The (Nearly) Impossible Challenge of Creating a Sustainable Economy (Part One)

Eurotrib -- financial profits chart
(Chart from )

Over the past year, JÈrÙme Guillet of the European Tribune has written an extensive series of articles about what he calls The Anglo Disease:

Describing the interest rates set by the bond market as the “cornerstone” for valuing equities and other securities, [Albert Edwards, Dresdner Kleinwort’s well-known global equity strategist] cautions that if the bond market has truly entered a new era of steadily rising long-term rates, “all investment portfolios will be shredded to ribbons”.

Increasingly cheap money, underpinned by ever more optimistic prognoses about inflation and, more generally, future returns on financial assets, has fuelled the massive financial boom we’ve been in for most of our lives and which has so transformed our economic landscape. By making high returns possible, it has generalised the requirement for such returns in all economic activities, and thus the need for constant restructuring of businesses, for cost-cutting, offshoring and, often, for the wholesale dismantlement of whole sectors of activity that could not generate the required profitability.

There is something happening here, and it’s been going on for a long time, driven by greed, political expediency, and a sustained and sophisticated campaign of misinformation about how a healthy economy is created and measured. It is quickly coming unglued, and the consequences of this deception are going to wreak havoc on us all for decades. It is possibly the greatest fraud and theft in the history of civilization. Here’s how it works:

  1. The government has to lie about the real increase in the cost of living, and the real levels of unemployment and misery among its citizens. This is in its interest, since admitting bad economic news is hazardous to politicians’ health.
  2. The government then has to artificially suppress interest rates, so that they, and corporations, can borrow money virtually free. As a consequence, since borrowing has no cost, there is no need to repay it; it can be refinanced indefinitely, and left for future generations to worry about. 
  3. To keep money supply high enough that it is freely available to all borrowers, the government needs to print masses of new money. To conceal this, it needs to stop reporting the true money supply, as the US government has done.
  4. To lock in foreign suppliers of cheap goods and services in struggling nations, the affluent nations need to develop co-dependent relationships with these countries, such that they are forced to accept payment in an essentially worthless currency.
  5. To lock in citizens, the government and large corporations need to work together to enable the large corporations to generate staggering profits, increasing by double-digits every year. So-called ‘free’ trade agreements, massive subsidies and tax breaks, the continued availability of essentially free money, deregulation, liability indemnification, allowing price-fixing oligopolies, union-busting and massive offshoring etc. all allow this. As a result, stock markets soar, and citizens (unable to obtain any return on risk-free investments while the real cost of living is rising by 7% or more per year) are forced to pump all their investments into these stocks, including their pensions.

So now you have all the players in the economy — corporations, governments, and citizens in affluent and struggling nations alike — codependent on this house of cards and its continuation. The chart above shows the results for the US — an economy whose profits are entirely paper, not the result of work or production of anything of durable value.

To get the idea, imagine a country where everyone sells insurance, and where, in order to get reciprocal benefits from others, everyone agrees to buy $100k worth of insurance from an insurance company every year. Imagine further that in this country the government prints an extra $100k per capita of money every year, and sets interest rates at zero. People borrow money, free, from the banks, and use the proceeds to buy shares in insurance companies, which, because everyone is buying so much insurance, are amazingly profitable, and generate enough profits to the citizens every year to allow them to import things of real value (like food, clothing, and oil). This is illustrated as follows:

funny money

In this idyllic country, the government prints $100k per capita each year (or borrows it abroad at zero interest rate), which costs it nothing. In return it gets $10k per capita in taxes, which it can spend to buy campaign contributors and votes to get re-elected, and/or to spend on their pet project (a war for conservatives, a social service for liberals). Doesn’t matter who’s in power, they’re happy.

The banks get this $100k at zero interest rate from the government, and loan it to citizens. They get zero interest, but they do get $10k per capita in service charges, late fees etc. So they’re happy.

The insurance companies get $100k in premiums per capita, and only have to pay out $20k in claims, so they can give their employees, the citizens, a little folding money, and pay huge salaries to executives, and still have so much left over that the shares leap in value on the market. So they’re happy.

The citizens get their small salaries, and the $20k in insurance payouts, and make $100k on the soaring value of their shares in the insurance companies, $20k of which they invest in additional shares (pushing demand and hence prices even higher), and $80k of which they spend on imported food, clothing, oil and other ‘consumer goods’. So they’re happy.

Everyone in this country is happy, and feels affluent, despite the fact no one is producing anything of any value whatsoever. No one wants to rock the boat, or know the truth about what is really happening. as long as everyone keeps believing this is a healthy economy, it can keep going. This is exactly what the top chart above portrays.

This lovely cycle is, of course, completely unsustainable. What is keeping it going now is that the foreign countries accepting the worthless currency of the US and similar non-producing affluent nations are utterly dependent on exports to the affluent nations to fuel their own fragile economies. If they, in Asia and the Middle East, were to insist on being paid in a currency or product with real value, or insisted on a reasonable rate of interest on their holdings in these risky, worthless currencies, the whole house of cards would collapse.

