Warren Buffet famously said, “Only when the tide goes out do you discover who’s been swimming naked.” The point of this metaphor is that in economic downturns you learn who has been taking excessive risks. Another way of putting it is that in easy times, everyone can be a hero or a genius. This has been the case for the American financial system for over thirty years. As long as credit money kept expanding, everyone had a chance to look like a financial genius.

This explains the prevalence of people in the financial media who somehow get everything wrong but maintain their status as experts. The most notable of this sort is Jim Cramer who has made a career out of being outlandishly wrong. Paul Krugman wrote a column for years about the economy, despite never being right about it. These are two famous examples, but the commentariat is littered with these types. As long as the arrow kept going up, being wrong was good money.

The trouble is that the entire financial industry is built on this premise. Being wrong comes with no penalty, because wrongness rarely comes with a cost. Sure, the MegaBrain Capital Fund might not perform as well as random guessing, but because the arrow always goes up, even the bad bets pay off. This also means anyone spouting random gibberish can present himself as an expert. Tens of thousands of mortgage payments, maybe hundreds of thousands, rest on this assumption.

The main reason for this, of course, is the United States has been both the global mint and the global bank since the 1980’s. You can see it in the markets. From 1985 to the present, the DJIA has increased by about nine percent per year. That includes the many busts that were backstopped by the global bank. From 1965 to 1985 the markets suffered a long bear market, after the long twenty-year bull market that kicked off after the end of the Second World War.

Another way to think about it is the American stock market boomed by about ten percent per year when the rest of the world was in rubble. Europe was literally in rubble after the war. Much of it was controlled by communists. China was a feudal, agrarian society trying to implement Marxist-Leninism. Japan only stopped glowing after that long bull market ended. In other words, the American economy and the equities markets had a great run when there was no global competition.

Somehow, as if by magic, equities had a run like the post war decades, despite the hollowing out of the economy. The run has also been longer. The twenty-year post-war boom ran out of steam even though Asia was not online yet, just because Europe was starting to recover. We have experienced a forty-year run while at the same time the American economy transitioned from inventing things and making them to driving each other around in Ubers.

It turns out that if the mint can make as much money as it likes, being the only mint on earth anyone values, and they give what they mint to the only banking system anyone values, the people in this system can do no wrong. For decades it has been like being at a casino with an endless line of credit. Not only that, but the dealers would also occasionally give you some insider information on the decks. It is not hard to look like a genius when you are playing with house money.

That world is coming to an end. The shock therapy we are seeing is not just a bluff to get better tariff deals. It is in anticipation of the fact that the world is shifting from where the dollar dominates all global trade to one where local currency arrangements will often be preferred over the dollar. If you want to buy from China, it will mean doing so in their currency, not dollars. The same is true for other major trading countries. The Russians have been the proof of concept for this approach.

This does not mean the dollar collapses or people revert to carrying sacks of gold while riding to town on their donkey. The primitive use of shiny bits of metal as currency only comes back if we enter a dark age. What is happening instead is a change in how the world views dollars and more importantly, dollar denominated debt. That means the days of unlimited credit money is coming to a close. The dollar and dollar denominated debt will reconnect with the American economy.

This is all bad news for the flim-flam men who dominate the financial services industry as it means being wrong once again comes with risk. The bad bets from MegaBrain Capital Fund no longer just mean a lower return. Those bad bets now put the firm in jeopardy and get the smart guys fired for making those bad bets. Swimming naked will now come with the risk of the tide going out and staying out. Like the fox in the hen house, risk is returning to the money game.

What is about to happen to the financial sector is like what we see happening with the government sector. The tens of thousands of people who do not do anything necessary will be let go, and that includes the experts in the media. In a world where risk is real, no one will tolerate a television clown dispensing bad advice, unless he is in a fright wig and wearing floppy red shoes. The clowns will back in the circus while the serious men do the serious work.

This is the end of America’s long holiday from reality. Playing make believe in government, finance or the media is no longer possible. Making money will not be about finding clever ways to get that sweet sweet credit money, but about inventing things, improving things and making things. That will not leave a lot of room for diversity experts or chattering skulls. Those people can be put to work in the new factories and repair shops, perhaps sweeping the floors.

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