I’m Andrew Levine the CEO of Koinos Group a startup financial technology company where we’re trying to build systems that prevent some of the shenanigans that we’re seeing at play so in the video below I take a big step back and try to give you a 10,000 foot view of the whole GameStop, RobinHood, WallStreetBets situation and why I think this is far from over.
But to understand everything that’s going on now we really need to go back to the 1970s which is when America shifted from an economy that manufactured goods that other countries bought, to an economy that financed manufacturing in other countries. This was a really fundamental change to the very nature of capitalism. It was a shift from industrialized capitalism, to financialized capitalism.
America had become so wealthy that we no longer had cheap labor and other poorer countries were catching up with our manufacturing capabilities. Before the 1970s other countries needed our goods and so they also needed to get US dollars which they needed to buy those goods, but in the 1970s that dynamic flipped.
After decades of manufacturing, political, and economic dominance, that created unprecedented demand for a single currency, the US dollar had become an indispensable part of the global economy. With our manufacturing capabilities on the decline, our strongest export became the dollar itself.
All of the countries that were developing competing manufacturing capabilities were too small, too young, and too untrustworthy to supply a currency that everyone could trust to oil the gears of this new global capitalism. Besides, the dollar, backed by the military and economic might of the world’s first superpower, had already been playing this role for decades.
Policymakers saw the writing on the wall and decided to lean in to the trend. They used our so-called exorbitant privilege to flip the script and make the US even more critical to the global economy not by trying to compete as a manufacturer, but by manufacturing more dollars and using those dollars to fund more growth outside of the United States.
But this scheme would only work if all of that money came back to the US to fuel more growth here. Which is where Wall Street comes in. We had succeeded in making the dollar the lifeblood of global trade--something every country used to buy and sell goods with one another. When they made these deals their profits would be in dollars not their own currency. They could sell those dollars to get their own currency, but we didn’t want them to sell, we wanted them to reinvest those profits in America.
And so it became Wall Street’s job to provide these foreign companies and nations with such attractive returns that they’d have to be idiots not to send their profits back to us so that they could make even more money.
But how was Wall Street going to deliver such massive returns? The first step was removing the regulations that were holding back financial firms from effectively printing money. Unlike the banks most of us are familiar with who can already create 9 dollars for every 1 dollar they hold, financial firms like the hedge funds we’re hearing about in the news would be able to create all kinds of exotic instruments that take some underlying asset like a mortgage or shares in a company and use that to create some new asset worth 100 times, 1,000 times more. This enabled them to generate those profits that motivated more money to flow back into the US and into their firms which they could use to create even more exotic instruments.
Yes, a lot of the money coming back to the US went into our companies and our treasury bonds, but Wall Street was the vacuum pump that sucked in that money with force based on its promise of massive returns. This caused our companies to transform in a way that mirrored our currency. Their product flipped from being the goods they produced for a profit, into the shares themselves and the goods or services they offered were more about constructing a narrative that justified creating shares that Wall Street could then gamble on and use to construct their magical instruments that created money from money.
This whole thing probably sounds extremely risky and prone to collapse given how everything is built on top of creating money out of thin air through financial engineering, which is precisely why we have had so many financial crises over the same period of time. These are effectively pyramid schemes and so when one gets too big it collapses and the government has resigned itself to the role of ensuring that either the schemes don’t get so big that they can take down the whole system with them or if they do get too big--too big to fail--they are bailed out.
Of course, all of this gives incredible power to Wall Street while also creating perverse incentives to make their schemes so big that, when they do fail, they are protected. People often wonder why the government continues to put up with this and now that should be clear. Without Wall Street we’re just a has been superpower. China’s economy is already bigger than the US economy and it’s still growing so it’s only a matter of time before their currency becomes more valuable to the rest of the world than ours. People don’t need our produce, our oil, or our machinery. We’ve just become the world’s casino and Wall Street firms are the dealers.
But everything changed in 2008, even if it doesn’t seem like it. The game ended. The capacity for Wall Street to print enough money to fuel the perpetual motion machine came to an end. Policymakers saw it and said outright that they feared it was the end of capitalism. It was this fear that led them to respond with unprecedented measures.
For the first time in American history the federal government had to step in and take the place of Wall Street by creating more US dollars out of thin air, though they used the more palatable term, “quantitative easing.” This money printing got the gears of financialized capitalism moving again but in a zombified manner. There was no real growth, just more money chasing every diminishing returns. It was a band-aid, not a long-term solution.
But another group saw what was happening too. People outside of the financial system who wanted to see a genuine fix. They saw the problem as the system itself and wanted a better one. The problem wasn’t that the system needed to be tweaked. The problem was that we, the people, had no control over it or insight into it. It was imposed on us and we had no way of understanding it or impacting it. And we had no ability to opt out of one system and into another. We wanted a system that was open, transparent and impossible to manipulate. Which is why software engineers released the first prototype of such a system in Bitcoin.
