Sunday, February 1, 2009

The Shape of Things to Come -- Part 2

It's important to understand that the many years of so-called "prosperity," "economic well being," and, for certain individuals, spectacular success, that formed the basis of neo-conservative (aka neo-liberal) "free-market" dogma for such a long time, were in fact built on a combination of monumental illusion and outright fraud, a mirage that has now evaporated along with the "free" market financial system it was supposedly based on. It's not simply that a few "bad apple" investment bankers got carried away with greed and wrecked a system that was otherwise operating legitimately. The system was from the start fundamentally flawed, an elaborate Ponzi-like scheme fueled far more by the get rich quick dreams of bankers and investors than by legitimate profits earned by legitimate businesses.

To see this, it's only necessary to reflect on the remarkable history of the the Dow Jones average, which didn't rise decisively above 1,000 until 1982, 98 years years after these statistics began being published, in 1884. Yet, less than 10 years later, in 1991, the average had risen threefold, to over 3,000. By 1995 it had passed the 5,000 mark and only two years after that rose spectacularly from 6,600 to over 8,000. And 5 years later, at the end of the century, it soared to 11,400. By October 9, 2007, it had risen to the spectacular height of 14,164.

Could normal business operations, no matter how successful, have produced such an unprecedented 1400% upsurge in value? I'm not an expert, but I wonder whether Bernie Madoff's fund appreciated at such an astonishing rate over the same time period. And if his rate of appreciation raised red flags, at least for Harry Markopoulos, then why shouldn't the Dow's climb from 1,000 to over 14,000, during roughly the same period, have also raised the same flags? Why isn't it raising the same flags now? If Madoff's steady rates of return were too good to be true, then what about Wall Street's phenomenal growth? The Dow sailed from 1,000 to 14,000 on the good ship Ponzi. In business after business the model was clear: you make money by doing whatever it takes to increase the value of your stocks -- whether you actually make any profit by producing anything is all but irrelevant, a mere accounting trick. This is the notorious Enron model, born again. The Dow went up because more and more money was being invested in the market -- investors made money based largely on money being put into the system by fresh investments, and gullible new investors continuously being sucked in via "creative" investment schemes, such as those 401(k)s whose value is now tanking.

In view of the above, what could the phrase "economic recovery" possibly mean? The "good old economy" that has supposedly been "broken," and that so many are now hoping to fix, was an illusion. It never really existed as anything other than a carefully disguised fraud.

(to be continued)

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