first majestic silver

The H.M.S. Prosperity and Icebergs

May 28, 1998

I am fascinated by our fixation on the story of the ill-fated Titanic. Movie box office records and book sales are indicators that death by an iceberg of the greatest unsinkable ship has struck a deep chord within our individual and collective psyche. The reason, I believe, is that our intuition tugs at us reminding us that our journey of prosperity and sonic stock market booms may not be unlike the journey and fate of the Titanic.

When we look at G-7 economies we are resplendent in the glow of prosperity. This prosperity has come about through economic growth, technological innovations, and natural resource depletion (a.k.a. development). Indeed the great ship H.M.S. Prosperity and other G-7 ships steam along in their unrelenting journey of economic prosperity. Our instrument panel and indicators of performance, such as GDP, stock market indices, and profits, indicate that all is well in our ecos or household. We cannot fathom weakness in the metal of the hull nor can we imagine icebergs that may thwart our journey. Our economic quality of life is unparalleled.

Our world is becoming increasingly "globalized" into a union of commerce, language and systems unprecedented in human history. The push towards global union at the expense of community independence and self-sufficiency is justified as necessary for stability, certainty, and unity. But who are the real beneficiaries? Unprecedented development of common global systems of trade, financial, and monetary systems have resulted in unfettered flows of investment capital and transnational business that is largely unaccountable to government and average citizens. We are fed a steady diet of economic jargon including debt and deficits, free trade, globalization, and competitive advantage; terms we simply accept in good faith without question or debate. Quietly we are headed or herded towards an engineered global union rationalized as necessary for economic survival. Canada's Finance Minister Paul Martin is now a major cheerleader for a world financial "cop" or "watchdog" that would monitor and safeguard against financial dysfunction such as currently exhibited by the once touted mighty Asian Tigers. Martin seems to be parroting George Soros, billionaire currency trader, who has called for a central world bank structure in his book the Alchemy of Finance.

Just as passengers on the Titanic, we place our faith in the captains, stewards, engineers and high-priests of our global systems — Central Bankers, economists and G-8 policy leaders. We believe our ship is the fastest and safest ever built, immune from financial, environmental or social icebergs. This time the fundamentals of a DOW 9000 are different, we are told. Just like the Titanic, the passengers are either too busy enjoying the prosperity journey or too tired or unaware of the existence of flaws in the metal of the hull making the ship vulnerable to icebergs. Those who are vaguely aware of the existence of icebergs and actually attempt to measure their existence in relation to the strength of the hull of the ship are caught in a game of circular musical chairs.

Pop journalists subtlety massaging our intellect and serving as cheerleaders of the perpetual economic motion machine. Our minds have become numb against the cacophony of engineered or advertised mantras that manufacture our consent and complacency. These mantras include deficits and debt, zero inflation, free trade, and global competitiveness. These words have become synonymous with warfare replacing the Cold War era rhetoric. Many of us, including economists and journalists, have lost the capacity to understand the true meaning and wisdom in these words resorting instead to blind faith. Sadly, we have lost the meaning of words like "comparative advantage" (a trade term which MIT economist Paul Krugman argues is more appropriate than competitive advantage) and we lack the knowledge and profound importance of monetary policy and how money is created. Most of us are content in our ignorance and complacency, just as the Titanic's passengers were content in their comforts and opulence ignorant of icebergs looming in the dark.

There are three classes of passengers. The first class are those with power and intelligence who finance and steward the prosperity voyage enjoying the fruits of their wealth. These financiers, captains, and engineers of the ship are convinced that the ship is unsinkable and many have rationalized that even if icebergs exist, they pose no real danger to the ship's technological features. Until now technological innovation has sustained exponential economic growth. They dance to their own music either ignorant or confident in the resiliency of the metal of the hull. The second class of passengers are the intelligentsia of scientists, economists, policy advisors, and journalists. They spend their time debating the existence of icebergs and the strength of the great ship. There are two camps: those who believe the ship's technology can withstand the impact of icebergs, and those who worry and even model the possible impact of striking an iceberg at current cruising speed. This class too is oblivious to the dangers of known icebergs, too busy rearranging the deck chairs, quibbling over the best seat on the top deck, and using their models to predict the existence of icebergs and the capacity of the ship to withstand their impact. They argue about the "icebergs" of government debt, inflation, global warming, free trade, and competitiveness. The third class of passengers are average citizens who, bewildered by the debate of the latter two passenger classes, rely on their intuition and common sense to guide their lives. Meanwhile the great ship prosperity sails on in seas known to contain icebergs. Ironically, there are not enough lifeboats on board.

