The Illusion of the Perpetual Money Machine

30 Pages Posted: 21 Dec 2012  

Peter Cauwels

ETH Zürich

Didier Sornette

Swiss Finance Institute; ETH Zürich - Department of Management, Technology, and Economics (D-MTEC)

Date Written: October 27, 2012


We argue that the present crisis and stalling economy continuing since 2007 have clear origins, namely in the delusionary belief in the merits of policies based on a “perpetual money machine” type of thinking. Indeed, we document strong evidence that, since the early 1980s, consumption has been increasingly funded by smaller savings, booming financial profits, wealth extracted from house price appreciation and explosive debt. This is in stark contrast with the productivity-fueled growth that was seen in the 1950s and 1960s. This transition, starting in the early 1980s, was further supported by a climate of deregulation and a massive growth in financial derivatives designed to spread and diversify the risks globally. The result has been a succession of bubbles and crashes, including the worldwide stock market bubble and great crash of 19 October 1987, the savings and loans crisis of the 1980s, the burst in 1991 of the enormous Japanese real estate and stock market bubbles and its ensuing “lost decades”, the emerging markets bubbles and crashes in 1994 and 1997, the LTCM crisis of 1998, the dotcom bubble bursting in 2000, the recent house price bubbles, the financialization bubble via special investment vehicles, speckled with acronyms like CDO, RMBS and CDS, the stock market bubble, the commodity and oil bubbles and the debt bubbles, all developing jointly and feeding on each other until the climax of 2008, which brought our financial system close to collapse. Rather than still hoping that real wealth will come out of money creation, an illusion also found in the current management of the on-going European sovereign and banking crises, we need fundamentally new ways of thinking. Governing is the art of planning and prediction. In uncertain times, it is essential, more than ever, to think in scenarios: what can happen in the future, and, what would be the effect on your wealth and capital? How can you protect yourself and your dearest against adverse scenarios? We thus end by examining the question “what can we do?” from the macro level, discussing the fundamental issue of incentives and of constructing and predicting scenarios as well as developing investment insights.

Keywords: economic growth, productivity, financial markets, investments, returns, debt, bubbles, monetary policy

JEL Classification: D53, D90, E20, E30, E60, G01

Suggested Citation

Cauwels, Peter and Sornette, Didier, The Illusion of the Perpetual Money Machine (October 27, 2012). Swiss Finance Institute Research Paper No. 12-40. Available at SSRN: or

Peter Cauwels (Contact Author)

ETH Zürich ( email )

Zürichbergstrasse 18
8092 Zurich, CH-1015

Didier Sornette

Swiss Finance Institute ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC) ( email )

Scheuchzerstrasse 7
Zurich, ZURICH CH-8092
41446328917 (Phone)
41446321914 (Fax)


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