Financialization & The Road To Zero, Part 3: From Financialization To Breakdown

Authored by ‘ICE-9’ via The Burning Platform blog,

This is Part 3 of a 4-part series.

Read Part 1 here…

Read Part 2 here…

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August 15th, 1971.  America’s 108 year run with capitalism was over.  The Nixon Shock – or was it?  The dog that didn’t bark during the late 1960s gold run was the US Treasury, the only piece left in the Federal Reserve System that could claim some independence from the central bank cross ownership nexus.  Its lack of action to either raise official gold prices to slow the withdrawals, or close the gold window earlier as foreign dollars washed ashore onto its financial beachhead suggests collusion in the purposeful destruction of capitalism’s pre-eminent precious metal reserve.  We are led to believe that America was propelled by surprise and necessity into its new commercial model divorced from physical gold reserves and silver stockpiles, but when one follows the money what was originally billed as an unexpected emergency reveals a decade long ruthless history of preparation.

The US Treasury wasn’t so passive during the early 1960s and had quickly transformed into a serious existential threat to the central bank cross ownership nexus.  Silver had become a contentious issue when the US Treasury’s silver stockpiles decline by 80% in a matter of months during a 1961 purchase run – possibly depleted by banking agents in an offensive action to create artificial scarcity and render it perceived unreliable as money.  But President Kennedy halted government silver sales in late 1961 and, after rebuilding the stockpile, signed his fateful Executive Order 11110 in June 1963 directing the US Treasury to issue debt free United States Notes based on a non-fractional 1:1 ratio to the silver stockpile.  Thus a new form of American money was born – one that did not pay interest to the central bank cross ownership nexus – and did not conform to the working definition of capitalism.  This interest free money was placed in direct competition to the heavily fractional and interest paying “gold based” Federal Reserve Notes in circulation and more than $4.3 billion of this new debt free money was issued.  But although these notes were only about 1% of the total M2 money supply, they represented a return to sound mercantile banking and put at risk the unlimited spending requirements of the growing special relationship between Congress and the Military and Industrial Complex.  Infinite fiat money was needed to expand and maintain the American Fiat Empire, and this new sound money limited by silver stockpiles could not stand in empire’s way – five months after signing Executive Order 11110, President Kennedy was dead.

The Johnson administration got straight to work destroying silver as money starting with the oldest trick in the book – coin debasement.  The Coinage Act of 1965 was the nation’s first step towards a pure fiat currency.  The act initially removed silver from dimes and quarters, reduced silver content in half dollars from 90% to 40%, and suspended new silver dollar production until 1970.  Then in 1970, the Nixon administration eliminated silver from both half and full dollar coins, with the silver-less “silver dollars” minted again and put into circulation primarily for use in slot machines – a perfect metaphor for the coming commercial model.  With no silver in coins, their true value was guaranteed at only a fraction of their face “value”, and so the US Treasury quit trying to hide the underlying inflationary pressures created by increased fiat money printing combined with dwindling precious metal reserves and gave up suppressing the silver price which doubled between 1967 and 1968.  Thus by the beginning of 1971, the United States had created nearly pure fiat coins comprised of low value nickel and copper, and in November 1970 the US Treasury sold the last of its dwindling silver stockpile and all but removed its self from influencing future monetary policy.

The 1960s was also a busy time printing money to build and protect the American Fiat Empire with wars both covert and declared.  These wars became increasingly expensive and the Federal spending trajectory through the 1960s indicated there were serious limits to the Fiat Empire’s expansion under the constraints imposed by a fractional reserve banking system.  Heavy funding commitments were made for proxy wars in Indonesia, Congo, Laos, the Dominican Republic, Brazil, Iraq, Chile, and Cambodia.  These expenses were added to the costly and overt Korean occupation and declared war in Vietnam.  These war costs, increased spending on social engineering project, and late 1950s income tax cuts necessitated an increased reliance on US Treasury bill issuance to fund government aspirations.  Increased debt issuance, in turn, fueled domestic inflation as the fractional reserve nature of the Federal Reserve System still operated to some degree as it should.  The 1950s value added American export boom had acted like a sponge to dampen inflation at home, as the “virtuous cycle” inflated wages faster than the cost of domestic goods.  But when the growth of value added exports stalled in the 1960s, the inflation remained so domestic wages and consumer purchasing power stagnated.  This inflation in turn reduced both American domestic consumption and foreign consumption of American value added exports abroad, so more foreign held US dollars were available to go shopping for investments.  The 1960s “virtuous cycle” was not adsorbing all these foreign held US dollars and all the collective thinking of the learned monetary and political scientists could not foresee this coming run on cheap gold despite the US Treasury’s previous recent experience with the run on silver.  Thus any logical assessment can come to only two conclusions – either the monetary and political scientists were incompetent, or the US Treasury was complicit as its gold reserves steadily drained away.

