By Philippe Herlin -
Researcher in finance / Contributor
to Goldbroker.com
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 !
