Have We Reached Peak Wall Street?

Tyler Durden's picture

Submitted by Charles Hugh-Smith via Peak Prosperity,

Though the mainstream financial media and the blogosphere differ radically on their forecasts - the MFM sees near-zero systemic risk while the alternative media sees a critical confluence of it - they agree on one thing: the Federal Reserve and the “too big to fail” (TBTF) Wall Street banks have their hands on the political and financial tiller of the nation, and nothing will dislodge their dominance.

Given how easily the bankers bamboozled the Washington establishment into bailing them out in 2008 to the tune of tens of trillions of dollars in backstops, guarantees, subsidies and zero-interest loans, this is a reasonable assumption. Especially when coupled with the free hand the Fed has to reward the banks with zero-interest loans and limitless liquidity.

Add in the unsurpassed political power of the banks’ lobbying and campaign contributions and the hog-tying of regulatory agencies, and it’s no wonder few see any threat to the Fed/financial sector’s dominance.

There’s also a compelling narrative that supports the Fed’s policies of keeping interest rates near-zero by printing money to buy mortgages and Treasury bonds: were the Fed to allow interest rates to normalize back up to the historically average range, credit-based consumption and housing sales would dry up, pushing the nation into a recession or even a depression.

What’s left unsaid is that such a contraction in credit would severely undermine the banks’ profits and solvency, and that it's that which is driving the Fed policy more than a concern for Main Street. Take a look at what happened to phenomenally robust financial profits in 2008: a contraction in credit caused financial profits (and solvency) to absolutely crater.

Interestingly, the collapse of financial profits back to 1.5% of GDP (gross domestic product) merely returned the financial sector to the level of profit it had earned in the 1960s and 70s. No one reckoned the high-growth 1960s were a depression, yet the collapse of financial profits back to the level of the go-go 1960s triggered the systemic insolvency of America’s financial sector.

This chart reveals the key driver of Fed policy: the enormous profits of Wall Street and the TBTF banks are based on an extraordinary expansion of leveraged credit that is visible in the red line—the ratio of total credit to GDP.  This line traces out the birth of financialization in the early 1980s and the implosion of leveraged debt in 2008.

Simply put, the only way the financial sector (Wall Street and the banks) could continue to grab almost 5% of the nation’s entire output as profit is if the Fed keeps interest rates near-zero and floods the system with the limitless liquidity of expanding credit and money-printing. Here is a snapshot of the Fed’s balance sheet, which reflects its unprecedented expansion of money:

This chart shows that the Fed manipulates interest rates by buying equally unprecedented amounts of mortgages and Treasury bonds:

Thus there are three reasons why analysts extrapolate the Fed’s current policies in a straight line into the future:

  1. Any contraction in credit would once again imperil the financial sector’s profits and solvency.
  2. Since Wall Street is politically dominant, the Fed will not allow credit to contract.
  3. Mainstream economists and politicians fear a recession triggered by credit contraction more than they fear a collapse of the U.S. dollar.

Analysts extrapolating Fed money-printing into the future conclude this expansion of the U.S. money supply will eventually devalue the U.S. dollar.  The mechanism for this devaluation is easy to understand: potential buyers of Treasury bonds will begin wondering if the piddling inflation-adjusted returns on Treasury bonds are worth the risk that their bonds will be redeemed with currency that is worth a fraction of the value they bought them with.

The Fed could respond to this bond buyers’ strike by printing even more trillions to buy even more Treasury bonds than it already buys every year, but the fact that the Fed might be forced to become the buyer of last resort is hardly a vote of confidence in the policies that support financial profits at the expense of market discovery of price and value.

Stripped of obfuscating complexity, a bond is a claim on future national income, and a bet that the currency used to redeem the bond in the future will have the same value as the currency initially traded for the bond.  If doubt arises about this, buying the bond or owning the currency is a bad bet.

