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FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

"Financialization" Will Ruin America. Unless We Do This...

Stock-Markets / Market Manipulation Sep 02, 2014 - 04:58 PM GMT

By: Money_Morning

Stock-Markets

Shah Gilani writes: There's a reason America is floundering economically. There's a reason for the ever-widening divide between the "haves" and the "have-nots" in the United States.

Our country is no longer a free market, capitalist republic.

America has devolved into a socialist plutocracy as a result of the "financialization" of the economy.


Wealthy financial alchemists with the backing of paid-for White House administrations and Congressional lap-dogs engineer and manage the U.S. economy.

They also manage the public's access to money and credit for their speculative benefit when they win, and to taxpayers' detriment when they lose.

There's only one way out of this downward spiral...

What Went Wrong with American Free Markets

The truth about who runs the country, for whose benefit, and how they do it, has to be told.

Then what to do to get us back on our constitutional, republican path will be obvious...

The history of how America morphed into a socialist plutocracy where financialization of the economy has completely undermined free-market capital allocation is straightforward enough.

Although the seeds were sown long before 1971, the official beginning of the financialization of the American economy began when President Richard Nixon announced on August 15, 1971 he was taking the United States off the gold standard.

The American dollar was redeemable in gold at $35 an ounce until Nixon took us off that fiscal tether. The currency, to which most others were pegged, would forevermore be allowed to "float" against other currencies.

To get Shah's critical briefing on how to protect your assets against this "financialization" morass – plus his weekly updates – click here.

Floating exchange rates means the value of one currency in terms of another currency isn't fixed, it changes depending on what the "market" determines the exchange rate should be.

The principal determinant in the valuation of one currency against another currency is the interest rate differential between the countries.

A country with a higher rate of interest (the 10-year U.S. Treasury rate is 2.40%) would likely have a more valuable, more expensive currency relative to a country with lower interest rates (Germany's 10-year bund pays less than 1%) because investors would sell their euros to buy dollars in order to park their money in higher yielding U.S. government bonds, which they have to pay for with dollars.

For importers and exporters of all stripes, exchange rates matter a lot. When exchange rates were "pegged" they didn't move much at all. When they began to float, changing currency values upended international trade.

Huge sums of currencies are swapped every day by importers and exporters who transact business in different currencies around the world. Constantly changing foreign currencies exposed businesses to huge profit and loss swings that had to be hedged to whatever extent possible.

But, as you now know, interest rates play the largest part in foreign exchange valuations. So, not only did currency hedging explode due to international trade factors, speculating on interest rate movements within countries and between countries emerged as the new biggest game.

Financial product innovation exploded as hedgers and speculators sought instruments to manage and profit from currency and interest rate movements. The Great Financialization game was on.

The biggest problem with untethering the U.S. dollar from a gold standard was that fiscal discipline disappeared.

If the dollar wasn't redeemable in gold, its value didn't matter on any relative basis, other than how it floated against other currencies. That left the Federal Reserve free to print as much money as it wanted to, and Congress with the ability to spend money it wouldn't have to raise by taxing the citizenry because the Fed could just print the money it wanted to spend.

Of course that wasn't supposed to happen. The prevailing economic theory of the day was "monetarism" as espoused by renowned economist Milton Friedman. According to Friedman's monetary theory, the Fed could grow the economy conservatively and robustly at 3% per year by simply increasing the money supply by that same amount every year.

It didn't work out that way because there was no control over the Fed. In theory they would manage the money supply, but in reality they answer to the bankers that control the Fed and to Congress which uses the Fed to pay for spending programs they lavish on voters to keep getting themselves re-elected.

The most disgusting and egregious manifestation of Congress' abdication of their fiscal and public duties occurred in 1977 when Congress amended The Federal Reserve Act, stating the monetary policy objectives of the Federal Reserve as:

"The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long-run growth of the monetary and credit aggregates commensurate with the economy's long-run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."

The so-called "dual mandate" gave the Fed the infinite, untethered ability to flood the economy with money to promote "maximum employment." In truth, Congress needed them to print money for their spending under the guise of lowering interest rates to spur economic growth and create jobs.

With all the capital they needed being supplied by the Fed, banks, so-called investment banks and trading juggernauts were awash in profit possibilities.

Financial products, including derivatives and other weapons of mass financial destruction, were devised as speculative vehicles for banks and trading houses to leverage themselves up in pursuit of paper profits on mathematical anomalies.

Since the beginning of the Great Financialization, the Fed has consistently flooded the banking system with capital and liquidity whenever it became over leveraged and favored institutions verged on insolvency.

Here's How to Fix the Problem

The Fed's backstopping of speculators' and bankers' failed schemes, originally named the "Greenspan Put," then the Bernanke Put, now the Yellen Put, virtually eliminated "moral hazard" and keeps the speculators bankrolled in an endless array of "carry trades."

With the majority of America's capital being allocated to financial speculation on account of its unprecedented return possibilities, it's easy to understand why there's not enough economic growth happening.

There isn't a free market allocating capital to productive endeavors, the kinds of endeavors that create long-term employment and careers.

The financialization of America is why the economy isn't growing and why the rich are getting richer.

If we want free market capitalism again, the first thing that has to be done is eliminate the Fed's dual mandate. Immediately. Next, we'll have to eliminate the Federal Reserve altogether.

There are other ways to control the money supply and manage price stability. The "Taylor Rule," which puts stipulations on when interest rates can be manipulated, is one way.

And last but certainly not least, fiscal discipline has to return to Congress.

The way to do that is to make sure no one currently in Congress returns to Congress.

Source : http://moneymorning.com/2014/09/02/the-only-way-to-fix-the-broken-u-s-free-market-economy/

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