In the middle of all that 1960s war spending and stagflation, Congress got to work printing even more money and launched a plethora of expensive programs under the umbrella of the “Great Society”.  These programs laid the groundwork for adsorbing the coming tens of millions of unemployed de-industrialized factory workers and created a pool of docile voters focused on their own dependent and immediate material needs.  Large spending bills were enacted like the Economic Opportunity Act of 1964, the Food Stamp Act of 1964, the Public Works and Economic Development Act of 1965, the Social Security Act of 1965 authorizing Medicare, the Social Security Act Amendment of 1965 Title XVIII authorizing Medicaid, and the Social Security Amendments of 1967.  Other large spending bills established government propaganda arms vested with influencing the coming pool of docile, dependent voters including the National Endowment on the Arts and Humanities Act of 1965 and the Public Broadcasting Act of 1967.  And although this “Great Society” did everything but create a great society, it got them voting on the welfare plantation for 200 years, and to ensure there was no resurrection of sound monetary policy, or for that matter, any serious economic policy discussion in public debate, in 1965 Congress passed the Voting Rights Act, the Nationality Services Act, and ratified both the XXIV Amendment in 1962 and the XXVI Amendment in 1971.  Never before in the history of a modern enfranchised people would a society be so devoid of monetary policy discussions, and thus the Federal Reserve System would dissolve further into invisibility with every carnival-like election cycle.

All that war and welfare deficit spending got rolling while the American Fiat Empire’s “virtuous cycle” was unravelling with the nation both entrapped in its Bretton Woods Venus Flytrap commitment and unable to increase its value added export capacity with its aging industrial infrastructure.  Heavy investment by Anglo-American oil companies in the Middle East and North Africa during the early 1960s began to generate large US dollar royalty and profit oil streams to their host countries resulting in a flood of surplus foreign held US dollars looking for investments while US value added export capability flat lined.  Oil production from Saudi Arabia increased from 1.35 million barrels of oil per day (MM bopd) in 1960 to nearly 4.0 MM bopd in 1970.  Libya came on stream in 1965 at 1.2 MM bopd and by 1970 was producing 3.4 MM bopd.  Iran, Venezuela, Kuwait, and Indonesia all experienced similar production increases.  Billions of foreign held US dollars were generated from the sale of crude oil into the global US dollar denominated commodity market with no coordination by the US Treasury to head off a potential gold buying rush.  And when it was obvious the gold rush was on, America’s European “allies” piled in too – France, Germany, England, and Japan.  All this took place without the US Treasury raising the gold price or taking any action whatsoever to stem its rapidly accelerating gold depletion.  It was as if “free enterprise” were nearly free when it came to buying subsidized gold with foreign held US dollars.

So on the morning of August 15th 1971, the United States’ “virtuous cycle” was sputtering, its precious metal reserves pilfered, and its value added export capability muddling along with an outmoded and inefficient industrial infrastructure.  Add to that rampant domestic inflation, unending foreign wars, civil unrest, high unemployment, and skyrocketing debt across all government levels when suddenly, with “no advanced warning”, the US Treasury went bankrupt – or more precisely, was constrained by a depleted gold reserve with no way to print the country out of its funding morass.  The magic formula had ceased to work, and Bretton Woods would have to be abandoned and a more abstract type of fiat money born to save the American “virtuous cycle” and soak up all those foreign held US dollars or the Soviets world gain control of the reserve currency status.  The United States faced an existential crisis comparable to its Fort Sumter decision – either continue to prosecute its Fiat Empire wars and ignore domestic economic troubles, or address domestic economic troubles and relinquish the Fiat Empire.  Nothing the monetary scientists did after August 1971 to salvage both options conjured up a false domestic prosperity that could also fund preservation of the Fiat Empire and wishful thinking had come to an end.  The Nixon Shock may have placated public opinion but did nothing to solve the underlying systemic problems in the “virtuous cycle”, so the US dollar plunged week after week against all major world currencies, stagflation settled in, and the “virtuous cycle” got a little more unraveled with every passing month.  And in early 1973 the entire national political apparatus was consumed with the Watergate scandal, so now nothing was going to get fixed.  The Powers Behind the Curtain would have to step out of the shadows to revive the American “virtuous cycle” and save its Fiat Empire on behalf of the central bank cross ownership nexus – enter the Globalists.