As a consequence, many observers have concluded that the Fed can’t stop printing money and keeping interest rates near-zero (because those policies enable the financial sector to skim its hundreds of billions of dollars in profits) and so the U.S. dollar is doomed to devaluation and eventual loss of its status as the world’s primary reserve currency.

The Reserve Currency

What is a reserve currency?  Although the subject deserves a book-length explanation, let’s pare it down to the essentials.

First, we need to understand that currency (money issued by nations) is a commodity like any other. The global currency exchange (called the FX market) discovers the price of currencies by supply and demand, just like the markets for wheat, oil, lumber or other commodities.  Various nations can arbitrarily peg their own currency to another currency, but ultimately the value of every currency is set by supply and demand.

Second, we need to differentiate between a trading currency and a reserve currency. Many people confuse the two. Let’s say a Chinese company buys sugar from Brazil and a Brazilian company buys electronics from China. The firms exchange Renminbi (yuan) and Brazilian Reals.  These are trading currencies, as they facilitate trade between two nations.

A reserve currency is a currency that nations hold as reserves to protect their own currencies from market shocks and as collateral for credit issued by the nation holding the reserve currency.

Gold is one form of reserve/collateral. In a gold-backed currency, the currency is directly pegged to physical gold. When the U.S. dollar was gold-backed, other nations could trade $35 for an ounce of gold.

Nowadays, there are no explicitly gold-backed currencies, though many nations hold gold as a form of collateral.

A reserve currency acts in a similar fashion, as a predictable store of value that can be easily bought and sold on the global marketplace.

When markets lose faith in a currency’s value, traders sell the currency before it loses any more value.  This selling lowers the value, creating a self-reinforcing feedback loop of selling triggering more selling.  This creates a currency crisis as the currency rapidly loses value. To stop the crisis, the issuing nation must sell collateral (gold, reserves of other currencies) to sop up all the selling. If the nation fails to stem the crisis, its currency collapses once its reserves are gone.

What does all this mean? What it boils down to is the global currency markets impose a discipline on money-printing. If a country prints its own currency with abandon and does not build up equivalent reserves/collateral to back that expansion of currency, eventually the nation’s money-printing devalues the currency.  Once the currency loses most of its value, the country no longer has the means to buy oil or other goods from other nations.

There is one general exception to this discipline: the nation that issues the reserve currency can print more currency and as long as there is sufficient demand for that currency as reserves, the issuing country has the “exorbitant privilege” of issuing intrinsically worthless paper and exchanging it for very valuable commodities such as oil, electronics, autos, etc. (For more on this topic, please see Understanding the "Exorbitant Privilege" of the U.S. Dollar)

Currently, the primary reserve currencies are the U.S. dollar and the euro.

Though some analysts argue that the reserve currency is a burden whose benefits are outweighed by its liabilities, the privilege of being able to issue your currency and exchange it for real goods and services without regard for one’s own collateral reserves should not be underestimated.

Simply put, the U.S. dollar’s status as a reserve currency is a key component of U.S. global dominance. Were the dollar to be devalued by Fed/Wall Street policies to the point that it lost its reserve status, the damage to American influence and wealth would be irreversible.

What if Wall Street is Recognized as a Strategic Threat to the Nation?

As a result, I discern another possibility to the consensus view that the Fed/Wall Street will continue to issue credit and currency with abandon until the inevitable consequence occurs, i.e. the dollar is devalued and loses its reserve status.

I propose an alternative narrative for consideration, in which the other power centers of the U.S. government (known as the Deep State) awaken from their ignorance of finance and awaken to the fact that Fed/Wall Street policies constitute a strategic threat to the dominance and prosperity of the U.S. nation-state.

In this view, Wall Street’s power has peaked and is about to be challenged by forces that it has never faced before. Put another way, the power of Wall Street has reached a systemic extreme where a decline or reversal is inevitable. 

