When it dawned on me that global economy is effectively a Ponzi scheme, it felt was a ‘light bulb’ moment’. But has anyone else seen this? I did an internet search and was not surprised to find that it has, indeed, dawned on many others as well.
If you do a search, as I did, you will find many insights into this topic and that there are several different ways the global economy can be seen as a Ponzi scheme. Scary!
Ponzi scheme aspects include:
- The central premise of the economy is perpetual growth
- The stock market automatically creates an illusion of growth
- There is artificial growth in the value of finite resources such as real estate.
- Speculation amplifies artificial values.
- We are living of finite resources unavailable to future generations: (climate progress, ,O’Reilly)
- The system of interbank loans is a house of cards: (washington post blog )
given that our economy is based on perpetual growth, I am sure there are others.
The Central Premise of the Economy is Perpetual Growth.
Anything that requires constant growth risks being a Ponzi scheme. Yet, the entire basis of our economy is growth, and continual population increase is at the core of creating the illusion of growth, even where there is no real growth. Others discussing this central point include: The Global Mail, Global Research.ca , infowars, RT America on you tube)
The principle of economics is that without growth we have recession and recession which is problematic. But how does the overall market continue to grow? Take for example wheat producers. Consider all the wheat producers added together and as a group our economy still requires them to grow revenues every year. Can you keep putting up the price every year? Turns out there is a limit. Can you get people to find new uses for wheat? This seems to have hit the limit long ago. But if there is simply more people every year, then sales can keep growing!
But if the global population was to drop, then every industry like wheat automatically must fall into recession.
The stock market automatically creates an illusion of growth
Consider a national stock market. Almost with exception every entry is at least exactly that: ‘national’. Every company on the stock market sells to an entire population. If that population increases, then it is logical the company sales will grow.
The wealth represented by the market is shared across a larger population as the population increases, but the stock market is not indexed per capita. This means any increase in population should automatically result in a lift in share prices, but all else being equal those shares now being held by a smaller percentage of the population.
Investors can be confident that on average the market will grow, simply because on average the population the companies on the exchange are selling to will grow. But what happens when there is a slow in population growth in developed countries?
There is Artificial Growth in Finite Resources: eg Real Estate.
Wheat (the example in the previous section) is a commodity where production can increase with increased demand, but there are some commodities where there are finite limits and supply simply cannot grow. But it turns out that for a commodity with fixed supply, like real estate, population growth can create an illusion of growth even when there is none.
Consider a hypothetical country with 1 million people. On average, each citizen owns one millionth of the own-able land. The national wealth in real estate is the average share each multiplied by the number of people.
But then the population rises to two million, meaning on average half as much land per person. Logically, this is half the wealth per person. But logic does not prevail! In fact, it is usually results in such a situation that each person, despite on average owning only half the land before the population increase, is considered to own s a more valuable asset on average, because land is now a scarcer commodity. The faster the population growth, the more pressure on supply of housing, the greater lift in value. So our hypothetical country now has the same total land, but simply because of the pressure population growth, this land has now become declared to represent a national asset of more than 2x the original value. In fact the faster such a country grows the population, the greater the total national asset in real estate. Even where the actual amount of real estate available is unchanged. So a country can simply ‘create wealth’ by ensuring a real estate market where supply is constrained. Of course the moment supply is adequate, there is a danger some one will realise “hey, in the end there is only the same amount of land there was back when we had 1 million people!”
But what about buildings, they actually do increase in supply? yes, but buildings are in effect manufactured and behave almost the same as cars. They depreciate, require maintenance, and with the exception of a few rare ‘classics’ must eventually be scrapped and replaced with a new one. Buildings are valuable, but in the long term in real measures they depreciate, rather than grow in value.
In summary, inflating the value of a fixed national asset such as land value, simply by creating a supply shortage, is also a Ponzi scheme.
Speculation amplifies artificial values.
Consider the above section on real estate. While population rise, prices will rise unless there is a way of increasing supply. Investors, predicting prices will rise, sometimes will buy an asset they do not intent to make any use of, simply because they can sell the same asset again later for a profit. Any time a substantial percentage of new real estate is being sold to investors with no wish to either occupy or lease out the property, then you have significant pure speculation, which also drives its own artificial shortages and keeps driving up prices.