The Boston Consulting Group has issued a paper that recommends 10 steps that developed countries must take to end what they refer to as ‘Ponzi finance’ and to return to a sustainable growth path but I believe their recommendations to be but theoretical and impractical constructs. While I believe we face – and will experience – interesting, speculative, fragile, and very challenging and very likely life-changing times going forward, I believe that the only thing that will force developed country politicians to work for common purposes is a further global financial crisis. This article provides an overview and assessment of said paper and the rationale for my position. Words: 600
So writes (paraphrased) Ian R. Campbell (www.stockresearchportal.com) in edited excerpts from his most recent ”Economic Straight Talk” newsletter (subscription) commentary on economic and resource news entitled World: The ponzi finance end game. (This commentary is an example of Campbell’s daily commentaries, critiques, ‘Think for Yourself’ challenges and ‘Speak For Themselves’ World Headline summaries. Subscribe now to receive his full, unabridged newsletter.)
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Campbell goes on to say (with his kind permission) in further edited excerpts:
“Boston Consulting Group’s (BCG) Daniel Stelter…has written a paper entitled Ending the Era of Ponzi Finance*…[which] begins with a 1992 quote from now deceased Hyman Minsky [which] is worthy of careful consideration:
“Over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is a large weight to units engaged in speculative and Ponzi finance. . . . The greater the weight of speculative and Ponzi finance, the smaller the overall margins of safety in the economy and the greater the fragility of the financial structure.”
Mr. Stelter’s paper…draws a parallel between ‘ponzi schemes’ (citing the 1920 business scheme of Charles Ponzi and the much more recent business activities of Bernard Madoff) and the manner in which the developed countries have, and continue to, borrow to fund current consumption to the detriment of future generations.
In summary, the BCG paper speaks to the current economic dilemmas of:
- record levels of public and private debt;
- unfunded liabilities;
- importantly, what it refers to as “A Broken Growth Formula” where it, relying on a third party study [Read: “This Time is Different: Eight Centuries of Financial Folly” – A Book by Reinhart and Rogoff], says that once an economy crosses the threshold of 90% cumulative debt to GDP, economic growth is negatively affected;
- too-large public sectors, shrinking workforces, slower productivity growth, diminishing returns from innovation, deteriorating education systems, systematic underinvestment in infrastructure, and ‘the end of cheap resources’; and,
- importantly, “Paralyzing Uncertainty: The Costs of Not Acting”.
The BCG paper then goes on to recommend “Ten Steps Developed Economies Must Take” to end ‘Ponzi finance’, and to return the developed countries to a ‘sustainable growth path’. These include, [in part]:
- deal with the debt overhang – immediately;
- reduce government unfunded liabilities; and,
- increase the efficiency of government.
- The list goes on….
Conclusion[After reading the BCG paper in detail,] it seems to me that, [while it]…is well worth reading as interesting background and as a summary of ‘where we are’, the recommendations found…[therein] are but ‘theoretical and impractical constructs’.
I…believe that the only thing that will bring developed country politicians to their knees and force them to both pray together and work for common purposes… is a further global financial crisis.”
[Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
Other Articles by Ian R. Campbell:
Many…commentaries by people referred to as ‘gurus’ or ‘experts’…often don’t state the assumptions that underlie the opinions they express leaving the reader…to take at face value what is said based on ‘assumed expertise’. I suggest you exercise caution and not blithely accept the views of ‘experts’ without first understanding their underlying assumptions and then satisfying yourself that those assumptions both make sense and are internally consistent with the views and opinions the ‘experts’ express, and the advice they give. Let me explain more fully below.
Every day now there is Media and Internet commentary on the current prices at which gold mining stocks are trading. Some of this commentary is excellent, some seems to be written from a “vested interest’ perspective and some is very simplistic. [This article discusses unstated underlying assumptions that some commentators base their views on, endeavours to provide a greater understanding of the gold ‘mining’ sector and influences on pricing of sector stocks and what investors need to do before investing in said sector.] Words: 2030
It is all too easy to look for like-minded persons who continuously reinforce one’s own views – a clear form of ‘lemmingism’, to coin a new word. Instead, one should make an effort to recognize both reader and writer biases when reading and thinking about things found on the Internet in social media websites and blogs. [Let me explain my views on that further.] Words: 720
If you hold, or are considering holding, physical gold or silver or both, [it is imperative that you] read as many ‘balanced opinions’ as you possibly can with respect to ownership of each. [Here’s why]. Words: 337
Highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked. Words: 1264