The new fractional “reserve” would have to revive demand for US dollars on a world changing scale, be price-pliable through political pressure, and under full control of US military “influence”.  That influence meant a full and unequivocal commitment to both Fiat Empire and Endless War at a cost of never solving America’s domestic economic and social problems.  So the Powers Behind the Curtain got to work, the United States made its third Faustian deal, and signed on with its Globalist savior – crude oil.  Oil was the perfect fractional “reserve” substitute –plentiful, cheap to produce, concentrated in defendable geographic regions, everybody needed it, and nearly every barrel traded was denominated in US dollars.  So from August 15th forward, with the Treasury’s Gold Window permanently closed and the requirement to hold gold reserves eliminated, the United States could, in theory, immediately get to work printing infinite pure fiat money.  And it would have gotten to work right away testing that theory save for one problem – oil was cheap and wouldn’t sufficiently soak up all those European and Japanese held US dollars.  Some calamitous event had to be conjured to pull the US dollar out of its malaise, stimulate global demand, and strengthen it against a competing basket of foreign currencies.  What the Fiat Empire needed was a global shock to offset the Nixon Shock.  The Powers Behind the Curtain had a solution, and it could not wait for the monetary scientists to figure things out.

That solution was war.  But not just any old war of attrition – a very unique, surgically placed Yom Kippur War in October 1973 of limited scope but tremendous global ramification.  After two years of muddling through stagflation with no solution in sight and Watergate coming to a boil, decisive proxy action was taken and during six months in 1973 oil prices rose from $3.56 per barrel to over $10.  The prologue OPEC embargo worked, and the denouement short war permanently established higher oil prices.  Now international demand for US dollars soared, and US domestic political confusion gave cover to its fiat money’s reversion to its true value in gold, rising unnoticed by a public stuck in odd-even gasoline lines from $41 per ounce at the Nixon Shock to $187 by the end of 1974.  And oil prices stayed high even as inelastic demand fell as the Middle East’s Kabuki Theater of rumors of war, terrorism, and threatened supply cuts culminated in the Powers Behind the Curtain’s pièce de résistance – the 1979 Iranian Revolution and $25 per barrel.  Mission accomplished, and the price of success was a decade of stagflation, costly long-term foreign aid payouts to the main actors, Endless Wars wherever there was oil, the rise of the Neo-Conservatives, and nationalization of Anglo-American Middle East oil concessions.  But Big Oil was quickly compensated – higher oil prices suddenly rendered frontier discoveries in the North Sea and Alaskan North Slope commercially viable.  Thus the Powers Behind the Curtain had achieved by politics what the monetary scientists could not with equations – a new fractional “reserve” that through the magic formula of inflation would soak up most of the European, Middle Eastern, and Japanese held US dollars to preserve the American “virtuous cycle” for the central bank cross ownership nexus and its new partner – The Military and Industrial Complex.

