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Is the Stock Market a Global Ponzi Scheme?

Well, everything seems to be back to normal on Wall Street after a rocky start to the week. So what happened? Are we OK?

We’re certainly back to “normal” if your idea of normal is mass delusion. For a couple of days we got a brief glimpse of what’s really happening to the global economy, and then everyone went back to fantasyland. So yes, we’re “O.K.” – until it happens again. Which it will.

Here’s what’s going on to the best of my understanding:

Six years ago, shortly after the stock market crash of 2008, Tom Friedman, a generally mainstream proponent of globalized markets and economic growth, wrote a thoughtful New York Times column in which he asked:

What if the crisis of 2008 represents something much more fundamental than a deep recession? What if it’s telling us that the whole growth model we created over the last 50 years is simply unsustainable economically and ecologically and that 2008 was when we hit the wall – when Mother Nature and the market both said: “No more.”

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 …

Friedman had been talking to climate expert Joe Romm, who’d told him that “we have been getting rich by depleting all our natural stocks – water, hydrocarbons, forests, rivers, fish and arable land … This is a Ponzi scheme.”

But soon after the panic and crash of 2008, the Ponzi scheme simply dusted itself off and launched into one of the longest bull markets in history, with everyone dancing along to the tune of “endless growth.” “We have been getting rich by depleting all our natural stocks – water, hydrocarbons, forests, rivers, fish and arable land. This is a Ponzi scheme.”

What’s been keeping it all going is China buying up raw materials from all over the world in order to build vast numbers of still-empty buildings and infrastructure, and to produce more stuff for the world’s wealthiest and most debt-ridden nations to keep buying.

In his column, Friedman also quoted Australian environmentalist and business consultant Paul Gilding, who warned him that we would look back on the crash of 2008 as a “momentous year in human history … the year when the Great Disruption began.” Two years later, in 2011, Gilding published his book The Great Disruption, in which he wrote:

The global economy is now bigger than the planet, and that means the economy at some point will stop growing. Whether that was 2008 or is still to come in 2012 or 2015 is of historical interest only. It is certainly going to come … It will be 2008 on steroids with volatility and a mad scramble for diminishing resources.

We’re going to drive growth up against the wall again and again, and it’s going to hurt.

This week we hit one of Gilding’s walls, and we’re now scrambling to put the global Ponzi scheme back together again. But we’re going to keep hitting more walls and bigger walls until we just can’t go on keeping putting it all back together any longer.

Gilding calls it a “cycle of denial.”

Growth is deeply ingrained in our global political, economic, and cultural systems … So even when growth stops, we will try hard to get it moving again, as we did in 2008. As a result, we will see growth return and then we’ll argue, “See, we can still grow!”

Then we’ll hit the wall again because of the ecological damage and resource constraints that growth creates, and we’ll bounce off the growth limits and shrink again. Each time we’ll argue it was some other cause and we can fix it with a narrowly focused solution.

He points out that while climate change is certainly an unfolding catastrophe, we need to look a bit deeper:

The problem is not climate change. That is just a symptom. The problem is the delusion that we can have infinite quantitative economic growth, that we can keep having more and more stuff, on a finite planet. We cannot, and that is just a fact.

… It is delusional to believe we can keep growing a materially based economy without hitting the physical limits of the planet. You can debate the precise timing, but not the basic principle. An infinite growth economy on a finite planet just doesn’t add up.

Right now, as a caller on the Diane Rehm Show pointed out on Tuesday, global debt stands at around $230 trillion and is growing every minute. Total annual output, on the other hand, is $75 trillion. So debt is now at 300 percent of annual output, and virtually every country in the world is increasing the debt either through sovereign debt or commercial debt.

And that’s just our debts and loans to each other. It doesn’t include the real debt, the debt to Mother Nature, to the oceans and the forests that we continue to ransack, and the mines we dig for coal and oil and rare minerals to sustain our lifestyle. In terms of our debt to the planet, we’re totally bankrupt.

As China’s growth has begun slowing down, it’s stopped importing so much of the steel and soybeans it’s been getting from Brazil (where they have to cut down yet more rainforest to grow yet more beans), the iron ore and coal from Australia (which had invested optimistically in a huge infrastructure to streamline its mining operations), the beef from Argentina, and, most of all, oil from around the world.

In terms of our debt to the planet, we’re totally bankrupt.That left oil prices tumbling to below $40 a barrel this week, which may feel like a good thing at the gas station but it’s bad for countries like Saudi Arabia, Iran and Russia that can’t balance their budgets without selling oil for at least $100 a barrel.

All of which creates yet more global instability.

In July, as Chinese stocks were collapsing, the Wall Street Journal reported that the “state-owned China Securities Finance Corporation has been spending up to $29 billion a day to try to stabilize stocks.” No one knows exactly how much more the government has poured into the stock market there in the last few weeks, except that it must be a staggering amount.

But the New York Times quotes financial strategist Albert Edwards as saying that “once you encourage an equity bubble, it will collapse and then you are really in trouble. This was utter madness.”

All in all, the global growth monster is now completely out of control, desperately trying to survive by raping and plundering whatever remaining resources it can from the planet.

The Powers That Be will keep working furiously to put Humpty Dumpty back together, as they appear to have managed to do this week.

But, like every Ponzi scheme, this one, too, is on the edge of collapse, and the whole rotten system is now entering the last act of its tragic drama of human greed and hubris.