World Economy Collapse: Our Economic Ponzi Scheme

Image Gallery 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. ISTOCKPHOTO/YEN-HUNG WANG

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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, in 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 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 of 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 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.

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