The reality is that icebergs do exist in these unprecedented waters. Many have emerged including the Asian financial crisis, Indonesian economic riots, impending collapse of Japan and China, Y2K computer coding problems, global warming and climate change, ecosystem degradation, resource depletion and social inequities (including disparities between intergenerational wealth, disparities between high and low income earners, and declining real family income). Like icebergs, 90% of their bulk and impact remains shrouded in uncertainty, hidden beneath the surface.

Sadly, the ship's guidance instruments are either flawed or are insufficient to signal impending icebergs or predict potential impact. Our current measures of economic growth and prosperity, namely GDP and stock market indices, are woefully inadequate for measuring the sustainability of our journey or our ship's societal well-being or quality of life. For example, the building, sinking and rescue of passengers from the original Titanic resulted in increases to world GDP. The current Titanic craze in 1998 is again contributing to world GDP through movie sales, book sales, and tourism benefits in the Maritimes. GDP does not account for loss of life, human grief, changes in quality of life, or environmental degradation.

Thus, genuine sustainable development (versus growth) is not being measured or monitored. Our myopia has clouded our ability to distinguish between the meaning of the words growth and development? In nature, life exhibits a restorative pattern or full-life cycle from birth to death to new birth; exponential growth is impossible in natural systems without death. Classical economies believe they can achieve exponential economic growth without eventually exhausting the carrying capacity of the ecosystem from which they derive their prosperity. Businessman Paul Hawken and ecological economist Herman Daly challenge us to imagine an ecology of commerce where the economy is part of the ecological system and thus reconciled with the laws of physics (1st and 2nd laws of thermodynamics).

New measures of genuine progress, sustainable development, and quality of life are being developed. Redefining Progress, a policy research group in the U.S., has developed the Genuine Progress Indicator (GPI) which provides a measure of societal well-being and sustainable economic development. The GPI adjusts GDP for the cost and value of changes in income distribution, household work, crime, family breakdown, air and water pollution, ozone depletion, commuting, and loss of forests and arable farmland. The result is a more accurate barometer of the overall health of economies.

The GPI results for the US show that between 1971-994 US GDP per person grew by 44% while GPI per person fell by 43% (in inflated adjusted dollars). The evidence confirms our intuition that the quality of our lives has declined yet the economy continues its exponential sonic boom. A preliminary GPI for Canada shows that between 1971-1994 Canada's GDP per capita rose 56% while GPI per capita only rose 12%. While more encouraging than the US GPI, Canada still shows a significant lag between traditional economic growth and genuine progress. The GPI provides indicators of the existence of icebergs, tracks their size and location, and helps us to assess their potential impact.

Peter Eliades in May 4, 1998 edition of Barron's writes ("Danger: Bear May be Crossing") that his barometric analysis of the current market suggests that an unusual pattern or iceberg has emerged that may forewarn an impending protracted and serious bear market.

His analysis shows that ending April 6, 1998 a 21-day churning pattern occurred, where churning is described by a narrow range of advance/decline ratio of .592 of the Big Board issues. The lowest advance/decline ratios (less than .733) in history (1926-1998) occurred only 5 times in history: July 19, 1929, December 8, 1961, January 25, 1966, October 6, 1968, and December 6, 1972. These incidents were then followed by subsequent market declines of -89.5% (1929), -29.1% (1961), -26.5% (1966), -36.9% (1968), and -46.5% (1972). This sign of the iceberg Bear, Eliades suggest usually precedes the final market high. If the past repeats itself the Dow's final high close for the current 1998 cycle should be 9182. On April 2 the DJIA closed at 9184.94. Eliades writes "If the Dow is making new highs beyond the end of May, then the power of the April signal will have dissipated. In that case, I'd then look for another Sign of the Bear to possibly emerge prior to a July or early August top." Icebergs are in the water awaiting our great ship.

Meanwhile, our current measures of stock markets and economies continue to defy the laws of physics, gravity, and nature largely because they ignore the real impacts of resource scarcity and environmental degradation. As we continue our journey on prosperity vessels, we must honestly ask ourselves whether we need new instruments and indicators of genuine progress and quality of life. When we come to the end of our own lives and growth curve, will we measure our journey in qualitative terms or in terms of how much and how many goods and services we consumed?

The first use of gold as money occurred around 700 B.C., when Lydian merchants (western Turkey) produced the first coins
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