Bitcoin created a digital currency that no one owned or controlled, that was open and totally transparent, and was easy to understand having properties similar to gold. But Bitcoin was just one new asset that was slow and expensive to send and receive. So Ethereum was released next and it was similar to Bitcoin, but was also a PLATFORM that anyone could use to produce all kinds of digital assets like Bitcoin but with whatever properties they wanted. While a bit faster, Ethereum was still slow, expensive, and difficult to use. It was nowhere near ready for mass adoption and so while the game of musical chairs had stopped in 2008, the economy was forced to limp along with the help of record low interest rates from the Federal Reserve.
And then the pandemic hit. Many think that the pandemic caused the economic crisis, but the reality is far worse. Things had been bad since 2008 and they were rapidly deteriorating as we entered into 2020. This left us vulnerable to the virus which then became a not-so-convenient excuse for our worsening economic situation.
Which brings us to the current events. WallStreetBets, RobinHood, GameStop, it all seems so complicated, but it’s really not because it’s the same old story. Remember, the American economy has become the world’s casino. With the real economy shut down the government has again been forced to go into money printing mode to an even greater degree than it did in 2008 and with most of that money going into corporate shares driving up their prices which is only encouraging people to gamble even more.
Meanwhile with everyone stuck at home they have nothing better to do than to play the game while Wall Street firms are doing what they’ve always done which is use some underlying asset to create even more money out of thin air.
WallStreetBets, a community on Reddit, simply uncovered their latest pyramid scheme. Though it’s certainly not new it’s now become a systemic threat to the economy, which is why I said at the beginning of this video that this is far from over. This scheme involves exploiting a loophole in the regulations that actually dates back to a time when people traded paper shares which could take weeks to arrive by horse and buggy. To grease the wheels of the financial system, always a priority in a capitalist economy (whether right or wrong), a financial instrument was created that enabled people to trade shares that they didn’t own.
Eventually people realized, after the fact, that this instrument could be used to effectively bet AGAINST a stock or “short” it. Remember, the original purpose of shares in a company was to simply track ownership over an organization that produced something of value.
While there may be some cases where shorting a stock is justified to send a market signal that a company is bad, the problem with shorting stocks is that when people with enough money target a single company by betting against it, it becomes a self fulfilling prophecy. This creates yet another perverse incentive to an industry already rife with perverse incentives. A Wall Street firm could make a guaranteed profit by betting against a company and then CAUSING it to fail.
Now GameStop might have not appeared to be a thriving company, but 97% of its stores were profitable and the people running the business were obviously aware of its challenges and trying to turn it around, but they were facing an uphill battle as a result of the massive short positions that were working against it.
But even that isn’t the story. The real shocking revelation from all of this is not that Wall Street was manipulating the system to make more money by destroying a company, that’s old news right? What’s been discovered from all of this is that Wall Street firms had apparently found yet another loophole. Due to poor oversight and a lack of transparency it was apparently possible for them to bet against the company using more of the company’s shares than actually existed! It’s as simple as that! A hedge fund exploited an ancient instrument that enables it to sell shares it didn’t own, to sell more shares (that it didn’t own), than even existed! Yes, this is math that only adds up on one street, in one city, in the world; Wall Street.
But should we really be surprised? Wall Street firms are, after all, masters at creating money from nothing. So now the picture should be clearer. RobinHood is in a precarious position. It sees itself as an empowering platform but it is only empowering more people to play in the casino with the same old dealers.
We don’t know how many firms are doing this and to what extent. Given Wall Street’s track record we can’t assume that having been given a blank check book they haven’t written countless checks. Precisely the opposite. And this is why this story seems to never end. We have no idea how deep the rot goes. If deep enough, that rot could collapse the very foundation of an economy that was already weak before getting hit by a pandemic that is still ravaging us.
This financial system is clearly not working and whether it’s now or later, the house of cards will crumble. The question is whether we will have anything there to replace it. As I mentioned before, projects like Bitcoin and Ethereum, technologies like blockchain and smart contracts, were leaps in the right direction, but they haven’t been able to break into the mainstream because they are too slow, too difficult to use, and because they charge people fees for every little thing they do.
We’re building Koinos to solve those problems. It will be open, transparent, and decentralized like Bitcoin and Ethereum, but it will also be fast, easy to use, and most importantly, it will have no fees.
We believe this is the key to building financial systems that spread wealth, instead of creating poverty. Establishing regulatory bodies and institutions that are open instead of closed, and build systems that are transparent instead of secretive.
Despite the current circumstances, we are optimists who see a better future ahead of us that is bottom-up and people-powered instead of top-down with all the power concentrated in the hands of a small number of people working behind closed. In other words, a more decentralized future. We hope you’ll join us in our effort to turn that vision into reality.
Also published on Peakd.