Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Friday Stock Market CRASH Following Israel Attack on Iranian Nuclear Facilities - 19th Apr 24
All Measures to Combat Global Warming Are Smoke and Mirrors! - 18th Apr 24
Cisco Then vs. Nvidia Now - 18th Apr 24
Is the Biden Administration Trying To Destroy the Dollar? - 18th Apr 24
S&P Stock Market Trend Forecast to Dec 2024 - 16th Apr 24
No Deposit Bonuses: Boost Your Finances - 16th Apr 24
Global Warming ClImate Change Mega Death Trend - 8th Apr 24
Gold Is Rallying Again, But Silver Could Get REALLY Interesting - 8th Apr 24
Media Elite Belittle Inflation Struggles of Ordinary Americans - 8th Apr 24
Profit from the Roaring AI 2020's Tech Stocks Economic Boom - 8th Apr 24
Stock Market Election Year Five Nights at Freddy's - 7th Apr 24
It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- 7th Apr 24
AI Revolution and NVDA: Why Tough Going May Be Ahead - 7th Apr 24
Hidden cost of US homeownership just saw its biggest spike in 5 years - 7th Apr 24
What Happens To Gold Price If The Fed Doesn’t Cut Rates? - 7th Apr 24
The Fed is becoming increasingly divided on interest rates - 7th Apr 24
The Evils of Paper Money Have no End - 7th Apr 24
Stock Market Presidential Election Cycle Seasonal Trend Analysis - 3rd Apr 24
Stock Market Presidential Election Cycle Seasonal Trend - 2nd Apr 24
Dow Stock Market Annual Percent Change Analysis 2024 - 2nd Apr 24
Bitcoin S&P Pattern - 31st Mar 24
S&P Stock Market Correlating Seasonal Swings - 31st Mar 24
Here's a Dirty Little Secret: Federal Reserve Monetary Policy Is Still Loose - 31st Mar 24
Tandem Chairman Paul Pester on Fintech, AI, and the Future of Banking in the UK - 31st Mar 24
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

When The Economy Went Ponzi

Economics / Economic Theory Oct 13, 2014 - 06:34 PM GMT

By: Andrew_McKillop


Adam Smith and the Ponzi Economy
Like the archetypal images of love that were handed down by early Greek philosophers, of Erotic love, Parental love, and what later became Christian or Dutiful love towards fellow persons and living things of all kinds, the supposed “classic image” of the economy is the “Wealth of Nations”. Taken by the “Neolibs” of the 1980s and their surviving throw-offs as a timeless ode to invisible but all-powerful “market forces”, this classic model was handed down by their guru – Adam Smith.

The problem is that his economic model was drastically simple. With his mentor the shadowy quack doctor Francois Quesnay, who “advised” Marie Antoinette at the court of King Louis XVI shortly before the French Revolution, both Quesnay and Smith said that all service sector activities are parasitic. They produce no wealth and only shuffle it around. When the parasites start printing shares and printing paper money like John Law did for Louis XVI's father, things get even worse.

The service sector is totally parasitic, said Smith. Today in the “mature economies” of the western societies typically 70% to 80% of all employed persons work in the service sector.

For the 1980s Neolibs it was urgent not to know this! They needed a mentor like Adam Smith needed a mentor.  All they had to do was simply turn upside down anything he said, so the Neolibs frenetically attacked all productive industries in a riot of de-industrialization and outplacement, paying for Chinese-made imports of industrial goods with debt and hoping that inflation will grow. To punish savers and reduce the real cost of debt by cheating creditors, paying them back with devalued money.

The entirely parasitic Ponzi finance service sector became the star player of the economy. Didn't Adam Smith say that was the right thing to do? Not at all.

The 18th century “Libs” said that the real wealth of nations is produced only by savings and by investment in fishing, hunting, farming, mining and related manufacturing. Put another way, if 70% of all employed persons in the developed economies were turfed out of their jobs tomorrow, and dumped in the memory hole of permanent unemployment, the economy would – according to Smith and Quesnay - probably work just as well, or badly as it previously did.

De-learn Re-learn Nothing
The fact that today's real economy is dominated by service sector jobs, and the financial economy is dominated by playtime gambling - was a politically-inconvenient fact for the “Neolibs” of the 1980s and their surviving apologists today. In the 1980s, it was immediately de-learned and unknown by them as they proclaimed a “supply side revolution” of the economy. Indeed, in the British case of Margaret Thatcher's neolib revolution one of her first actions was to almost totally shut down British coal mining, with plenty of North Sea oil enabling her to do it  – airily proclaiming that the redundant miners could “go out and clean windows”, a classic service sector activity! The miners were however a little better off than Britain's youth unemployeds of the time, who were sternly told by Thatcher they had No Future. They could crawl away and die in the gutter, 18th century style!

