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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
!
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