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A Structural Change in the Global Debt Based Financial and Economic System

Economics / Global Financial System Jun 04, 2009 - 11:53 AM GMT

By: Submissions

Economics

Best Financial Markets Analysis ArticleBrett Jordaan writes: What politicians and central bankers around the world are either neglecting to tell us, or to consider, is that the current economic crisis, now a global recession and fast becoming a depression, is a result of a fundamental structural shift in the very makeup of the world economy. The credit crisis is widely accepted as the trigger for the current economic woes, but those who take a broad view of the world will see that our current predicament was actually years in the making, and ultimately, inevitable. As inevitable as the collapse of a house of cards, or the implosion of a Ponzi scheme. In fact, the global monetary system actually fits the description of a Ponzi scheme.


In your standard Pyramid or Ponzi scheme, those players that get in early are paid out by those that enter underneath them, who are in turn paid out by those that they recruit below them. Now from an objective distance, anyone with a right mind can see that Ponzi schemes are destined to fail, as their existence is predicated upon a continuous stream of players or “investors” entering the scheme with new money. From a simple perspective, if one considers that nothing is actually produced and no net benefit is gained through such a scheme, it becomes evident that they are doomed to collapse, almost intended to do so by design.

But Ponzi schemes have and do exist, and some have managed to prevail for a surprisingly long period of time, al la Bernie Madoff’s gigantic scam. In a staggering testament to personal greed and complacency, people became blinded in their pursuit of profit, ignoring the warning signs for well over a decade. This is a classic example of the human tendency towards cognitive dissonance.

Cognitive dissonance in terms of investing is a psychological term to describe the phenomenon whereby investors will change their memories to suit their desired outcomes. Thereby previous wins become exaggerated with importance and losses are either forgotten, or relegated to the unimportant far-flung corners of once mind. This is what has occurred in the public mind in accepting the legitimacy of the greatest, most pervasive Ponzi Scheme in all history; the current global monetary system. This is actually a number of inter-locking, interconnected Ponzi structures (the massive derivative bubble, the housing bubble, debt-financed national spending plans, etc), all underpinned and made possible by the existence of fiat currency.

Every fiat currency ( paper money that is not backed by anything except the “faith in the government”) in history since Roman times has failed, recent examples being the German Weimar Republic and of course Zimbabwe. It is clear that the world is increasingly losing faith in fiat currencies, as governments borrow ever greater astronomical sums to finance record deficits and central banks print ever greater quantities of paper, or “money” as it is currently called, to finance spending. This is evident in the surge in the price of gold , which is the only currency to maintain its value throughout history and was in fact the only value behind the strength of the world’s currencies until the final abolition if the gold standard by US president Carter in the 1970s. Since then we have embarked on a grand global monetary experiment, where no country’s currency is backed by anything tangible, except the “full faith of the government”, whatever that’s supposed to mean.

The current structure of the world economy is so unbalanced and unsustainable, it is a wonder that we have not entered into a crisis earlier. When one considers that the majority of the economies of the Developed West, such as US, UK and Western Europe, are driven by consumption, and those of the East through manufacturing and exports, the cause of the “recession” begins to become apparent.

The West consumes goods made by the cheap workshops of the East. But the West cannot afford to buy the East’s goods, so it borrows money in order to buy more. Take the world’s largest economy, the United States. Over 70% of U.S. GDP is attributable to consumer spending. In a nutshell, China manufactures cheap goods which are consumed in the U.S. and paid for by money borrowed from China. So every month, the U.S. govt sells IOUs (Treasury bonds) to China, enabling the US to buy more of China’s goods. Every month the U.S goes into greater debt and every month China saves more dollars.

The irony is that as the Fed (US Federal Reserve) prints ever greater sums of money (most notably recently through “quantitative easing”), China will be left sitting on a pile of steadily declining Dollars as the inevitable devaluation that results from oversupply of money takes hold.

China knows this and this is why it has been making calls for a new international reserve currency and has tripled its gold reserves in 8 years.

Another irony here is that this scenario is a mirror image of what has happened at a household level, where individuals have spent more than they earned each month, and borrowed to pay for it. The main source of financing was of course home equity, which entered a massive bubble caused by the creation of cheap credit (easy money) by the US Federal Reserve and central banks around the world. Households went on a spending binge on the crazed basis that home prices will always rise. Similarly, the U.S govt has entered on a spending binge on the failing assumption that the world will continue to loan it money and to demand continually devaluing dollars.

The U.S. makes little of real value, and it would have entered into serious recession to rectify this a long time ago, had the US dollar not been in the enviable position as the world’s reserve currency.

Now the engine of growth in the US and the West has seized, as the housing bubble continues its inevitable collapse and consumers logically reduce their spending to rational levels. People are actually saving, as the light of sanity shines some truth on the utter lunacy of continual throwaway consumerism.

Unfortunately it seems that sanity is incompatible with running a government and economy nowadays. The solution to our problem trumpeted by the US and other governments is…. More DEBT! Yes, we must borrow and spend our way out of this mess they say. Oh, and if we cannot borrow at a national level (because other countries are seriously starting to doubt lending us money), we’ll print more money to magically create wealth and go back to the good old days of borrowing to buy a lot of junk we just don’t need.

Now I find it very difficult to believe that Nobel prize-winning economists and the brilliant central bankers are experiencing such tremendous cognitive dissonance, that they actually believe that the current system can continue, or in fact be rejuvenated by more of the actual causes of this crisis. More spending and more debt, to solve the problem of excessive spending and excessive debt.

Is it just me, or are we being taken for a ride? Are the people in control deliberately sending us headfirst into an economic and social catastrophe in order to gain more power and take more of our feeedoms, or are they so incompetent that they do not see the writing on the wall?

We are in a structural recession. The global economy is structurally adjusting into a more balanced and sustainable system, one driven by savings and production, not borrowing and debt. Savings will finance investment in production of goods and services that actually provide a benefit to society and the biosphere. We live in a world of finite resources. Continual population growth, consumption and environmental degradation are not compatible with this reality.

Any attempts to turn back the clock, to return to that hitherto unsustainable status quo will just cause this transition to be more painful. The excesses of the past are gone and those that realise this and adjust their lifestyles and paradigms, will be the pioneers of the new age to come. It seems that we cannot trust our leaders to solve this problem, it is up to each of us to have the courage to face change, and embrace the opportunity it brings.

Best regards

Brett Jordaan
London, UK

Brett Jordaan is a qualified Chartered Financial Analyst and freelance writer.

© 2009 Copyright Brett Jordaan - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Marli Creese
05 Jun 09, 12:53
correction

It was President Richard Nixon who closed the gold window on August 15, 1971, not Jimmy Carter. Easily verifiable historical inaccuracies weaken your argument and undermine the hard currency cause.


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