But this flood of new PetroDollars coming into OPEC states had to be soaked up too, and the decrepit and outmoded US value added industrial export capacity would cost too much and take too long to modernize to be of any practical use.  So the Powers Behind the Curtain set America on a dual strategy – vastly increased US Treasury bill issuance auctioned to foreign buyers combined with domestic de-industrialization.  The US Treasury bill issuance would soak up much of those PetroDollars and deals were struck with the new Middle East national oil companies where in lieu of America “challenging” the expropriation of the Anglo-American oil concessions, these OPEC states would instead purchase large sums of US Treasury bills at regular intervals and pledge to sell every barrel of oil produced in US fiat dollars.  Domestic de-industrialization was more complex and relied on a combination of creeping punitive environmental regulations wielded by a weaponized Environmental Protection Agency, together with the Federal Reserve System setting ever skyrocketing interest rates that eventually reaching 22.36%.  This combination drove foreign demand for US Treasury bills and practically shut down new capital investments for domestic industrial activity, and by the start of the 1980s much of America’s domestic industrial base shut down and either relocated production overseas or sourced finished product from foreign suppliers.  This offshoring was important as it sent US dollars overseas to develop a new contingent of US Treasury bill buyers and soaked up their surplus US dollars back into the “virtuous cycle”, thus not only preserving, but growing the US dollar Fiat Empire at the expense of the domestic workers’ now inescapable decline in living standards.  Entire swaths of America’s Rust Belt began to wallow in unemployment and hopelessness, while countries like Japan, Taiwan, and Korea saw record GDP gains and unparalleled growth in domestic consumer demand all while under the all-expenses-paid protection of the US Military and Industrial Complex.  Thus Japan’s, Taiwan’s, Korea’s, and eventually China’s industrializations were subsidized by American wages through the purposeful de-industrialization of the United States, as government’s unspoken policy now dictated the United States remain non-competitive to these East Asian countries so long as their financial institutions made large, reliable purchases of US Treasury bills.

During the late 1970s and early 1980s, both Britain and the United States respectively saw coordinated political shifts billed as the rise of “conservatism” but were in reality accelerations into more developed financialization commercial models.  Despite the economic hype surrounding Thatcherism and Reaganomics, both platforms continued each country’s de-industrialization project, deficit spending took exponential form, and foreign trade imbalances began their inextricable divergence.  And after interest rates peaked in 1981 and regular foreign buyers had been lured in, the Federal Reserve System reversed interest rate policy and began reducing rates combined with widespread media promotion of independent material success.  Together, these produced an explosion of US consumer credit and a shift in employment towards service sectors like finance, retail, and information technology.  To facilitate the rise in consumer credit, ambitious financial deregulation was enacted and the transportation industry de-regulated to accommodate nationwide distribution of rising foreign imports.  With reliable foreign demand for US Treasury bills established from Japan, Western Europe, and OPEC countries, the Powers Behind the Curtain could now crash the oil price to spur even more western consumer demand for imported goods, de-industrialize the American oil sector, and accelerate military spending to challenge the Russian fiat empire to a fiscal duel of attrition to the death.  The Globalist financialization plans had fallen into place, and Fiat Empire victory over Russia was just one fiscal quarter of deficit spending away.

And that victory came in November 1989 with the collapse of the Berlin Wall and an end to the Russian fiat empire.  With its ever increased military spending requirements to fend off American threats, the Russians were unable to invest in modernizing their industrial infrastructure which had decayed to the point where it could no longer support the Soviet fiat empire’s “virtuous cycle”.  With insufficient value added exports coming out of Russia for purchase by its satellites, demand for rubles dried up, the ruble disintegrated, and the Russian fiat empire dissolved as trade vaporized.  Had the Russian commercial model transitioned into some form of Soviet financialization where it offshored its industrial value added capability to its satellites, while simultaneously adopting deficit spending with ever widening trade imbalances, backed with ruble denominated debt sales to these satellites, the Soviet “virtuous cycle” may have been salvaged and continued on.  Thus what we learn from the American and Russian experience is that financialization is the transition out of capitalism by which technically bankrupt fiat empires outsource the costs to modernize their industrial export capability to satellites with the fiat empire in order to keep the “virtuous cycle” operating.  This industrial outsourcing enables the fiat power to commit the maximum amount of spending to maintain its military capability in defense of its fiat empire using its tax base and the expanding money inflows received from Federal debt issuance to foreign holders of fiat money.  Thus financialization is in essence a commercial model of securing guns through tax dollars and butter through credit.