Part 2: The Implications of a 'War of Elites' focuses on how, as a result of its over-reach, Wall Street is at risk of encountering blowback from forces that the financial sector assumed were benign or under its control. Now that Wall Street poses a strategic threat to the viability of the American Project, its dominance may well be about to be challenged in ways few imagine possible.

What would such a power struggle look like? How would it unfold? What would the costs be to society? How will the rest of us be affected?

Click here to access Part 2 of this report (free executive summary, enrollment required for full access).


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Say What Again's picture

Is this the picture of Putin after he learns he's been a victim of Front-Running by the HFTs?


kliguy38's picture

Too late......so what if its peaked. These baastids that run this ponzi have infiltrated every aspect of your life and your country..........gl with getting yourself out of that can.

zaphod's picture

This is how systems that require exponential growth break down.

When QE1 happened, that jump in the money supply looked massive, but now 5 years later QE1 looks like a drop in the bucket compared to QE3.

Similarly in 5 more years this QE3 jump will look small. 

James_Cole's picture

This is how systems that require exponential growth break down.

Very few pay attention / really understand what that means. 


Interesting coming out of the IPCC on climate change, lot of talk on crop yields. 


That'll kill your growth!

Richard Chesler's picture

Exactly what part of


wasn't clear?


Say What Again's picture

This old geazer knows about exponential growth.


I love this guy!

James_Cole's picture

In a finite system exponential growth must be coupled with exponential decay, yet people still put an irrational amount of faith in technology to save us all. 

Not many people looking at that IPCC report to see what 'adaptation' will really mean. 

buzzsaw99's picture

...a contraction in credit would severely undermine the banks’ profits and solvency, and that it's that which is driving the Fed policy more than a concern for Main Street.

No shit sherlock. You just now figured that out?

Hohum's picture

Problem is, the politicians are elected by contributions from the banks.  Peak Wall Street?  Not any time soon.

cougar_w's picture

Politicians will do what ever they have to in order to retain power. If they need to destroy the TBTF to placate a restless public, they will do it and they will find a way to extract more money in the process. In that sense Wall Street has made a pact with the devil.

venturen's picture

I think you have it backwards...the politicans don't control the banks...it is the other way around.

Spitzer's picture

Detroit was the richest state in the world in the 50's.

Post freegold, mass savings with be out of reach of Wall street.

The Wall street bulls balls will be blue for a long long time

Mi Naem's picture

So poor now, it was recently demoted to a city and taken over by Michigan. 

csmith's picture

No, the problem is that the EU, the Japanese, Chinese and everyone else are racing even faster than we are to crush their currencies. It's going to take a while.

NoDebt's picture

Oh, come now.  Surely we are devaluing faster than Europe, at least.

cougar_w's picture

No sure the Fed are devaluing at all. Most of the QE is locked into bank deposits at the same time that vast sums of cash are evaporating from Main Street and middle-class households due to credit defaults. The PTB need to change strategies 180 degress, and soon, or deflation is what will eat us alive.

Dr. Engali's picture

"The PTB need to change strategies 180 degrees, and soon, or deflation is what will eat us alive."


They can't. Not with a balance sheet recession. The banks can't lend money because they have too many impaired assets on the books, the consumer is under employed and over leveraged, and large corporations are loaded with cash with no place to spend it. We are fubared until the markets are permitted to clear themselves.

cougar_w's picture

I agree, they are trapped. But this isn't anything to cheer. The thought of a significant enough "market clearing" makes me shudder.

Dr. Engali's picture

Yeah me too. BTW I didn't junk your first point. There is merit to what you said. Without the fractional reserve system lending there is no monetary expansion.

cougar_w's picture

We are all being junked to the moon by TPTB, and our entire world is being dragged through the toxic filth of a debt economy. Against that backdrop my picking up a few junks here and there is a minor irritation at best.

g speed's picture

Bingo---without debt there is no money creation in a fractional reserve system-- and of course banks can't make it out of thin air it no one signs the note

the problem is no one want's to be the one going into debt anymore--so money is getting scarce- people think inflation is causing price rises but its misallocation of the money thats left that is cousing price rises--to witness --why is everything you don't need costing less and every thing you need costing more?? if it was inflation all prices would rise -not just some prices--

Mi Naem's picture

"Peak Wall Street?"!?! 

