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
- Stock market indexes can creates an illusion of growth
- There is artificial growth in the value of finite resources such as real estate.
- Speculation amplifies artificial values.
- Further examples from other sources:
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.
Stock market indexes can create an illusion of growth.
Consider a national stock market. Most countries have a stock market, and at least one “index” tracking the “X” (40, 100, 200, 500 etc) highest valued companies. Almost without exception, every entry large enough to be included in the index, operates internationally or at least nationwide. Local businesses are not large enough to make the index, so entire classes of business are not represented in the index.
Every company on the stock market index, has as a market, the entire population of one or more countries. If that population increases, then simply be retaining market share, it is logical the company sales will grow. In other words, just retaining position results in growth, provide the population of the market grows.
Consider just the national situation as most companies on a given index, will enjoy greatest success in their home market. Now consider what happens as the national population grows. The wealth represented of the nation becomes shared across a larger population as the population increases, but the stock market is not indexed per capita, so the wealth of companies within the index arises from selling in an increasing market. This means, any increase in population should automatically result in a lift in share prices, but all else being equal, the shareholder base remains the same size, so those shares are then being held by a smaller percentage of the population, than prior to the population increase.
In a country with population growth, 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.
As the population grows, the ever smaller percentage of the growing population who are shareholders in the companies within the index, grow richer.
But what happens when there is a slow in population growth?
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. It turns out that for any 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 of real estate wealth per person, 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, the usually result is that each person, despite on average now owning only half the land relative to before the population increase, is considered to own a more valuable asset than before, as land becomes 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, typically of more than 2x the original value. In fact the faster such a country grows the population, the greater growth of the total national asset in real estate. Even when the actual amount of real estate available is unchanged. The exact same land, will simply become considered of greater value. 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!”
During such a real estate boom, the entire population can experience a rise in “wealth”. Unless of course, real wealth is measured in the amount of “real estate” a person holds. Consider a country with high population growth like Australia. The nominal value of “real estate” per person nationally has risen dramatically over the past 50 years, and at a rate much higher than the rate of inflation. However the average amount of land each Australian owns, has significantly decreased in this time. Does this represent a true increase in real wealth? As people need a home, while a person can get a lot for selling their home, they only get to keep that money by moving to a smaller home. Would that be a true increase in wealth?
The saga of decreased land per person yet valued ever higher despite the decrease, can continue while population growth continues. But eventually, population growth must end, and what happens then?
Buildings do increase in supply. But buildings are in effect manufactured, and as an asset 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 through population growth, is also a Ponzi scheme that collapses when the growth eventually ends.
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.