State of the World Economy: The Emperor Has No Clothes

In Hans Christian Anderson’s iconic fairy tale, The Emperor's New Clothes, two swindling weavers promise an Emperor a “new suit” that they tell everyone will be invisible only to those who are unfit for their positions. So, when the Emperor parades before his subjects, the spellbound people laud his beautiful new clothes in fear of being exposed as unsophisticated or stupid. Eventually, it took a child to cry out, "But he isn't wearing anything at all!" before the king’s subjects could muster enough confidence to admit the obvious reality.

Scholars note that the phrase “emperor's new clothes” describes a common situation where "weavers" of official policy insist that the value of their labor be recognized apart from the physical reality of the moment, and has become a standard metaphor for anything that smacks of pretentiousness, pomposity, social hypocrisy, collective denial, or hollow ostentatiousness.

While today's existing global power structure continues to try to conduct business as usual and insist that the economy is in good standing, there is no question that existing systems are unsustainable. The economic value of all of our assets and resources are at stake, and dealing with the symptoms of the problem rather than their root causes, while delaying the consequences and numbing the public to their real effects only exacerbates the inevitable results. Note these sobering facts:

• According to most recent Census Bureau data, from 2005 – 2009, average US household wealth declined by 28%. Currently, at least 62 million Americans, 20% of US households, have zero or negative net worth.


• Recently, the National Academy of Science released their latest findings that the number of Americans living in poverty in 2009 was at least 52 million, the highest level in history.


• Currently, an all-time record 6.3 million people have been unemployed for over six months.


• According to the most recent available IRS data covering the year 2009, while the cost of living from 1990 - 2010 has increased by 67%, average income fell 15.2% since 2007, its lowest level since 1997.


• In its Economic Snapshot for August 2011, the Center for American Progress documents that all of these, as well as other ominous trends, continue.


• On the heels of the Bureau of Economic Analysis’ revisions downward of recent reports, the talk of a double-dip recession are on the increase.

The bottom line - Financial distress continues to be increasingly widespread throughout the U.S. and the world.

To make matters worse, the United States’ credit rating, described by the Wall Street Journal as "a cornerstone of the global financial world," was shaken this month when S&P downgraded it from AAA to AA. Notably, S&P said the downgrade "reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics."

And it’s no better across the world. Arson, riots and looting are on the increase in Europeas public and private credit spirals into ever-riskier realms. The debt crisis is more advanced in Europe than it is in the U.S. Can Europe be anything but a precursor for theUnited States in this case? Remember,Greece had its first credit downgrade in December of 2009.

Ominously, the same day the financial world was shaken by the U.S. credit downgrade, nakedcapitalism.com officially began its Bank of America Death Watch with with the following reasoning:

It is clear that the Charlotte bank has too much in the way of legal liability that it will not be able to shed and yet-to-be-taken write-downs on balance sheet items (for instance, roughly $125 billion of home equity loans and junior liens on residential real estate as of end of last year) for it not to be at risk of a death spiral.

Any guesses as to who is likely to be holding that bill in the end? In response, and in an unprecedented move demonstrating the desperation of the moment, the Fed announced that they will freeze interest rates for the next two years to keep the government and private citizens afloat and continuing to borrow. Then, with a perfect storm of serious financial problems erupting around the world, Federal Reserve Chairman Bernanke issued the following opening statement from the bankers’ annual August retreat atJackson Holeto squarely address the nation’s most pressing financial question:

We meet here today almost exactly three years since the beginning of the most intense phase of the financial crisis and a bit more than two years since the National Bureau of Economic Research’s date for the start of the economic recovery.

Where do we stand?

Here was the master weaver’s answer…

There have been some positive developments over the past few years, particularly when considered in the light of economic prospects as viewed at the depth of the crisis. Overall, the global economy has seen significant growth, led by the emerging-market economies. In theUnited States, a cyclical recovery, though a modest one by historical standards, is in its ninth quarter. In the financial sphere, theU.S.banking system is generally much healthier now, with banks holding substantially more capital. Credit availability from banks has improved, though it remains tight in categories – such as small business lending – in which the balance sheets of potential borrowers remain impaired. Companies with access to the public bond markets have had no difficulty obtaining credit on favorable terms. Importantly, structural reform is moving forward in the financial sector, with ambitious domestic and international efforts underway to enhance the capital and liquidity of banks, especially the most systematically important banks; to improve risk management and transparency; to strengthen market infrastructure; and to introduce a more systemic, or macro-prudential, approach to financial regulation and supervision.

Current economic reality and the state of financial “reform” show the Fed chairman’s words to be akin to the Emperor’s beautiful new clothes being woven for public consumption. Just as with today's bankers' elaborate financial memes and schemes, the emperor’s new clothes became more imaginative with each successive description of the swindlers’ wonderful cloth - even though it had no material existence. How will the markets respond to the increasingly illusionary fashion design?

Perhaps the real truth of The Emperor's New Clothes is not that the child's truth is mercifully free of adult corruption, but that it recognizes the terrifying possibility that whatever words we may use to clothe our fears, the fabric cannot protect us from them. Even Chairman Bernanke seems to acknowledge this sober fact when he concludes in his Fed meeting speech:

To achieve economic and financial stability, U.S. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time. As I have emphasized on previous occasions, without significant policy changes, the finances of the federal government will inevitably spiral out of control, risking severe economic and financial damage.

In sustainable development parlance, the “profit” leg of the triple-bottom-line appears more and more dubious with every passing day. Sustainable economic growth – an ever-increasingly fleeting concept in today’s world – is one of the vital legs of sustainable development. So in the absence of it, is sustainable development dead?

Absolutely not.

In a revealing new article, Developing a Sustainable Endgame for the Global Economy, SLDI has identified why this should all have been expected (but wasn’t), and how shifting investments from Wall St. and banking-based assets to the only investments which mitigate the increasing risk of systemic failure of the economy brought on by excessive debt - sustainable global infrastructure – is the best course of action from here. Only by investing in nature-based assets with lasting inherent value such as land, shelter, food, water quality, and other ecosystem restoration services will we mitigate the increasing systemic economic risk and achieve the short- and long-term wealth gains we all strive to achieve.

Back in January 2009, amid all the bad news and demands being placed on the President-elect Obama transition team prior to his inauguration, SLDI offered a reason to hope for the future by formally submitting its offer of assistance to help boost the administration’s economic recovery plan and policy agenda – and save the country billions in the process. Unfortunately, the politics of money have continued to rule Washington. SLDI's public proposal for sustainable infrastructure was ignored, and little has been done to improve our dire circumstance.

While today’s weavers fail all of us, the real economic system at play will continue to deliver real value – if we manage it sustainably. Anything less, including the actions currently being taken, is akin to attempting to build on top of a falling house of cards. Those with the vision to invest in sustainable infrastructure assets will profit through this time of unprecedented turbulence – even while trillions worth of financial “assets” disappear into thin air.