Don’t listen to the ruling elite: the world economy is in real trouble

The G20 working group meeting in Shanghai didn’t come up with any constructive proposals for reviving the global economy and, instead, complained that the recent market turmoil didn’t reflect the “underlying fundamentals of the global economy”. The oil price has declined by 70 per cent since June 2014, while the Brazilian real has halved, and the Russian rouble is down by 60 per cent. The global economy is on the cusp of another recession, and these important people blamed it all on some sort of psychological problem of the people.

READ MORE: G20 finance minsters and central bankers move to ease fears about currency volatility and market turmoil

Over the past two decades, the global economy has been blessed with the entry and participation of 800 million hard-working Chinese, plus the information revolution. The pie should have increased enough in size to make most people happier. Yet, the opposite has happened. The world has gone from one crisis to another. People are complaining everywhere. This is due to mismanagement by the very people who attend the G20 meetings, the Davos boondoggle, and so many other global meetings that waste taxpayers’ money and put inept leaders in the limelight.

One major complaint that people have is that the system is rigged – that is, the rising income concentration is not due to free market competition, but a rigged system that favours the politically powerful. This is largely true. The new billionaires over the past two decades have come mostly from finance and property. Few made it the way Steve Jobs or Bill Gates did, creating something that makes people more productive.

The most important factor in the rigged system is monetary policy being used to pump up financial markets in the name of stimulating growth for people’s benefit. This is essentially the trickle-down wealth effect, that is, making some people in the financial food chain rich while the spillover gives people a few crumbs. Yet, instead of crumbs, the wealth effect has pumped up property prices in Manhattan, London and Hong Kong, as well as the price of modern art. Essentially, the wealth effect has stayed within the small circle of the wealthy. And these people show up at Davos to congratulate policymakers on their “successes”.

Wasting resources is an equally important factor in making the global economy weak and prone to crisis. After the 2008 financial crisis, the US government and Federal Reserve spent trillions of dollars to bail out the people who created the crisis. Instead of facing bankruptcy and jail, these people have become richer than ever. Predictably, they have used their resources to rig the system further.

READ MORE: High levels of investment – and debt – are good for China’s economy

After 2008, when Beijing launched a massive investment push, the global ruling elite all praised China for saving the global economy. China has increased credit by over US$20 trillion to finance the construction of factories and homes. However, investment does not guarantee final demand. The process of building up a factory creates demand. But, when it is completed, it needs to sell its goods to someone. What China did was build even more factories to keep this factory occupied. This Ponzi scheme couldn’t last long. We are just seeing the beginning of its devastating consequences.