Ending the Ponzi Era

You recall Bernard Madoff? He built his imperium on a castle in the air, a so-called Ponzi-scheme (named after the famous fraudster Charles Ponzi)

Do you get the feeling that the whole world economy resembles Madoff or Charles Ponzi? Then you should have a closer look at The Boston Consulting Group’s report “Ending The Era of Ponzi Finance”.

The last decades, since WW2, debts have just just risen, notably after 1980s. Households, governments and the private sector; all are heavily in debt. The total debt in OECD countries rose from 160 percent of GDP in 1980 to 321 percent in 2010. Taking on a loan to invest in additional growth is not wrong (however, more about my thoughts on constant growth to come), but lately most of the debts have been used to consume, speculate, or even worse, to pay off other debts and interest. When every borrowed dollar only produces 18 cents in new GDP (same figure was 60% in 1960) – which idiot will have to be persuaded to pay at the end?

The large economies are already heavily leveraged.

Add to that:

1. aging population where fewer workers will support welfare promises

2. reliance on cheap, infinite commodities. We know commodities are not infinite.

The whole Ponzi-scheme is about to fall apart. BGC in its report gives 10 advices for the governments to deal with. No popular measures to win an election, but the harsh reality we are facing.

  •  Deal with debt immediately. Realize that not all debts can be paid off.
  • Reduce welfare promises. Higher retirement age, lower benefits and more efficient health care system
  • Increasing government efficiency. Less administration and fewer employees.
  • Prepare for labor shortage as the population is aging. Which leads to;
  • Develop smart immigration policy. The western world needs more, not fewer people from other countries to compensate for the skewed demographics.
  • Invest in education.
  • Invest more in infrastructure and other assets which will contribute to growth. Companies should invest more in the Western world and re-shore production and services.
  • Increase the efficiency of the use of raw materials. Energy and resource efficiency.
  • Global alliances, even as competition increases. Destructive competition will harm everyone.
  • Go in for entrepreneurship and innovation.

Full report from BCG here





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