Ponzi Structure and Dissipative Structure#
First, let's define the Ponzi structure, which divides the economic system (such as companies, countries, etc.) into Ponzi structure and dissipative structure. The Ponzi structure refers to an economic system that cannot organically attract external capital, while the dissipative structure is the opposite of the Ponzi structure, indicating that the economic system can organically attract capital from external sources. The term "organic" is very important here and is somewhat equivalent to sustainability. For example, a traditional Ponzi scheme refers to a situation where people continuously enter a capital pool, using the capital from new entrants to repay the interest on the capital within the pool. There is no external organic business model that can generate cash flow. On the other hand, investing in a company that produces products and has external customers willing to purchase the products at a profitable price generates organic cash flow for the company, which represents a dissipative structure. In this case, the dissipation is manifested by external customers (non-shareholders) willing to consume the products, thereby continuously injecting funds into the economic system.
In the past, people believed that the United States had good national fortune, which can be expressed as finding new perspectives to continue its dissipative structure during a bottleneck period, mainly through technological innovation after World War II. Attracting global talent and fully leveraging bottom-up subjective initiative may be the source of innovation in the United States. However, now the large government spending in the United States has led to an increase in the pool and a continuous increase in debt. The country is moving closer to a direction of greater government control, and the output per unit is decreasing (see the chart below).
The significant decline in GDP growth brought about by each $1 of debt, in 1952, each $1 of debt by the U.S. government could bring about a $0.8 increase in GDP, but now it only brings about a $0.35 increase in GDP (there are reservations about the data in the chart, as different data with larger discrepancies have been seen elsewhere, but they all reflect a downward trend). In addition, the interest expenses of the U.S. Treasury are increasing significantly as the FED raises interest rates, reaching $969 billion in 2023 Q2. The contradiction of this problem may become more and more prominent.
The Negative Cycle of Expenditure and Debt#
- The average monthly deficit of the U.S. government in the first six months of 2023 is about $218 billion.
- Since the government is the sector that leveraged up earlier, maintaining high interest rates is equivalent to increasing government spending.
- Government tax revenue is not enough to cover expenses, so it can only finance through issuing U.S. bonds.
- The supply of U.S. bonds increases, and the recipients include foreign governments, companies, and the FED. If the main recipients are the FED, it falls into a Ponzi structure because the FED's funds come from printing money rather than organic external capital.
- Continuous printing of money is overdrawing the credit of the U.S. government and there is a limit to it. Eventually, foreign governments, companies, and the public will be unwilling to hold more dollars/U.S. bonds. The role of the FED as the ultimate buyer will be continuously magnified.
How to Transition from a Ponzi Structure to a Dissipative Structure?#
- The United States continues to innovate and create products that have global demand, such as the internet in the past and potentially AI, autonomous driving, etc. in the future.
- In the case of new products with global demand, the taxing power should still be in the United States, or directly impose taxes on overseas through force.
- The U.S. government should reduce its expenditures. Under the current political governance structure, it may require a painful process to reach a consensus on reducing expenditures and then limit expenditures within the basic framework of taxing power.
The Ponzi Model of Borrowing New Debt to Repay Old Debt, What Factors Make It More Sustainable?#
The following excerpt is from Snowball - Adimiral-Nemo:
The fundamental play of Keynesianism is to borrow from future generations, spend on the present generation, let the present generation live a good life, and the future generations will have an easier time repaying the debt at a higher level of economic development and a larger population. This is feasible in accounting terms, and Keynes has considered this issue in his economic notes.
The rapid global population growth after World War II also made Keynesianism more feasible. However, there is a key point here. First, the future population must increase, and second, the debt you borrow must be invested in the foundation that can lead to higher economic development levels, especially for the population. In other words, the things you borrow and invest in must be able to generate higher returns.
From this, we can see the core difference: in terms of population, we are decreasing, and the affluent population is flowing out (it doesn't matter if they retain their nationality, as long as they go to other countries to consume and invest). The United States has a good birth rate. There are still many illegal immigrants who are willing to climb over the walls and cross the jungles of Central America, carry drugs, and engage in prostitution just to enter the United States. Not to mention the wealthy population around the world who immigrate to the United States. Recently, the United States has needed to tighten the EB5 program and relax the EB3 program to attract fewer wealthy individuals to open factories and attract more employees to alleviate labor shortages and reduce inflation. Do we still need to worry about the lack of future population growth to repay national debt? Does China have it? Moreover, how many Chinese people are among those who cross the jungles and walk through the border walls?
In terms of the assets invested, China's debt has been invested in infrastructure in areas where the population is flowing out. There are almost no externalities that can be effectively realized, such as roads and bridges that no one uses. How can we realize externalities for the population? On the other hand, the United States has borrowed mainly for tax cuts. The meaning of tax cuts is to directly invest in every citizen, with the poorest and factory owners receiving the most investment. Factory owners understand the king's tax cuts. The poorest can receive a tax refund check every tax season. Delaying the repayment of college loans for sleeping kings is giving interest subsidies to the youth. So, who has a thicker capital to repay the debt in the future? Is it better to repay the debt with unused roads and bridges or with citizens who have received direct assistance and can bring more creative population?
The current problem lies in the fact that some people have not understood what real assets are! China believes that investing in infrastructure such as roads and bridges will directly become assets (which is indeed a good investment in densely populated areas with strong externalities). On the other hand, the United States has invested in the most scarce and potentially growing asset, which is the population itself. People are the most valuable in the world! Protecting the people is the way to govern. The growth of a high-quality population is the best source of future economic development, expanding the tax base, and enhancing the ability to repay debt. This difference in behavior is actually caused by some fundamental differences in cognition.
Therefore, population may be the core factor for the sustainability of this model.