With the Russian fiat empire vanquished, the start of the 1990s saw the American Neo-conservatives take over from the Powers Behind the Curtain and assumed full control of US – and therefore global – foreign policy.  They quickly filled the entirety of the political void left by the end of the Cold War with hot wars, and unleashed the shock and awe of Freedom across the unaligned no-man’s land throughout the Islamic fringes of the old Soviet fiat empire.  Almost overnight the world’s greatest enemies became those counties that the Cold War had kept the central bank cross ownership nexus from devouring.  War, chaos, and occupation-without-conquest led to a string of new US military bases across Asia and East Africa, a score of new countries added to the Fiat Empire, billion dollar arms deals with newly built “democracies”, and trillions of newly printed fiat money pouring into the Military and Industrial Complex.  Freedom exploded throughout the unipolar world, the red-white-and-blue was planted on nearly every meridian and longitude, and dissent was ground into ashes.  But payment for this great expansion of war was hedged on the back of the new “Information Economy”, an economy that produced nothing but more of itself that in turn produced more nothing but was the important receptacle for hundreds of billions of additional fiat dollars that created a simulation of economic growth and prosperity without generating operating profits.  And that simulation fueled the inflation that drove “valuations” ever higher that underwrote printing more billions to throw into the next round of the Next Big Thing that produced capital gains that funded the wars and death around the globe and delivered “You’ve Got Mail” on the home front.  Everyone partied like it was 1999 when the speculation floodgates were thrown wide open, the money printing presses were dialed up, and that Depression era relic Glass-Steagall finally repealed and that worked for a whole five months until April 2000 – the month that financialization broke.  Enter the monetary scientists to Wall Street’s rescue.

It wasn’t supposed to happen.  The Fiat Empire was at grave risk as hedged capital gains dried up and war funding became uncertain.  But rather than fix anything – and how could anything be fixed at this point – the central bank cross ownership nexus doubled down on its financialization bets.  What the United States needed was an even bigger Fiat Empire and a massive monetary stimulus to blow an even greater investment bubble spread across many sectors – bonds, stocks, commodities, property, and much more valueless information technology.  Every conceivable thing of any perceivable “value” was called up to duty and commoditized, collateralized, capitalized, hedged covered and naked, hypothecated, leveraged, re-hypothecated, and securitized.  Financialization 2.0’s success depended heavily on a distracted populace unaware of its immersion within a simulation of economic “prosperity”, combined with dialing up the money printing presses to 10 and ridding the country of every last evil financial regulation and restraint.  Thus 9/11 inaugurated the initiation of Endless-Endless Wars in pursuit of conquering every unclaimed square foot of the planet for the US dollar Fiat Empire.  All pretense about fiat issuance and an underlying fractional “reserve” were discarded, and a hyper-financialized period of choreographed DLIA record highs and interest rate record lows was designed to give cover to the immense “wealth” concentration taking place into Wall Street hands during the fog of terror.  And to ensure success for Financialization 2.0 and complete the American de-industrialization cycle, China quietly gain full membership into the World Trade Organization just four months after the 9/11 controlled demolition.  Subsidizing this rise of China’s industrial economy would not only speed the US economic transition into pure financialization, but also make it a quasi-satellite of the US Fiat Empire’s “virtuous cycle”, replacing long anemic Japan and securing another source of increasing long-term demand for US Treasury bills needed to support years of additional deficit spending.  Thus 9/11 initiated the Great Hedge to monetize the national asset base and extract every dollar of future “value” creation from the remaining American simulacra of capitalism, and transfer the bulk of economic endeavors into four new grand domestic sectors – Wars, Waste, Wall Street, and Welfare.  And Financialization 2.0 worked for some until September, 2008. 

Enter again the monetary scientists to Wall Street’s rescue.

