Thu Jan 15th, 2009 at 08:24:00 AM EST
For awhile people have been trying to name the Reagan-Bushes era by analogy to the Gilded Age, the Jazz Age, etc. Well recent events which have brought it to an abrupt end have revealed what it actually was: the Ponzi Age.
The real Ponzi Scheme now in the news is just a small example of the underlying story, which is based upon government encouraged private actions.
Here's a quick outline.
from the diaries. Jérôme
Ponzi Schemes require using the money from those who join later to pay back those who joined earlier along with the huge profits they were promised. It can continue as long as the new arrivals supply enough funds to keep those in the scheme happy. As time goes, on this number grows geometrically which is why it is also called a pyramid scheme, with those at the top (the original participants) being support by a bigger and bigger base.
In the US there was a shift in economic philosophy starting with Reagan. No longer was the ideal behavior one of tucking away money for the future, saving up enough for a down payment on a home, and depending upon a company run pension plan for one's old age.
Instead workers were encouraged (or forced) into becoming investors to supply the needs of their old age. Participation in the stock market used to be in the 10-15% range, but the creation of IRA's and 401K's has pushed this number to over 50%. This money flows into the financial sector every month and provides the fresh blood that a Ponzi scheme needs.
Along with the shift in savings allocation firms were encouraged (bribed by tax breaks) to shift their pension funds from bonds and other secure investments into the stock market and other risky activities. This added to the supply of fresh funds.
So much money has to go somewhere and since there are a limited number of stocks (and corporate bonds) issued there is competition to hold them. When there are many buyers and fewer sellers you get price inflation. This is exactly what happened. Over the past 40 years the stock market has risen to unprecedented heights, both as compared to earnings and as compared to yields from other investments. People were led to expect 15% or more returns on a steady basis, even though the long term average is more like 8%.
There is an old joke about two diamond dealers who keep selling the same stone back and forth to each other at ever higher prices, until one says he doesn't want to buy. Then the market collapses.
Much has been made of the huge rise in wealth inequality over this period, but the principle reason is because the wealthy have owned the type of investments that have seen the biggest rise up in price. If you own a million shares in a stock and it goes from $1 to $10 you are "worth" $9 million more. You housekeeper's IRA owns the same stock, but she only has $10 invested, she becomes $90 wealthier. Before the rise the wealth difference was $999,990, after 9,999,900 a huge increase in spread.
In the past decade or so the influx of money into the stock market from investors has slowed because many more people were already in the system. There was not the same rapid shift into these plans as before so the growth rate slowed. At this point the system was in danger of imploding. Fortunately for the financial sector, the shift to globalization occurred at the same time and the funds available expanded to include much of the rest of the world.
Now the financial markets had infusions of cash from China, Japan and elsewhere to buoy them up and the party continued for almost another decade. This has now, finally, slowed as well as these countries have started to need these funds for their own domestic purposes and as the yields and safety of their investments has become less secure.
The traditional economists have been thrown into a panic. First, their livelihood depends upon them promoting the virtues of Ponzi investing and, second, the "assets" which have been the basis of the wealth rise are shrinking. There is much talk about the dangers of deflation, but who does it really hurt? If you are a consumer and gasoline or TV's are cheaper in the future why should you complain? Even if you home is worth less, you still get to live in it and have the value that it provides. When you buy a new car it immediately goes down in value, but you continue to pay off the loan because you are still getting the same utility out of it as when it was first purchased.
There is also the argument that consumers will stop buying because they will be better off waiting since prices will be lower in the future. But modern electronics gets cheaper all the time and people buy it anyway even knowing that a better deal will be available later. There is a worth to having the use of a purchase now and not in the future that outweighs this type of calculation for many items. In addition necessities like food and clothing can't be put off, one has to eat and one can't walk around naked.
So the assets which are deflating are those held by the wealthy and these are the ones which they are really worried about going down. To go back to our millionaire and the housekeeper if things go back to the way they were originally she loses $90 and he loses $9 million. Who is worried?
Let's have a little honesty here, the aim of government and the economists who they employ is to preserve the Ponzi generated wealth by re-inflating the balloon as quickly as possible, but where is the fresh money supposed to come from? The average worker is already participating at a level which can't change much and foreign investors are moving elsewhere. So governments do what they always do in such cases, they print money and pump it into the economy. More money sloshing around means more available at the base of the Ponzi pyramid.
Can this work? Not over the long term. More money always leads to inflation which, while it makes apparent prices go up, does nothing for the real price of assets. In fact banks and other lenders hate inflation because they get back devalued currency. The reluctance of banks to lend the bailout funds shows that they understand that inflation is on the horizon and that lending money now is not in their interests. Economists have been predicting that inflation is under control because of the new understanding of fiscal and monetary controls. These are the same people who claimed that we were in a new era of continually rising asset values just a few years ago. Wrong then, wrong now.
The Gilded Age ended with the creation of the "progressive era" regulatory structures. The Jazz Age ended with the Great Depression. What will come now that the Ponzi Age is winding down?