Likewise, if the investors began to realize that the Ponzi scheme that is the modern stock market was not sustainable, and started taking their money out of it, then the fictitious wealth created by the expectation of eternally-increasing double-digit rates of profitability would instantly dry up. In fact, if any of the five deceptions listed above were no longer accepted by citizens, the world would be plunged into an economic depression as serious as that of the 1930s.

As JÈrÙme Guillet puts it “it is not possible to generate 15% per annum returns on capital forever when the underlying economy is growing only by 3%”.

This is the precipice on which we now sit. We can either keep on perpetuating the deception, and fooling ourselves that it can go on forever, or we can try to transition our economy to one that is durable and sustainable and based on real value (and real values, like well-being instead of wealth). The latter would require enormous, sustained, coordinated effort to move the house of cards to a stable foundation, one card at a time, taking great care not to let the rest collapse.

In the second part of this article (within a week), I will lay out a scenario for how this might happen. It’s an almost impossibly difficult prescription, and it would require a great deal of honesty about what we have been doing wrong, including possibly putting the perpetrators of the deceptions in some place where they can no longer wreak havoc on our world.

To give you some hints, it would require a massive redistribution of wealth both within and between nations. It would require a complete rebuilding of local economies around production of goods of real value. It would be an economy built on knowledge sharing and know-how, not on funny money, or oil or other non-renewable resources. There would be no room in this economy for large hierarchical companies, the hoarding of wealth or knowledge, or acquisitions or divestitures that (as most do) inhibit competition and innovation and destroy value. It would be a hands-on economy where everyone’s time would be comparably, highly valued, and where people in the economy would collaborate because it makes economic sense, and produces better products, and makes work more fun. It would be a steady-state economy, with no growth (and initially, absolute reductions) in the amount of resources or energy consumed or waste or pollution produced.

We could get there, though I doubt we have the will or capacity to sacrifice and admit failure and work togetherto do it. Stay tuned for Part Two.

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5 Responses to The (Nearly) Impossible Challenge of Creating a Sustainable Economy (Part One)

  1. Chaitanya says:

    I agree completely that world economy is unsustainable from environmental point of view. And also agree that US is over-spending by borrowing money and thus passing the bill to future generations.However, this statement is intriguing:>>> The chart above shows the results for the US — an economy whose profits are entirely paper, not the result of work or production of anything of durable value. Hmm.. US is still, in many ways, the engine of innovation in the world. About 10 years back, i couldn’t have bought a book on the internet. Where are we now ? Who has produced all this technology ? US is still leading the world in knowledge based industries such as IT, pharma etc. Anything involving cutting edge research, US is involved. Perhaps the “manufacturing” data above is from old-economy industries such as steel, which naturally shifted to places like china which offer advantages to that industry. If you have a graph of IT profits, it will probably trump the financials industry. So, all this is simply following the path laid out by globalization. Industries are naturally shifting to places best suited to them. And US, atleast for now, has the edge in innovation industries. One can argue, for or against globalization, and about un-sustainability of economies from environmental perspective .. that’s a completely different argument. But, to say that US economy is completely running on good will and printed paper and ponzy financial schemes, is a bit of exaggeration.Another point. By printing excess money and lowering interest rates, the governments are infact doing “massive redistribution of wealth”. Inflation is the hidden distributor. People who borrow money from rich people get to pay back in depreciated money. And its getting very difficult for people with surplus money to keep up with inflation now a days. So, that in itself is a redistribution, don’t you think ?

  2. Prof. Goose says:

    Dave, Have you ever checked out Herman Daly’s guest post on “the Steady State Economy?” over at TOD:’s definitely on point. (sending you an email with the link too…)Hope you’re well!K

  3. Jon Husband says:

    There is something happening here, and it’s been going on for a long time, driven by greed, political expediency, and a sustained and sophisticated campaign of misinformation about how a healthy economy is created and measured. It is quickly coming unglued … Agreed … if one has been paying attention, it has been like watching a TGV roar by whilst knowing that three crossings ahead (not sure that there are any crossing on TGV lines, but I’m using it for the imagination ;-) there are two massive flatbed lorries and three schoolbuses full of people immobilized right on the tracks with no tow trucks anywhere within striking distance.We can yell and wave our arms all we want, but the massive train wreck is just gonna happen …

  4. John Goekler says:

    Hey, Dave:May I gently challenge your assumption that the necessary transformation of our lives and culture is about sacrifice, rather than joy? Changing the world is about changing our own perception of the possibilities. (Belief underlies behavior, yah?) Also, as Dana Meadows used to say, although unlimited growth is not possible (unless you’re a cancer cell), unlimited development (in the sense of maturity / improvement / progress) is.Best,John

  5. Siona says:

    “Also, as Dana Meadows used to say, although unlimited growth is not possible (unless you’re a cancer cell), unlimited development (in the sense of maturity / improvement / progress) is.”This is beautiful, John, but I respectfully disagree. I’ve sat with enough dying people to know that even the most wise and beautiful and psychologically mature and spiritually developed among us find our bodies and beings reduced eventually to unreliable systems of disrepair that eventually, inevitably fail. Even development is limited by our creaturely finitude.

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