Saturday, March 28, 2009

American Dream, Ponzi Schemes and Survival

Dear Readers,
After a magnificent rally in global markets this week, let us sit down and look at bigger things for a while. Stock Markets are a mirror of economy in general and economy of world has changed a lot in last century - from hard tangible currency, epidemics, Wars to central banks, fiat money, irresponsible resource (mis)use, latest products of financial engineering etc.

What is economy? Well, I am NOT going to tell you the text book definition here, actually, in my humble opinion, economy is the system of force by which people find ways to co-operate with others so that they can live better and improve the chances of their offspring's survival in future. If one understands this definition then he knows why it is so important for an economy to be sustainable in the long run (centuries / millenniums ahead). But, while mother nature is there to teach us lesson, father greed is always one step ahead motivating(?) us to find ways that could fetch us more and more.

The Global Economy:
For many decades Global Economy is running like this:
Manufacturers in some part of the world (say China) make goods and sell them to Consumers (say Americans). They, the Chinese, get dollars in return and lend those dollars to Americans (buying bonds). Then the Americans buy more Chinese products from those borrowed dollars... and the cycle goes on and on...

Then, add ecological dimension to it and it becomes like this (Quoted from an Article by Thomas L. Friedman of The International Herald Tribune):

"We have created a system for growth that depended on our building more and more stores to sell more and more stuff made in more and more factories in China, powered by more and more coal that would cause more and more climate change but earn China more and more dollars to buy more and more U.S. T-bills so America would have more and more money to build more and more stores and sell more and more stuff that would employ more and more Chinese"

Now, just looking at this system makes me feel sick as a human being. Is this sustainable? Definitely not and in fact it has already started breaking down as The Great World Depression is unfolding.

Now, let us play a quick game - look at the images below and guess where they were taken.

What did you say? some developing country? India? China? South America? or Africa? You are wrong. These pictures are from the Richest State of the Richest Country in the World - California of US of A. The American Dream! Unbelievable? well this is the actual news story taken exactly from The International Herald Tribune:

"FRESNO, Calif.: As the operations manager of a outreach center for the homeless here, Paul Stack is used to seeing people down on their luck. What he had never seen before was people living in tents and lean-tos on the railroad lot across from the center.

"They just popped up about 18 months ago," Mr. Stack said. "One day it was empty. The next day, there were people living there."
"U.S. cities deal with a surge in shanty towns
Like a dozen or so other cities across the nation, Fresno is dealing with an unhappy déjà vu: the arrival of modern-day Hoovervilles, illegal encampments of homeless people that are reminiscent, on a far smaller scale, of Depression-era shantytowns. At his news conference on Tuesday night, President Obama was asked directly about the tent cities and responded by saying that it was "not acceptable for children and families to be without a roof over their heads in a country as wealthy as ours."
(Please note that these pictures are taken from and are a property of The New York Times Company
You read those words of the Messiah - Obama. He says its unacceptable. Yes it is. All Americans should be ashamed on seeing those pictures. What went wrong? I don't know the details of those living in those tents but my guess is the habit of living paycheck to paycheck and zero saving might have something to do with them. In simple words - A consumer dependent economy can not make you prosperous. Period.

Now, dear readers, some of you must be angry with me. "What is the problem with earning and spending?" you may ask. Well, let me quote this June 15, 2005 news story from

"FENGHUA, China - Chen Hsien, an employee of Fenghua Ningbo Plastic Works Ltd., a plastics factory that manufactures lightweight household items for Western markets, expressed his disbelief Monday over the "sheer amount of [garbage] Americans will buy. Often, when we're assigned a new order for, say, 'salad shooters,' I will say to myself, 'There's no way that anyone will ever buy these.' ... One month later, we will receive an order for the same product, but three times the quantity. How can anyone have a need for such useless [garbage]? I hear that Americans can buy anything they want, and I believe it, judging from the things I've made for them," Chen said. "And I also hear that, when they no longer want an item, they simply throw it away. So wasteful and contemptible."

Even the person who happens to get direct benefit of this reckless American consumers' habit can't believe the irresponsible behaviour of The Consumers! This is what happens when you have easy money in the form of credit and various asset price bubbles (like housing, commodities and stocks).

The Ponzi Schemes:
You must be aware of the recent Madoff Scam, a Ponzi Scheme which runs on the theory that part of money taken from future investors is given to past ones as returns instead of earnings. and part of it pocketed. What happens is that the starter of this scheme continues it till the time there are no more new customers / investors available. In essence the scheme fails because its not economically viable as "earnings" are less than the payments because it requires ever increasing flow of money from investors in order to keep the scheme running. History is evident that all such schemes result in ultimately hitting the wall and going bust.

Now, look at the current global economic model, the crisis and then the way Feds and Govts are handling it. First of all the model itself is not sustainable. It had to to hit a wall and it hit it when house prices started falling in prices in the US of A. Now, the Feds and Govt there have only one solution in their minds - let us reflate asset prices with more of fiat money so that it gets going again. They are saving the wrongdoers (the lenders and the borrowers both) by robbing the ones who saved their hard earned money for a rainy day. What they are basically doing is trying to salvage a breaking down Ponzi Scheme. Will they succeed? yes, but only in postponing it (and the more they are able to delay it, the more the crisis will grow in size). "Bailout" is the word that rules mainstream media these days. Bailouts of failing entities is the magic mantra they think. But, bailouts are against nature and natural forces. They do not calm down Mr. Market but instead make him angry. Anyway, what if we don't have any option called "bailout"? Read the next section...

If you thought the above mentioned Ponzi Scheme is the ultimate one, then you are wrong. Well known physicist and climate expert Joe Romm writes blog and this is an interesting piece from his post "Is the global economy a Ponzi scheme?"

"In our case, investors (i.e. current generations) are paying themselves (i.e. you and me) by taking the nonrenewable resources and livable climate from future generations. To perpetuate the high returns the rich countries in particular have been achieving in recent decades, we have been taking an ever greater fraction of nonrenewable energy resources (especially hydrocarbons) and natural capital (fresh water, arable land, forests, fisheries), and, the most important nonrenewable natural capital of all — a livable climate.

The system is destined to collapse because the earnings, if any, are less than the payments."

He adds, "Knowingly entering a Ponzi scheme, even at the last round of the scheme, can be rational in the economic sense if a government will likely bail out those participating in the Ponzi scheme."

But, here is one catch - Mother nature doesn't do BAILOUTS. So, once this Ponzi Scheme hits the wall, there will be no option but to surrender.

1 comment:

  1. cool my dear, this is just perfect story of the day, i just took some excerpt to match with one of my story:

    Are stocks bouncing back?

    and its a great story, keep up the good anyalsis


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