Been hearing that for years now, and they just keep printing those charts higher and higher. 

El Hosel's picture

Don't worry, there will never be another Stampede out of stocks, risk has been eliminated in the New Normal. Get on the Gravy Train, everyone rides for free and lunch is on us.

Kaiser Sousa's picture

here we go with the stupid phony paper price of Silver dancing around the $20 marka gain...

fucking stupid...



sbn's picture

Where is the percentage of CHF as a reserve currency?


cougar_w's picture

Nearly zero. I think that was one of the points being made.

Hindenburg...Oh Man's picture

holy 2:57 pm market pump batman

Dr. Engali's picture

This is a good article by Charles explaining the reserve currency, and I agree with him that there is a war going on between the elites that the causal observer can't see. Take for example the current assault on HFTs. There is no way that this would be made public if there wasn't something more sinister going on behind the scenes.

Colonel Klink's picture

God I hope so!  Fuck Fraud street, the do nothing regulators, and a complicit government.

inky's picture

Bring on the reset ffs.

Usa goverment stop throwing yr dummy out of yr pram no country has been reserve currency for aslong as the world has needed them to be.

Just accept your day as top bill is over.

TruthTalker's picture

Sad thing is it was done on purpose - We will Kill The Dollar   https://www.youtube.com/watch?v=_F7bM63ZfWQ

ZerOhead's picture

"I propose an alternative narrative for consideration, in which the other power centers of the U.S. government (known as the Deep State) awaken from their ignorance of finance and awaken to the fact that Fed/Wall Street policies constitute a strategic threat to the dominance and prosperity of the U.S. nation-state."

The "Deep State(s)" will only awaken when there are no resources left to finance their MICC/banker backed wars/associated stategies of global conquest with.

In other words... much too late.

cougar_w's picture

That would do it. However the Deep State can also awaken if voters start setting shit on fire. Or if they cannot pay taxes anymore. The power base of the Deep State has roots growing in all directions and it will protect those roots using whatever force or threat of force is required.

ZerOhead's picture

There will be no peaceful revolutions allowed.

The response to "setting shit on fire" can only result in increased security (oppression) and spying on the masses. For them they simply MUST control the population or it is all over. And like the Ukraine the end result will be a collapse in economic acivity combined with a considerable devalution of the dollar at the very least.

I'm just hoping beyond hope that TPTB will find a way to keep all critical infrastructure systems relatively intact and functioning or else we are headed deep into the unknown with no way to get back...

cougar_w's picture

I agree, if "setting shit on fire" happens one town at a time. They'll just disappear people by the dozens.

But "setting shit on fire" can also be a rolling tsunami of violence overwhelming all things. I don't think it will happen that way in the US, so you are probably correct about the outcome.

To your last point, I think you can start saying goodbye to the systems you rely on. There is no money for anything now. And yes, no way back.

We're going down the rabbit hole, however you slice it.

thismarketisrigged's picture

this guy on cnbc jack bougjarnan whatevet the fuck his name is, he seems like the biggest fucking douche.


he is saying with a straight face how the market speaks for itself and is where it should be, and thinks the fed has nothing to do with it, its hilarious

cougar_w's picture

He's just doing his job. Like this guy:


IIRC "Bagdad Bob" is selling insurance, or something like that, these days. Probably not a bad guy, just had a tough assignment.

disabledvet's picture

so there is a lot that "sounds" right here but in fact the whole article is pretty much a total pile of bullshit...and the author knows this for a fact i might add..

first off...Wall Street is who is buying all those Treasuries and MBS's...which of course is the Fed's Big Bitch because they want all that "money printing" (excess reserves) to be "put to work in the real economy."

