Like most British expats, for the last few weeks I’ve had an unhealthy interest in UK politics. (Unhealthy because I’ve chosen not to live there, so it’s really none of my damn business, but I still can’t help getting involved, and even went to the great lengths of registering for – and using – my expat vote in Thursday’s General Election.) After such a disastrous result on Thursday, my friends and I have been picking it apart in long discussions on FaceBook, and trying to figure out how the British public have managed to vote for completely the opposite of what they claimed they wanted. It certainly wasn’t due to the quality of the Tory campaign, or David Cameron’s charismatic personality (in my opinion, he has about as much charisma as a slug), but mostly down to a shockingly poor pre-election performance by Labour.
But what does this have to do with Ponzi schemes?
Well, the discussion got a bit more involved, and we started analysing our own, and each other’s, political views. And we found out something quite interesting. Not one of the main parties comes close to representing what our (admittedly small) sample of the mostly not-very-British public wants.
A few months back, I completed the questionnaire on the Political Compass website. (It only takes a few minutes to do, and it’s quite eye opening.) I shared the questionnaire today, and a few of my friends did it and got interesting results, so I thought I’d do it again to see if my results had changed. They had only changed a little!
What’s interesting about it is that most people saw this, and thought I was heading towards Communism (which is totally not true because Communism as it was practiced in the Soviet Union is an authoritarian form of government), and one of my friends joked that “in a Capitalist world you’re kind of screwed.” I said, in a Capitalist world we’re all screwed, but they’re not quite ready to know what I meant.
I come from a very right wing, Capitalist family. In my first General Election, I actually voted Tory, and was glad when they were re-elected. By my next Election, I had started to think for myself, and tactically voted for Labour. By my late 20s, I’d heard my father talk about the need for a business to “grow itself out of trouble” too many times, and I had started calling my family the filthy Capitalists. (To their faces, and in semi-jest, I should add. They were coming to accept that we would never see eye to eye on such things as politics, business and finance.)
At the age of 26, I read a book called The Last Hours of Ancient Sunlight by Thom Hartmann and, although its message resonated with me, I wasn’t quite ready to hear it then, and I didn’t have all the pieces to make sense of the puzzle. Another 5 years later, I read The Party’s Over: Oil, War and the Fate of Industrial Societies by Richard Heinberg, and the pieces finally fitted together. The Capitalist Ponzi scheme was laid bare, and my days of blissful ignorance were over.
What is a Ponzi scheme, exactly?
Ponzi schemes are named after Charles Ponzi who, back in the 1920s, contrived a plan to make his fortune buying and selling International Reply Coupons. IRCs were used to pre-pay return postage, and could be redeemed in any country for the price of postage to another country. Of course, the price varied from country to country, so Ponzi’s idea was to buy them somewhere postage was cheap and redeem them where postage was expensive.
It seemed like an excellent idea, and he started contacting friends and offering to double their money in a short time if they invested in his scheme. Everything went well, and the scheme grew … and grew … and grew … with more and more investors, coming in with more and more money. Within a few months, his enterprise had turned over hundreds of thousands of dollars.
Unfortunately for Ponzi’s investors, the amount of money being moved around was far more than could ever be made on the trade of IRCs, so he had practically given up on them altogether. Instead, he used the incoming investments to pay his older investors.
This was fine at first, because there were plenty of new investments coming in, but it couldn’t go on forever. Ponzi was promising to double investors’ money in 90 days, so every 90 days he required the amount of new investments to double. Of course, that couldn’t go on forever. There’s only so much money, there are so many people (so many potential investors) in the world. Ponzi’s scheme required exponential growth in a closed system and it was eventually destined to collapse.
It was never allowed to get that far. The authorities saw what he was doing, and closed him down. Ponzi spent several years in prison, and his final investors got back less than 30 cents for every dollar invested.
What does this have to do with Capitalism?
Like Ponzi’s investment plan, Capitalism requires exponential growth. (You’ve probably heard politicians and financial experts talking about the importance of growth to the economy.)
Back in the days of the Gold Standard, where each country’s printed currency was linked directly to the amount of gold stored in government vaults, growth was entirely dependent on the discovery of new gold reserves. If the Bank of England, or the Federal Reserve, wanted to print some more money, they had to have the gold to back it up. Paper currency was nothing more than a claim on gold, and anyone could take their currency to a bank and demand to have it exchanged for gold.
As new gold discoveries slowed, which they tend to over time – all discoveries of resources slow over time, because there’s only a limited amount of any resource on the planet – this presented a problem to the banks. They had developed a system of adding new paper currency into circulation by loaning it into existence. The Fed, or the BofE, distributed currency to the smaller banks, and the banks issued loans to customers, which were to be paid back at a specific rate of interest.
When the rate of new gold discoveries became less than the growth rate required to match the interest on loans, the Gold standard was abandoned, and a currency printing free-for-all took its place.
In reality, the rate of currency printing has to be linked to something, and this has become the overall rate of growth in the economy – the amount of stuff being made and sold, and the energy used to manufacture and transport it. As long as there are more goods being manufactured and sold, growth continues nicely, and the Fed can keep on distributing currency to the banks so they can keep on issuing new loans.
But what happens when the materials to manufacture goods, and the energy to transport them to consumers, are in short supply? Maybe governments just break the tie with physical economic growth – the way they did with gold – and carry on issuing currency as normal?
This has been done in the past. It results in more currency being available to pay for the same number of goods, and leads to inflation that can rapidly get out of control.
What if governments just stop issuing currency altogether (or at least issue less)?
Then there isn’t enough money in circulation to repay the interest on all the existing loans, and this in turn leads to defaults, home repossessions, and business failures.
Unfortunately for Capitalism, our world is a mostly closed system. (The only outside input is energy from the sun, which typically takes millions of years to be converted into a form that we can reliably use, and we’ve been happily burning through our stores at many, many times the rate at which they can be replenished.) We are entering a period when the amount of new materials and energy available is likely to start decreasing each year.
Capitalism’s one basic requirement – continual growth – is no longer going to be met.
The eventual outcome of this is not clear. We may face hyperinflation, as governments keep issuing more currency in desperate attempts to prop up the economy. We may face deflation and recession (or depression) as very limited amounts of currency are issued, and defaults on loans, repossessions and unemployment become the norm. Or we may swing backward and forward between the two.
The reality is, Capitalism has had its day. We need a new financial system going forward, and one that can function effectively in an environment of less rather than more.