Time after time, over history, speculative manias seemingly emerge out of nowhere, fueling extraordinary booms that prelude devastating busts. After a while, you’d think we would have recognized how to avoid them, but as manias tend to occur every 20 years or so, the next generation is doomed to repeat the mistakes of their predecessors. And it’s been the same for over 300 years. From the Tulip Mania to the Dot-com Bubble, once leaders instill moral hazard in the minds of their citizens, cheap money ignites excessive greed and risk-taking, creating a speculative frenzy.
Although each bubble possesses unique characteristics, they follow a similar pattern, no matter where in the world they occur, with some exhibiting more bizarre tendencies than others. In the 1980s, after a small crash in Kuwait’s official stock market, the government introduced tighter regulations, forcing investors to stick their money into riskier investments. Housed in an air-conditioned parking garage, Kuwaiti’s unofficial stock market, Souk Al-Manakh, became the third-largest worldwide by market cap after wealthy investors bid up the price of speculative companies. In the end, it took a simple rumor of a dealer’s check bouncing for the bubble to burst, causing a deep recession in the Kuwaiti economy.
Decade after decade, similar booms and busts surfaced across the world, with the same flawed thinking from elites producing the same result. But when the 2008 financial crisis came along, the rules of the game changed. The interconnectedness of global finance meant that one asset class was capable of bringing down the entire system. The U.S. government and the Federal Reserve “had no choice” but to use the same policies that had caused the crisis to prevent a collapse. Their solution? Turn the entire U.S. economy into one gigantic moral hazard.
Thirteen years on, and bubbles are no longer bubbles. Instead, they have become the hip, new asset class on the street. Every speculative asset class has been “securitized”: stocks, corporate debt, real estate, fine wine, fine art, vintage guitars. Take your pick. You’re spoilt for choice. Valuations don’t matter. It’s whether the price goes up or down.
The elites have replaced America’s economy with “the Everything Bubble”, and it’s harder than ever to achieve the American dream. Every year, home and food prices rise, more manufacturing industries disappear overseas, and the cost of healthcare and education skyrockets. But rather than addressing these issues, the American elites have ignored them and now define their success by whether “stonks go up”.
“Stonks go up” is not a reference to stocks, per se, but the system that allows asset prices to rise indefinitely. In reality, stocks are not stocks anymore. We have no market or price discovery, just a constant struggle to postpone economic gravity. To make our situation a little less surreal — and more of a parody, we replaced the “c” with an “n” and invented the stonks meme. We clung to the weirdly shaped man in a suit and tie standing in front of a chart to find solace in our crazy economic world. Our future rests on whether a four-figure number on a screen rises. The S&P500 index’s closing price must be stapled to everybody’s fridge in the morning because it’s the number one marker of America’s health.
While that number remains stable, America’s flawed bubble economy remains stable. To the elites, nothing else matters. Although it does zero for the country long term, the upper echelons of society — the politicians, the Wall Street machine, the bankers, the central bankers, the “look at my yacht” high net worth individuals — have become obsessed with preserving the indefinite rise of asset prices, and for now, they can do just that.
Since the speculative activities Wall Street engaged in pre the 2008 financial crisis broke the system in two, they had to copy the politicians and the central bankers and embrace financial insanity. It’s common knowledge that banks create money out of thin air to maintain the fake economy, but what most people don’t realize is, post the 2008 crisis, they create assets out of thin air to make up for the poor liquidity in the system. Before, subprime was the prominent liquidity driver, but as that market collapsed, Wall Street needed a quick replacement. First, they used pristine collateral such as U.S. government bonds, but as risk appetite increased, they began to securitize everything from auto loans to credit cards.
In the shadow banking layer, an asset’s properties have become irrelevant. What matters is the asset’s dollar value. Because shadow banking markets — the Eurodollar system, the repo market, and money market funds — lie outside anyone’s jurisdiction, while an institution has an asset denominated in dollars on its balance sheet, anything goes. Assets pose as other assets known as rehypothecation. Even rehypothecations of rehypothecations exist. Think of these as a CDO squared: “a CDO of a CDO”. They will get away with using anything as collateral because, in the end, they know the authorities will bail them out if they pose a risk to the system, using former British prime minister, Theresa May’s idiom, a “magic money tree” to rescue any institution when appropriate.
To keep citizens from revolting and the system running smoothly, politicians and central bankers have lost their leadership roles. Instead, they have become perception managers, using a range of psychological tools to keep us in a constant state of confusion. Take the debt ceiling: “a legislative limit on the amount of national debt that can be incurred by the U.S. Treasury, thus limiting how much money the federal government may borrow”. But this does not exist; there is no limit. It’s there to make you think the government is fiscally responsible, but it rises every time the system reaches crisis point.
As perception managers, their job is to convince you that becoming dependent on the system is the only option, to make you spend more, to make sure you keep loading up on debt so that the system keeps functioning. Your job as an American used to be to pursue your dreams by embracing the sound elements of capitalism. Now it’s to support the crony capitalist “stonks go up” machine. Saving for that dream car, house, or holiday? Sorry, you’ll have to put that on hold: It’s your patriotic duty to feed the system with your hard-earned money. You must take out that credit card with a 25% interest rate because Amazon has 75% off AI-powered electric toothbrushes. You must buy that $2,000 exercise bike with an oversized iPad attached, and if you can’t afford it, you can pay for it in monthly installments.
Society has become obsessed with debt not just because there’s a lot of stuff to buy in a consumer-capitalist society but because our money buys less every year. Yet, the economy must expand, and if you don’t participate, if you try to cash out and take profits, you’re a systematic risk, a traitor. Saving for a rainy day is modern-day financial terrorism, and your punishment for dissent is death by inflation: to watch your money erode away in your savings account, only you can’t see it because inflation remains hidden. You become a blind, long-term day trader: Wall Street’s computer algorithms take your money but you can’t see your balance going to zero.
You have become part of the craziest monetary experiment in human history and you’re powerless to stop it. It has become part of you without you even realizing it. Every medium you use to express your anger against the system only feeds and increases its ever-growing power. Decentralization, the most popular escape from the system, is the last mainstream beacon of hope. But it’s a false hope. It’s a retreat from society altogether. We’re removing ourselves from the system rather than changing it, which will lead to the stark fragmentation of society: the centralists versus the decentralists. This won’t end well.
While the decentralization movement builds momentum behind the scenes, we will continue to see craziness become the new normal. We’re at
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