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Why the Global Economy Is a Ponzi Scheme and We Are All Bernie Madoffs

As Thomas Friedman agrees in the next article, we have constructed the grandest of Ponzi schemes by living off future generations.

Yes, homo “sapiens” sapiens have constructed the grandest of Ponzi schemes, whereby current generations have figured out how to live off the wealth of future generations. Yes, we are all in essence Madoffs (many wittingly, most not) or at least his most credulous clients. What comes next will be the subject of a multipart series.

I had been planning to write something on this for a while when NYT columnist Tom Friedman interviewed me for “ The Inflection Is Near?” which appears in today’s New York Times:

“We created a way of raising standards of living that we can’t possibly pass on to our children,” said Joe Romm, a physicist and climate expert who writes the indispensable blog climateprogress.org. We have been getting rich by depleting all our natural stocks -- water, hydrocarbons, forests, rivers, fish and arable land -- and not by generating renewable flows.

“You can get this burst of wealth that we have created from this rapacious behavior,” added Romm. “But it has to collapse, unless adults stand up and say, ‘This is a Ponzi scheme. We have not generated real wealth, and we are destroying a livable climate …’ Real wealth is something you can pass on in a way that others can enjoy.”

A few years ago I thought that aggressive action by governments around the world to push clean energy could spare the public dramatic lifestyle changes in the coming decades, but I have been convinced otherwise by

  • the failure of U.S. leadership [thank you George W. Bush and the conservative movement stagnation]
  • the remarkable shift in our understanding of climate science in the past two years ( here, here, and here)
  • China’s decision to join the Ponzi scheme full throttle and emulate our rapaciousness (see here and here), and
  • a recent, brilliant talk I heard (a teaser for a future post).

The adults, in short, are not standing up. Sadly, most haven’t even taken the time to understand that they should (see “ Most opinion leaders just don’t get global warming“).

And so every generation that comes after the Baby Boomers are poised to experience the dramatic changes in lifestyle that inevitably follow the collapse of any Ponzi scheme.

This global Ponzi scheme is not just a metaphor (see “The greatest thing by far is to be a master of metaphor”), but for me a central organizing narrative of how to think about the fix we have put ourselves in (see How Lincoln framed his picture-perfect Gettysburg Address, 4: Extended metaphor).

What exactly is a Ponzi scheme? Wikipedia has a good entry:

A Ponzi scheme is a fraudulent investment operation that pays returns to investors from their own money or money paid by subsequent investors rather than from profit. The term “Ponzi scheme” is used primarily in the United States , while other English-speaking countries do not distinguish colloquially between this scheme and pyramid schemes.

The Ponzi scheme usually offers abnormally high short-term returns in order to entice new investors. The perpetuation of the high returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors in order to keep the scheme going.

In our case, investors (i.e. current generations) are paying themselves (i.e. you and me) by taking the nonrenewable resources and livable climate from future generations. To perpetuate the high returns the rich countries in particular have been achieving in recent decades, we have been taking an ever greater fraction of nonrenewable energy resources (especially hydrocarbons) and natural capital (fresh water, arable land, forests, fisheries), and, the most important nonrenewable natural capital of all -- a livable climate.

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