The Boston Consulting Group (BCG), one of the world’s most prestigious consulting firms, is making waves by stating something that only a few marginal analysts, generally from the Austrian school, are saying : all developed economies have become giant Ponzi schemes (read the essay). The fraud consists in paying interests to the investors with funds provided by newcomers, which can only lead to bankruptcy, as shown by the Madoff affair, last example to date.
In the same way, developed countries have borrowed tomorrow’s riches to finance today’s consumption. According to the Bank for International Settlements (BIS), the total debt of governments, households and companies in the OCDE countries has grown from 160% of GDP in 1980 to 321% in 2010. And most of this debt has been used for financing consumption (bureaucrats’ salaries, household spending) rather than for infrastructure or investment. Most countries being in deficit, a part of their debt goes to... servicing older debt, which is the definition of a Ponzi scheme. On top of that, those countries are guaranteeing « entitlements » (retirement, health care) that are far from being funded.
In order to avoid this progressive stranglehold we would need some growth to pick up, but the public sector, being too heavy, hinders it. Rather, we are facing stagnation.
The BCG proposes some solutions to avoid this ruin, some that make sense (make the State more efficient, review untenable promises, invest in education and infrastructures), but a fundamental aspect is neglected in their diagnosis and their answers : the monetary situation.
Because, of course, none of this could have happened without this August 15, 1971, event, when the dollar, and thus the international monetary system, was disconnected from gold. Freed from this hindrance, these countries could let their public finances loose. Credit, now only based on promises instead of on real value, has ballooned. Money, which was based on gold, is now based on debt.
The answer to our actual crisis goes through a return to « sound » money. Not necessarily a gold standard, which would be too brutal, but at least we should let gold circulate as real money alongside the fiat currencies. Generally, we should favor any complimentary monies or currencies. Let’s demand that the interest rates be fixed by the market, not by the central banks, and that these central banks stop buying public and private debt. One might say that this is wishful thinking... but ‘tis the time of year, so let’s go for it ! And a happy new year 2013 !