Reality strikes back!

In 480 BC, the Persian King Xerxes I led his huge army across a ponton bridge over the Hellespont to launch his invasion of Greece. According to Herodotus, the first bridge was destroyed by a storm, prompting the king to behead the builders and punish the sea by having his soldiers whip the waves with chains. Powerful leaders have always had problems with accepting the laws of physics and the forces of nature.

This is what makes the recent decision by the Federal Reserve to lower the interest rate so interesting. Rather than accepting that the Coronavirus will slow down the world economy, with a corresponding drop in share prices, a desperate and futile attempt was made to keep Wall Street happy. The mad king did not behead anyone this time, but the actions of the Fed were about as effective as whipping the seas with iron chains.

If you still believe that stock markets are related to the real economy, the recent worldwide drop in share prices is not surprising. After all, many companies – such as airlines, travel companies, and manufacturing companies with global supply chains – will be harmed by a possible global pandemic. The reasons are easy to understand and not very much can be done about it, apart from trying to limit the spread of the virus. In particular, lowering interest rates is not going to solve anything, as the companies suffer from a lack of demand and not from a lack of capital. Predictably, Wall Street reacted to the decision by the Federal Reserve with even more losses. To quote Bloomberg News: “Rate-cut magic doesn’t work on markets adjusting to economic reality.

The problem for the US government is that the stock market is directly linked to the apparent value of people’s retirement savings. President Trump has repeatedly boasted about how he has made people richer by adding trillions to their 401(k)s. To see this fictitious wealth being wiped out by a virus from China is apparently more than he can bear and will probably reduce his chances getting reelected. Acting like a mad dictator, he demanded reality to be changed.

Sadly, the actions of the Federal Reserve also illustrate why it is so difficult to solve the climate crisis. For many decades, voters have been promised the fruits of an eternally growing economy. The assumption was that if we start saving for our retirement early enough and invest the money wisely, the markets will generate enough return on investment so secure our pensions. Nobody seems to have considered the possibility that the stock market could become saturated with capital, i.e. that there would be more capital available than investment opportunities. Once it happens, the financial markets turn into gigantic Ponzi schemes, where useless pieces of paper are traded at ever higher prices. It also means that the money for our pensions is not available anymore.

The failure of the financial markets is only a symptom. The underlying problem is that we are living above our means and that the economy is unable to maintain our high level of material consumption, even if we are prepared to sacrifice the future our children by ignoring environmental costs. There is no alternative to system change, as was again pointed out by Joseph Stiglitz on Project Syndicate recently: Solidarity Now. Climate Change has only made the need for change more urgent.


Here is an in-depth look at the Fed’s response: The Fed’s Baffling Response to the Coronavirus Explained.

The following post by George Monbiot has a similar message: Real Life

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