The neolib “revolution” heavily featured financial shenanigans - the Ponzi finance “industry” - which is entirely a tertiary or service sector activity, and wholly parasitic. Thus the supposed intellectual basis of the “new economic liberalism”, of the 1980s was a mutant concept from the moment it started down its rocky born-to-lose path to the nowhere of the 2008 financial crisis. After that, we moved on from No Future to No Economic Future.

When the “neolibs” said productive industry they meant service sector activity. When they said supply-side they meant the society of consumption – demanding industrial products made in China. Put another way, their “revolution” was confused, hypocritical and totally unrelated to the real world.

Not being able to know how the economy works was new normal -  because it became a Black Box, literally Deus ex Machina or a magic thing which surges from nowhere, with nobody in charge, nobody responsible, and only answerable to its own arcane laws and principles – for example as Janet Yellen and Mario Draghi tell us almost daily, that deflation “is bad” and inflation “is good” and that the central bank money printing presses must operate full-tilt, showering almost-free betting chips on the 24/7 stock exchange casino. Which “discovers value as well as creates it”. Prosperity for all!

In Debt We Trust
Kevin Phillips is well-known for his focus on what he calls “the scary intersection of oil, debt, and religion” in what he says is an emerging “economic theocracy”. Like the title of one of his books – Bad Money – when this is added to Big Debt things are not going to work out fine. His key theme is that the financialized economy is a dangerous epiphenomenon, creating only speculative froth and producing little or nothing real, a symbolic and parasitic wealth play with its own high priests, that hinges on more than simple public tolerance.

Public ignorance is as vital as public credulity – maintained by the elite-serving mainstream media. The party cannot go on unless the people credulously believe in the Black Box economy – and are maintained in a disinformed state bordering on pure childlike fantasy, where firstly they do not know what is really happening, and secondly become unable to know. They fatuously believe that the crony elites who they tolerate so easily – because of their wealth – are “muddling through”.

At one and the same time, shown by-so called algorithm trading, derivatives, Dark Pools. Libor rigging  and HFT or high frequency trading, the high priests of finance have placed themselves behind a wall of arcane techniques and technology hiding their corruption and 24/7 market rigging. Ordinary persons are unable to understand how it all works. What happens in and on the financial markets is therefore now unknown to most people. In strictly logical terms, which do not apply here – and only apply at times of stark collapse of fake “value” on the financial markets - not knowing things should make it hard to believe in them.

Phillips and others argue that transforming the economy into a “black box' is closely related to the substitution of democracy, by a modern form of economic theocracy operating a debt based economy relying entirely on “confidence”. Like any Ponzi-Madoff scheme, any kind of belief will in fact do as long as its credulous. Whether it is partly-rational or purely ritual is not important - the public must stay stupid and confidently believe – not just believe.

Phillips started his professional life as a political strategy adviser to Richard Nixon and shares several  similar life-changing, and belief-changing experiences with David Stockman, the former national budget director of Ronald Reagan, and others such as the former US trade official Paul Craig Roberts. They are all called “right-wingers who shifted to the left” and all of them have a scarcely disguised contempt for today's political establishment and its total interdependence with “late-stage crony capitalism”. For Philips, what has happened in the US and other so-called mature democracies, and their so-called “liberal capitalist” economies over the past 30-odd years is easy to see as a frenzied get-rich-quick New Religion with its own “Ponzi laws' relying solely on childlike belief.

Forget About Democracy
The economic theocracy strictly avoids and rejects rational knowledge, and operates only on belief.
Kevin Phillips, like David Stockman and Paul Craig Roberts basically say the USA “got religious” but the new religion is Bad Money and Big Debt, which will never be repaid. They all agree that the financial system or “industry” is a giant Ponzi scheme, but like power in any theocracy – whether it is The Vatican, Saudi Arabia, Israel or Iran – the people have to go on believing. They must abandon rational knowledge, but must never abandon credulous belief.

Democracy has no place in an economic theocracy. The erosion of democracy and rule by incompetent and corrupt Me Too governments run together like hand in glove. Knowledge of governance or the democratic process and its institutions is largely unknown to a majority of ordinary western citizens today, but their “instinctive belief” in democracy and their “confidence” in the economy must be maintained for the party to continue, but, Pjillips and other say that the Ponzi scheme of national debt and money printing is only a meta crisis or the metastase of a deeper cancer inside the “body politic”. It was only possible because democracy failed and government was “out to lunch forever” on a meal ticket supplied by the crony capitalists.