Of course the Fed has also said "we want inflation" and of course we have higher prices so the Banks simply throw this one right back at the Fed and say "see, there you go. What's the problem?"

In the meantime it is DEPOSITORS that have gotten screwed by the GOVERNMENT because in order to fund their INSANITY (two lost wars neither with any discernable purpose I might add) they have/had to go "full on Japanese and crush interest rates to zero."

This has in fact been done so well that the entirely of the commodity complex collapsed last year.


Didn't see that coming. Apparently neither did they!
So now "third world" (Argentina is a third world currency/country? Venezuela? Brazil too? BWHAHAHAHAHAHAHA! Why not throw India, Indonesia, Japan, Australia, Canada, Russia, Turkey, Egypt...did I miss any?) and their currencies have been totally annihilated.


I do agree..this particular Fortune Teller (and yes you have made a fortune if you've been listening to me) has found the current situation surprisingly "unbounded" (a personal Space Program? Privately funded? "And there's more where that came from"???!!!! Well at least we know where the moullah is closely approximated.)

So i'm suppose to short this yet again?
I'm just gettin' ready to call a bottom in coal....the commodity.
The USA has "infinity coal."

I'm trying to go there. I'm just not getting it yet.
This i get at least...

NOTaREALmerican's picture

There will NEVER be peak bullshit, which - when dealing with humans - is all that matters.


TheRideNeverEnds's picture

Gotta buy em before the FED does.  You may be wondering " That is all well and good, but when do I sell them out?".  You don't, ever.  Sector rotation is fine but going to cash or getting short is a ludicrous proposition.  We are going ever higher into perpetuity; permanent high plateau, new paradigm, green chutes, the whole deal.  As your net liq increases use that new margin to buy more, your nominal net worth will grow exponentially with the FED balance sheet.

El Hosel's picture

Volume says it peaked long ago.

cougar_w's picture


In biology it is called "studying a system that no longer exists" and happens when some part of nature has taken a fatal hit but then takes a while to actually grind to a full functional halt.

Midnight Rider's picture

The direction we're going will lead to a horrific end for the majority of the population. With most all of the appreciating assets in this Ponzi scheme being owned by only a few percent of the population, to focus on this and destroy the purchasing power of the entire rest of the nation in the process will get very ugly. I do see the pitchforks coming out if we don't redirect at some point. This bubble is getting rediculous. The market needs to consolidate for a while. More directly is needs to give some back are redirect capital being thrown at the Ponzi into more productive efforts that will actually help save our economy.

cougar_w's picture


But understand this. It is all going down in flames. We might each be too busy to take much notice as it burns down, but the global economy is headed for steaming ashes. That will herald the end of 300 years of prosperity born from the fortuitous accidents of an uncaring universe.

Midnight Rider's picture

I agree that we might be in a no-win scenario here, but I also think we would have a better shot at it if were weren't running a Ponzi scheme for the 1%.

RaceToTheBottom's picture

I am surprised that we have not hit this point in 2009

g speed's picture

We did-- the poor have been at the throat of their neighbors and the rich have been scaming each other mightly since 2009--it's just now that people are articulating it.

falak pema's picture

The "Karzai moment" of the Wolves of Wall street.

The history of that man and the job he did for Pax Americana, mandated and paid for by those who put him in place, encapsulates the matrix of deep state and its slippery slope of lies and criminal acts that the greatest nation on earth has committed; to protect the  undefendable, to bolster the unsupportable, to justify the insufferable.

Wall street is the financial expression; since Reaganomics and NWO translated into financial construct, the evil spirit of MIC hegemony;  of that careening geopolitical sequel to CIA mandated "exceptionalism" :  since Iran's rape, under non aligned Mossadegh, became the original template of subsequent  US imperial plays all over the world.