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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.
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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
About the Author
Shah Gilani is Chief Financial Strategist for Money Map Press and boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker. The work he did laid the foundation for what would later become the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk and established that company's "listed" and OTC trading desks. Shah founded a second hedge fund in 1999, which he ran until 2003. Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see. On top of the free newsletter, as editor of The 10X Trader, Money Map Report and Straight Line Profits, Shah presents his legion of subscribers with the chance to earn ten times their money on trade after trade using a little-known strategy. Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on FOX Business' "Varney & Co."