Financialization 3.0 got underway at the onset 2008’s Great Recession and ushered in the age of Hope and Change under the brave new centrally planned world of Modern Monetary Theory – TARP, UBI 1.0, QE1, QE1 Extension, QE2, Operation Twist, and QE3.  No one paid attention to the “economy” anymore as all eyes were transfixed on the next FOMC minutes release and that buzz the instantaneous HFT response to the DJIA 30.  The simulated American “economy” entered into a new uncharted phase of never ending toxic CDO and CLO backstops to save the mountains of accumulated CDSs that underpinned all manner debt issuance that supported the rising stock “values” that were now totally divorced from any profit generation, and the simulation was MMT goal-seeked towards data-driven macroscopic objectives inferred from biased and skewed statistically manipulated information.  The money printing presses were dialed up to 11, the failed and fungible “Information Economy” was rebranded into the “Sharing Economy”, and all national bets were triple-downed on intangibles and goodwill and non-GAAP enterprise values.  But again almost nobody created anything of tangible value to drive true recovery as getting onboard the money transfer mechanism was what passed for an “economy”.  Those few tangible things left in the real economy took a backseat their financing by the “smart money, as the creation of these tangible necessary and beneficial things was left to the mugs and dupes who had to assume risk and exist in what small element of the commoditized world that had yet to be de-industrialized.  The “Sharing Economy” shared no profits other than capital gains with a select few early investors and again produced nothing but more of itself that in turn produced more nothing but was the important receptacle for trillions of additional fiat money that now created a simulation of a simulation of “growth” and the perception of “prosperity” that generated negative operating profits despite ever increasing “valuations”.  And the central bank cross ownership nexus shrunk again leaving even fewer parties standing to reap the rewards bestowed by the monetary scientists.  This simulation of a simulation fueled even more inflation that drove “valuations” ever higher that underwrote printing more multi-trillions to throw into the next round of the next Next Big Thing that produced capital gains that funded the wars and death around the globe and delivered not only “You’ve Got Spam” on the home front, but now that spam came with a file attachment from a Nigerian Prince.  And Financialization 3.0 worked for even fewer until September, 2019.  Enter the crisis management professionals, not so much to rescue Wall Street but to put the American “economy” on life support  to give the central bank cross ownership nexus just enough time to exit their positions and grab what they could just before the Big Reversion to the Mean.

Financialization 3.0 was not supposed to fail – the monetary scientists had promised the central bank cross ownership nexus it would transition successfully into Globalism.  America’s de-industrialization was not complete, there were still some things of real value left that did not yet have liens attached, and there were still vast profits to be hedged and brought forward from future “prosperity”.  However, financialization did break via the bond market’s exposure to its weakest links in Germany, so another round of monetary giveaways courtesy of the Federal Reserve System commenced.  Just unadorned REPO this time, no Hope and Change, no learned monetary scientists, no glowing Fourth Estate front page editorials, and no partying like it was 1999.  Then, by sheer coincidence, the World Military Games were held in Wuhan China where by accident Team USA stayed less that two blocks from a certain wet market and came in 35th like some bunch of biochemistry sissies and six weeks later there were dead Chinese in the streets.  No one noticed the bond market’s continuing implosion when the global shutdowns started and the REPO and PPP began, no one noticed it took a trillion in new money to get hundreds of billions in stock market appreciations, no one noticed tech billionaires getting billions more while they were infused with the excitement of a $1,200 UBI 2.0 direct deposit.  And how could anyone possibly imagine that one day all the bills would come due while they were sheltering in place and stuck in the middle of a flu virus transformed into a political pandemic scheduled to wipe out humanity?

And that is where financialization stands today – outright unabashed money transfer to Wall Street and the ultra-rich, a window into the Globalism which we were supposed to smoothly transition.  There is no excited talk anymore about grand plans of industry, no more predictions about things like flying cars, no one gazes up at the moon in wonderment anymore.  Expectations have been managed downward and optimism has been crushed in preparation for the coming events.  Nothing remains of the American Exceptionalism except a pantomime of stock buy backs, over-hyped iShit rollouts, diversity and inclusion, LBOs, ETFs, HFT, HFT ETFs, and disrupting the world one Java script code block at a time using H-1B imported labor.  But despite the broken and adrift system, the financial surface world screams normality, there is still the perpetual urge and ever present push to “do something” even though everyone can perceive something is seriously different this time.  Everyone’s piling in – get in now or you’ll miss the big tech short.  Thirty year mortgage refi rates are at historic lows – hurry before you lose your job and can’t qualify.  It has never been a better time to buy a house – get out of the city now before the mob burns down your 900 square foot crap shack.  Zero commission brokerage accounts click here (fees and restrictions apply) – and…it’s gone.  Buy, sell, or hold?  What are you waiting for?  Another all-time high.  Synergies, paradigm shifts, raising the bar, the deal of a lifetime, low hanging fruit, win-win.  Get off the fence, get your ducks in a row, step up to the plate, and think outside the box and push the envelope because failure is not an option.  The business of America – is still business.  But that business now is the business of financialization, the gathering up of the remaining mugs and dupes who still own some disposable assets to be sucked into the giant wealth transfer vacuum that is Wall Street.  And when Wall Street has sucked up every last penny, our trip down the Road to Zero will be complete.  That is when the salvation of Globalism will be forced upon us.