In reality, democracy was the first victim of the process. In western society, it became unknown as far back as the 1980s. The process of governance progressively became “fuzzy-edged”. The two party system became Tweedledum and Tweedledee politics. A thickening fog rose up on the winding and rocky path to We Know Not Where. For the so-called mature liberal democracies we now have No Government in any serious sense of the word, and this alone is not a metastase but a mega-crisis.

The more extreme members of the neoliberal priesthood said the Free Market would magically replace all previously known forms of governance. There would be no need for the people to know anything about government. Citing one-liners of Adam Smith and David Ricardo of 200 years ago, they claimed that democracy would be swept away and forgotten. In the post-liberal democracies, they said, rulership would be “aristocratic” or “regalien”, and would directly appeal to Humanity's natural aristocratic instincts and abilities. This new form of government would decide spontaneously – exactly like “the markets” -  with no need for rational knowledge. Chaperoned by “the markets” acting like a Good Fairy in a seamless web of corruption and confusion, all tiresome rituals of elections and parliaments, laws and regulations would be struck down. Nirvana, for crony capitalism!

The antique trappings of democracy would disappear like mildew on a damp pair of shoes taken from a dark cupboard and brought into the sunshine. To be sure this was plain and simple millenarianism with a nihilist flavor, as in Medieval Europe's witch hunts and in non-western “primitive societies”, or in a gory and barbarous form, the Islamic State in Syria and Iraq.

Transforming The Economy and Society
The major roles of collective mass amnesia and the rejection of knowledge-based rationality were clear. These were the real pillars of the so-called New Economy and the so-called New Society. When the “neolib” soothsayers rode high, in the early 1980s, the two arch-est priests of the new religion, Britain's Margaret Thatcher and the USA's Ronald Reagan gave serial press conferences to explain and describe their Great Transformation. With po-faced, popeyed sincerity, sometimes tinged with hysteria, they would outdo each other. Margaret Thatcher arguably did it best. She repeatedly declared:  “There is no such thing as society” and governments are only needed for societies. If there are no societies ergo we do not need governments, but just on an interim basis supreme leaders like the Cockeyed Duo would hang around to lead the people – to Nowhere.

Almost insanely however, at the exact same moment in time, the image of “the knowledge-based society” was being assiduously promoted. Science and technology were on the march. The Internet and personal computer or PC revolution was coming but here again the incredible hypocrisy of the western elite was on show. Society and its values can be thrown away like a used Kleenex. But we are proud to have a knowledge-based society!

Philips and other critics of the New Religion of Greed point out that something grave and somber happened to government, and even the notion of government, starting in the 1980s. To be sure this can be analyzed and attributed by many authors to some form or type of “crisis of capitalism”. Continuing with that approach, Western and  American capitalism hit a pivotal period in its history, and capitalism – always ready for a gamble - ventured a new and risky play. Firstly, the economy was “financialized” as Old Stuff like the mining and the manufacturing industries of Smith and Quesnay were dumped as “unclean and unsuited” to the great transformation. Then the debt handle was turned, very fast, to shower the capitalist casino with new gaming chips. Next, the housing and stock markets were “democratized” making them a 24/7  firework show of greed or “price discovery” and “new value”. The next market crash was set in stone – but of course further down the line.

However an alternate analysis is that society “cracked” and lost faith in knowledge. The loss of interest in, and the abandonment of, democracy were only a later metastase of that original cancer. This pivotal change almost certainly happened some while before the 1980s – possibly the shock for western society of the 1975 Vietnam war defeat of the USA or the oil shocks of the 1970s. Possibly there had been a cumulative phenomenon of the type that some climate scientists pretend is in store for us, as CO2 levels build to a fatal “tipping point” after which there is no going back for global warming and the Heat Death of the planet.

For the economy, its “system architecture' was transformed, placing the financial industry atop the Mayan pyramid of greed with its frenzied priests slashing at the sacrificial victim – the Old Economy - brought to slaughter by Ponzi finance capitalism. The invention of the hedge funds in the late 1960s, based solely on speculation, may have been another tipping point.

Periodically and even cyclically, the shaky edifice of Ponzi finance and crony capitalism will collapse, and 6 years after the 2008 crisis started, the time is uber-ripe.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2014 Copyright Andrew McKillop - 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 advisor.

Andrew McKillop Archive

© 2005-2022 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in