GDP: A Potemkin Village
A mental barrier has emerged in economics that even the top economic minds cannot overcome. All solutions have ceased to work. The right-wing ones—innovation, reforms, tax cuts—as well as the left-wing ones—higher taxation—simply do not work.
EU funds don’t work, quantitative easing hasn’t worked, and globalization has failed. In its current form, MMT (Modern Monetary Theory) cannot work either, though not because of inflation. There are no euros for UBI (Universal Basic Income), and local currencies are vanishing due to convertibility issues. Cryptocurrencies never truly functioned as currencies. The focus on GDP is one of the significant causes of this failure because it views the economy as a whole. And measured by GDP growth, that whole truly seems to work. Let’s look at how.
The average debt of every inhabitant on the planet is $40,000. According to Oxfam, the richest 1% own more wealth than the remaining 99% of the global population combined. The backbone of the global economy is gambling—the stock and financial markets. The most important economic news of the day is the lottery draw. Not the usual six, but hundreds of numbers showing market movements. The average dividend yield of the S&P 500 is 1.2%. Stock values are driven not by expected returns, but by new deposits. This creates dynamics that resemble a Ponzi-like structure.
What does this gambling have to do with the economy? One of the greatest absurdities is that people want to buy local goods and services. Companies have the capacity to meet this demand. However, money has left many regions, so it is missing as a means to connect these motivations. Recently, cryptocurrencies were added to the mix—the essence of madness: clusters of ones and zeros scattered across computers around the world. Currencies that cannot be used for payments are effectively useless. But their price goes up, so people invest. Yes, this is how bizarre today’s economy has become. No one finds it strange. Even prominent economists such as Angus Deaton have acknowledged being wrong on some key issues.
GDP originated during the Great Depression of the 1930s. Its creator, American economist Simon Kuznets, pointed out that his calculation is a technical indicator of production and does not measure people’s quality of life. He warned that it should not be used as a measure of welfare. Yet, that is exactly what happened. GDP functions as a kind of Potemkin village—an illusion of prosperity. Every state regularly announces its growth, suggesting everything is fine. However, “trickle-down” economics—the trickle-down of wealth to workers—is drying up. In truth, it never really worked.
In the USA, 67% of people live paycheck to paycheck. Even in the highly praised Singapore, it is 60%. Meanwhile, economic experts stare silently as their house of cards, called the liberal market economy, collapses. And that is the better case, as other groups continue to persistently preach nonsense based on their ideological leanings. Instead of GDP, we should be interested in the economic situation of the bottom half of employees. Shifting focus to those at the bottom has strong political and economic reasons. Logically, these are the voters of extremists. They will not vote for parties that have excluded them from a share of the wealth. If they vote, they will vote against—against anyone. Half of all employees and their families represent a massive block of consumers. If they live paycheck to paycheck, they generate no demand. Innovators and companies can make every effort, but there is simply no one to buy their “super products.”
Following the US presidential elections, tariffs arrived—a clear signal about the true state of the American economy. It also brought the realization that the experts in Brussels didn’t even pick the right model to emulate. Another year has passed, and Stéphan Séjourné, the European Commissioner for the Internal Market, is now merely stating a definitive defeat. “If we do nothing, it is clear that soon 100 percent of technologies will be made in China,” he said recently. We should be thrilled because someone has finally identified the problem. Not solved it, just identified it.
We are currently witnessing the growing strain on the model of the so-called “free market.” The free market is a competition. The greatest competition in the world. Two hundred countries, millions of companies, and billions of employees—and consumers—are fighting each other. Victory in this competition is only temporary. The knockout blow dealt to the West by China is proof of that.
What we must do is adapt the competition. That is exactly what America did when it introduced tariffs. And it is exactly what Séjourné proposed by favoring European companies. The path to success, therefore, lies in distorting the competition—the market—something the elites have not yet understood. Certainly not in a similarly primitive and dysfunctional way; it can be done much more elegantly. The free market has devastated the local economy. We must heal it and then protect it. This will ultimately be in the hands of local populations. But first, they must be given the tools to utilize local resources.
For centuries, a phenomenon has functioned reliably and unnoticed: the Klondike Effect. If money flows into a district, the district and its inhabitants prosper. When money flows out, the region decays. Regional prosperity and decline are thus driven by the direction of capital flow. These dynamics can be addressed more directly through two interconnected mechanisms that keep wealth circulating within the region and prevent its leakage. The first is a regional currency that functions alongside the national currency and anchors local demand. The second is UBI, a universal basic income paid in this currency, with a built-in inflation brake that permanently stabilizes this demand. Of course, it cannot be a decentralized cryptocurrency like Bitcoin. But an internet-based currency could be.
They say there is no money for UBI? That is not true. In the Brazilian city of Maricá, for example, UBI is paid in a local currency. The experiment also has a theoretical foundation: MMT (Modern Monetary Theory). So far, it has been widely rejected due to fears of inflation. However, it must be said that recent inflationary waves were cost-driven, not demand-driven—though that is another topic. Certain elements of MMT, provided there is an inflation brake, can be tested in small regions in exactly this way. And if we look back at the beginning of this blog, no other solutions even exist.
Entrepreneurs are not waiting for subsidies. They are waiting for demand. When this demand is present and locally anchored, businesses are created, innovation follows, and the region begins to recover. The goal is the prosperity of every inhabitant. Individual prosperity requires a prosperous region, and a region prospers only when wealth stays within it. Project Bossa World provides a detailed solution.