The fundamental problems affecting the global economy – and in particular the most developed regions of the world – can be summarized in three charts. Figure 1 shows how the world has grown beyond its means, or to put it another way, why we’re not as wealthy as we thought we were. It shows how somewhere in the region of a third of the world’s supposed wealth doesn’t actually exist, because a substantial part of the recent growth in the global economy was founded on nothing more solid than the credit bubble – a bubble that, despite a partial deflation in 2008, has resumed its growth, fuelled now by public debt rather than private debt.
The following chapters go into more detail, but for now I’ll explain this chart in simple terms: real wealth must come initially from the earth, before having value added by human ideas and labor, so there should be a close correlation between the amount of wealth in the world and the quantity of raw materials extracted from the earth. The lines on the graph show this link clearly until the 1970s, after which time the line representing the economy (wealth measured in terms of Gross Domestic Product, or GDP) begins to rise more quickly than the line representing mineral extraction.
This is because the economy is being inflated by credit, and most of this credit has been created artificially by banks. The additional wealth that is supposedly boosting the economy doesn’t really exist, which means that currencies have become overvalued in relation to minerals. This in turn means there will have to be a correction at some point, because ultimately the only thing giving money its value is its relationship to the real wealth that it supposedly represents. We have effectively borrowed this growth from the future and, one way or another, we will have to pay it back.1
Figure 2 shows how technology, combined with the element of competition inherent in the free-market system, has improved productivity to the point where manufacturing no longer creates enough jobs – and never will, unless we make radical changes to the system.
Figure 1
Although this chart draws on US data, the trend is the same throughout the developed world – and even in the developing world, though the process might be less advanced in other nations.
Figure 3 shows how the wealth that does exist is no longer being spread around enough; how wealth is becoming more concentrated in the hands of those who are already wealthy.
We see how earnings in the US and Europe became more evenly distributed from the 1950s to the late 1970s, after which point the richest 1% increased their share of total earnings from less than 10% to over 20%, in the US at least. In Europe the trend is the same, though the inequality is less pronounced (this is my own estimated average for what is now the European Union, using available data). This inequality is linked to the first two charts because much of this wealth has been ‘made’ in the booming financial sector, and before that – before it ended up in bank accounts and investment funds – it came from the profits of large corporations that benefited from the increasing productivity of industry. Higher output with fewer workers means more profit for executives and shareholders. And we should bear in mind that this wealth came originally from natural resources, more than half of it in the form of crude oil, as I will demonstrate in Chapter 8.
Figure 2
The economy – which is really just the name we give to the wealth-creation process – might seem like a very complex system these days, but it still follows a simple pattern: natural wealth is taken from the earth, has value added by industrial activity, and is then distributed, via those industrial workers, throughout society. Traditionally, this wealth was spread around in the form of payment for goods and services, which created other jobs, which in turn led to more demand for industry, feeding a virtuous cycle of economic growth.
But lately something has gone wrong with the system: real jobs are in decline, not as much wealth is being spread around, and the value of that wealth, or at least of money, has been eroded by the boom in credit.
Figure 3
This failure of the system is linked to the ever-diminishing proportion of real industry relative to the financial sector. Banks accumulate more wealth than is needed for investment by productive industry and therefore use it to profit from unproductive investment, resulting in more debt creation and less job creation.
So the causes of the economic sickness we are now suffering from are actually quite easy to diagnose, once we cut through all the fat and jargon to reach the heart of the problem. In the following chapters I expand on these three points to show how they relate to every aspect of the economy and how they affect us all, from the humblest laborer to the billionaire chief of a global conglomerate.
1 A consideration is made here for fuel-efficiency gains and the recycling of resources, particularly metals, which can result in more wealth being created from a given unit of raw material. However, although metal recycling now accounts for approximately half of all metals used in industry, the world total of around 280 million tons per annum represents less than half a per cent of total natural resource use by volume, taking into account all fossil-fuel extraction and agricultural produce. The bulk of mineral use consists of low-value construction materials, and until very recently these were rarely recycled. I show the effect of these factors later on in Figure 15.
Basic economics; GDP explained
To understand what has really gone wrong with the economies of the developed world, it might help if we give some thought to the concept of wealth. Riches, abundance, prosperity, even just a general feeling of well-being or happiness: all these can be thought of as wealth.
By some measures (for example, the World Bank’s 2006 report, Where is the Wealth of Nations?) wealth includes ‘intangible capital’, as well as the stuff we might normally think of as wealth, such as property and money. By ‘intangible capital’ the World Bank means human potential, as defined by the quality of education and the political and social institutions of the nation in question.
These are difficult things to measure of course, so economists and governments calculate the wealth of nations in terms of Gross Domestic Product, or GDP, which is an approximation of the final output, in money terms, of all economic activity. GDP has become a global standard as an indication of a nation’s wealth, primarily because it’s the only measure widely available and, when adjusted for the purchasing power of different currencies, allows for a useful comparison between countries.
So the GDP figure has become important as an indicator of the health of a nation, as well as its wealth – if the figure rises, we have a growing economy, which governments and economists think is good; and if it falls, we have a recession, which is bad.
Things are not quite so clear-cut as this might suggest, however. For a start, GDP figures