Our Global Ponzi Economy
Our mismanaged world economy today has many of the
characteristics of a Ponzi scheme. A Ponzi scheme takes payments
from a broad base of investors and uses these to pay off
returns. It creates the illusion that it is providing a highly
attractive rate of return on investment as a result of savvy
investment decisions when in fact these irresistibly high
earnings are in part the result of consuming the asset base
itself. A Ponzi scheme investment fund can last only as long as
the flow of new investments is sufficient to sustain the high
rates of return paid out to previous investors. When this is no
longer possible, the scheme collapses-just as Bernard Madoff's
$65-billion investment fund did in December 2008.
Although the functioning of the global economy and a Ponzi
investment scheme are not entirely analogous, there are some
disturbing parallels. As recently as 1950 or so, the world
economy was living more or less within its means, consuming only
the sustainable yield, the interest of the natural systems that
support it. But then as the economy doubled, and doubled again,
and yet again, multiplying eightfold, it began to outrun
sustainable yields and to consume the asset base itself.
In a 2002 study published by the U.S. National Academy of
Sciences, a team of scientists concluded that humanity's
collective demands first surpassed the earth's regenerative
capacity around 1980. As of 2009 global demands on natural
systems exceed their sustainable yield capacity by nearly 30
percent. This means we are meeting current demands in part by
consuming the earth's natural assets, setting the stage for an
eventual Ponzi-type collapse when these assets are depleted.
As of mid-2009, nearly all the world's major aquifers were being
overpumped. We have more irrigation water than before the
overpumping began, in true Ponzi fashion. We get the feeling
that we're doing very well in agriculture-but the reality is
that an estimated 400 million people are today being fed by
overpumping, a process that is by definition short-term. With
aquifers being depleted, this water-based food bubble is about
to burst.
A similar situation exists with the melting of mountain
glaciers. When glaciers first start to melt, flows in the rivers
and the irrigation canals they feed are larger than before the
melting started. But after a point, as smaller glaciers
disappear and larger ones shrink, the amount of ice melt
declines and the river flow diminishes. Thus we have two
water-based Ponzi schemes running in parallel in agriculture.
And there are more such schemes. As human and livestock populations
grow more or less apace, the rising demand for forage eventually exceeds
the sustainable yield of grasslands. As a result, the grass
deteriorates, leaving the land bare, allowing it to turn to desert. In
this Ponzi scheme, herders are forced to rely on food aid or they
migrate to cities.
Three fourths of oceanic fisheries are now being fished at or beyond
capacity or are recovering from overexploitation. If we continue with
business as usual, many of these fisheries will collapse. Overfishing,
simply defined, means we are taking fish from the oceans faster than
they can reproduce. The cod fishery off the coast of Newfoundland in
Canada is a prime example of what can happen. Long one of the world’s
most productive fisheries, it collapsed in the early 1990s and may never
recover.
Paul Hawken, author of Blessed Unrest, puts it well: “At present we are
stealing the future, selling it in the present, and calling it gross
domestic product. We can just as easily have an economy that is based on
healing the future instead of stealing it. We can either create assets
for the future or take the assets of the future. One is called
restoration and the other exploitation.” The larger question is, If we
continue with business as usual—with overpumping, overgrazing,
overplowing, overfishing, and overloading the atmosphere with carbon
dioxide—how long will it be before the Ponzi economy unravels and
collapses? No one knows. Our industrial civilization has not been here
before.
Unlike Bernard Madoff’s Ponzi scheme, which was set up with the
knowledge that it would eventually fall apart, our global Ponzi economy
was not intended to collapse. It is on a collision path because of
market forces, perverse incentives, and poorly chosen measures of
progress.
In addition to consuming our asset base, we have devised some clever
techniques for leaving costs off the books—much like the disgraced and
bankrupt Texas-based energy company Enron did some years ago. For
example, when we use electricity from a coal-fired power plant we get a
monthly bill from the local utility. It includes the cost of mining
coal, transporting it to the power plant, burning it, generating the
electricity, and delivering electricity to our homes. It does not,
however, include any costs of the climate change caused by burning coal.
That bill will come later—and it will likely be delivered to our
children. Unfortunately for them, their bill for our coal use will be
even larger than ours.
When Sir Nicholas Stern, former chief economist at the World Bank,
released his groundbreaking 2006 study on the future costs of climate
change, he talked about a massive market failure. He was referring to
the failure of the market to incorporate the costs of climate change in
the price of fossil fuels. According to Stern, the costs are measured in
the trillions of dollars. The difference between the market prices for
fossil fuels and an honest price that also incorporates their
environmental costs to society is huge.
As economic decisionmakers we all depend on the market for information
to guide us, but the market is giving us incomplete information, and as
a result we are making bad decisions. One of the best examples of this
can be seen in the United States, where the gasoline pump price was
around $3 per gallon in mid-2009. This reflects only the cost of finding
the oil, pumping it to the surface, refining it into gasoline, and
delivering the gas to service stations. It overlooks the costs of
climate change as well as the costs of tax subsidies to the oil
industry, the burgeoning military costs of protecting access to oil in
the politically unstable Middle East, and the health care costs of
treating respiratory illnesses caused by breathing polluted air. These
indirect costs now total some $12 per gallon. In reality, burning
gasoline is very costly, but the market tells us it is cheap.
The market also does not respect the carrying capacity of natural
systems. For example, if a fishery is being continuously overfished, the
catch eventually will begin to shrink and prices will rise, encouraging
even more investment in fishing trawlers. The inevitable result is a
precipitous decline in the catch and the collapse of the fishery.
Today we need a realistic view about the relationship between the
economy and the environment. We also need, more than ever before,
political leaders who can see the big picture. And since the principal
advisors to government are economists, we need either economists who can
think like ecologists or more ecological advisors. Otherwise, market
behavior—including its failure to include the indirect costs of goods
and services, to value nature’s services, and to respect
sustainable-yield thresholds—will cause the destruction of the economy’s
natural support systems, and our global Ponzi scheme will fall apart.
Adapted from Chapter 1, “Selling Our Future,” in Lester R. Brown,
Plan
B 4.0: Mobilizing to Save Civilization (New York: W.W.
Norton & Company, 2009), available on-line at
www.earthpolicy.org/index.php?/books/pb4.
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