it already was. Let’s look at the bigger picture…
Why the Fed Will Fail
The Fed will fail as a result of two dynamics: diminishing returns and the U.S. dollar’s role as a global reserve currency. The Fed’s reign as the godhead of financier-banker supremacy has been fun and games for the past 12 years of stock market euphoria, but that’s about to change.
All those expecting the Fed to sink the U.S. dollar to near-zero to “save the stock market” don’t seem to realize that they’re also expecting the U.S. to surrender its global hegemony, which rests entirely on the U.S. dollar.
The USD is the world’s dominant reserve currency. It dwarfs the next largest reserve currency, the euro. The Chinese yuan, due to its peg to the USD, is a proxy for the USD. It’s a tiny sliver of global reserves.
The owner of a reserve currency can create “money” out of thin air and trade it for autos, oil, semiconductors — real-world goods that were not created out of thin air. All these real-world goods required tremendous investment and significant costs to be produced and transported.
No wonder trading something for nothing — a remarkably good deal — is termed an exorbitant privilege.
It is not an exaggeration to say that the ability to create “money” out of thin air and trade it for real-world goods is the foundation of America’s global power.
If the Fed prints dollars to near-infinity and the dollar loses value relative to other reserve currencies, the U.S. loses its exorbitant privilege of trading “money” created out of thin air for real-world goods.
So everyone expecting the Fed to “print” the dollar to zero is claiming the Fed is consciously choosing to lay waste to the foundation of American power — just to boost Big Tech Robber Barons and zombie global stock markets.
The Fed Can’t Have It Both Ways
Recall that the Fed is not the Empire, it’s the handmaiden of the Empire. The Fed’s dual mandate — for PR purposes, stable employment and prices — is actually balancing the conflicting demands of a global and domestic currency.
The inherent problem with a reserve currency is that it must meet global economic needs and domestic needs, and these are intrinsically in conflict. America’s billionaires and pension funds want the U.S. stock market to loft higher on the back of a declining dollar, but that diminishes the global purchasing power of the dollar — a trend spiraling down to economic ruin.
The Fed’s balancing act has run out of runway. It’s either destroy American hegemony by crushing the USD or secure hegemony and let the stock market function as a “market” rather than as a device to further enrich the top .01%.
As for diminishing returns: consider what the Fed “bought” by handing $1 trillion to financiers, banks and billionaires in 2008-09 and what it “bought” with $3 trillion last March. The Fed’s balance sheet shot up from $925 billion on 9/9/08 to $2.08 trillion on 9/9/09 — an injection of $1.16 trillion to “save” the global financial system (and the U.S. stock and debt markets) from complete meltdown.
The Fed continued goosing markets higher, adding another $1 trillion by 2013 (balance sheet $2.96 trillion). So the Fed “bought” a five-year rally in global risk assets — a rally that sent wealth and income inequality into orbit—for a mere $2 trillion.
Last year the Fed had to print over $3 trillion in three months to “save the markets” from a reckoning with reality.
So will the next “save” require $5 trillion, or will it be $7 trillion? And what are the consequences for such insanity on the U.S. dollar’s global hegemony?
“Choose Wisely, Fed”
So the Fed has a binary choice: preserve America’s global hegemony or further enrich the billionaires. You can’t have both. Hegemony requires a currency that’s increasing its value relative to other currencies, not plummeting to near-zero.
If the Fed chooses to further enrich the billionaires and top .01%, then the skyrocketing wealth-income inequality will unravel the domestic social and political orders. There is no way that will be a “win” for the Fed, as the resulting backlash against the Fed’s stripmining the nation to enrich the top .01% will have consequences for the Fed as well as the nation.
So the Fed will fail. If it spews endless trillions to further enrich the billionaires it will destroy the exorbitant privilege of the reserve currency and the global hegemony that privilege enables.
If it preserves global dollar hegemony by not spewing endless trillions, global stock and debt markets will experience the equivalent of a financial tsunami, earthquake and hurricane hitting all at the same time.
It’s either/or — there is no win-win. Choose wisely, Fed.
Charles Hugh Smith
for The Daily Reckoning