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 !