And that government of the Ponzi, by the Ponzi, for the Ponzi, shall not perish from the earth…
Ponzi Scheme Definition, from Wikipedia:
A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned. The Ponzi scheme usually entices new investors by offering returns other investments cannot guarantee, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors to keep the scheme going.
Knowingly entering a Ponzi scheme, even at the last round of the scheme, can be rational economically if government bails out those participating in the Ponzi scheme. If governments use newly created currency to bail out the scheme victims, the newly printed currency will devalue the rest of the currency in circulation, meaning all holders of that currency will suffer price inflation. However, Ponzi schemes cannot last forever.
Who was Ponzi and what did he do?
Charles Ponzi (March 3, 1882 – January 18, 1949) was an Italian swindler, who is considered one of the greatest swindlers in American history. He was born Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi in Lugo, Italy in 1882.
When Ponzi was released from prison, he eventually made his way back to Boston. A few weeks later, Ponzi received a letter in the mail from a company in Spain. Inside the envelope was an International reply coupon (IRC), something which he had never seen before. He asked about it and found a weakness in the system which would, in theory, allow him to make money.
The purpose of the postal reply coupon was to allow someone in one country to send it to a correspondent in another country, who could use it to pay the postage of a reply. IRCs were priced at the cost of postage in the country of purchase, but could be exchanged for stamps to cover the cost of postage in the country where redeemed; if these values were different, there was a potential profit. Inflation after World War I had greatly decreased the cost of postage in Italy expressed in U.S. dollars, so that an IRC could be bought cheaply in Italy and exchanged for U.S. stamps of higher value, which could then be sold. Ponzi claimed that the net profit on these transactions, after expenses and exchange rates, was in excess of 400%. This was a form of arbitrage, or profiting by buying an asset at a lower price in one market and immediately selling it in a market where the price is higher, which is not illegal.
Ponzi started his own company, the “Old Colony Foreign Exchange Company,” to promote the scheme. He set up shop in a building on School Street. Word spread, and investments came in at an ever-increasing rate. Ponzi hired agents and paid them generous commissions for every dollar they brought in. By February 1920, Ponzi’s total take was $5,000, (approximately $54,000 in 2008 dollars). By March, he had made $30,000 ($328,000 in 2008 terms). A frenzy was building, and Ponzi began to hire agents to take in money from all over New England and New Jersey. At that time, investors were being paid impressive rates, encouraging yet others to invest. By May 1920, he had made $420,000 ($4.59 million in 2008 terms).
Ponzi was bringing in cash at a fantastic rate, but the simplest financial analysis would have shown that the operation was running at a large loss. As long as money kept flowing in, existing investors could be paid with the new money. In fact, new money was the only way Ponzi had to pay off those investors, as he made no effort to generate legitimate profits. (Sound Familiar?)
Social Security System Ponzi
Found this on HowStuffWorks.com – I’m laughing right now because of how ludicrous this sounds. This was our governments idea:
In 1935, when Roosevelt signed the Social Security Act into law, there were a lot of people who needed benefits (because of the Great Depression), but there was no money to pay those benefits with. The idea at the time was that people currently working would pay into the system, and their money would immediately go back out in the form of benefit checks. Each generation of retiring workers would get paid by the people currently working, and therefore the system would fund itself forever despite the fact that the system had no money to start with. Read more
So we all know this is a game of musical chairs. WOW. My kids and grandkids probably will be the ones without a chair.
Our Present Doomsday Cycle
In a report just released by a non-pastisan panel which includes Rob Johnson of the United Nations Commission of Experts on Finance and bailout watchdog Elizabeth Warren, we’ve officially been warned that:
The country is now immersed in a “doomsday cycle” wherein banks use borrowed money to take massive risks in an attempt to pay big dividends to shareholders and big bonuses to management – and when the risks go wrong, the banks receive taxpayer bailouts from the government.”
Do these two descriptions sounds frighteningly similar to one another to anyone but me?
Could it be that the US banking system and government, not Bernie Madoff, are in fact perpetrators of the biggest Ponzi Scheme in the history of the world? After all, Madoff’s $65 Million heist is absolute peanuts compared to the bailout funds… and profits, that have been realized by the banking system in the last year or so.
By definition, what the government and banks are doing is actually worse than what Madoff did. At least Bernie’s victims made the conscious decision to invest their money in his funds, and most of them were high net worth individuals, ability to withstand a hit to their bank accounts… the US taxpayer has no choice in the matter, and will suffer far worse consequences if in fact the house of cards all comes crumbling down here.
According to that report, we may not be far away…
“In 2008-09, we came remarkably close to another Great Depression. Next time we may not be so ‘lucky.’ The threat of the doomsday cycle remains strong and growing. What will happen when the next shock hits? We may be nearing the stage where the answer will be – just as it was in the Great Depression – a calamitous global collapse.”
Yet despite all the warning signs, and all the hard lessons learned from the 2008-2009 downturn, instead of trying to change course and right the ship, the powers that be simply seized the opportunity to further line their pockets, taking on more risk and making bigger bets in the form of “new investment” from the US taxpayers.
“The balance sheets of most Wall Street banks are fiction.” – States Frank Partnoy, a panelist from the University of San Diego.
Faulty balance sheets, risky short term investments, paying off bad bets off with new investor’s capital, huge dividends and giant paydays for management…. You decide.
Jon Maddux, CEO
www.YouWalkAway.com
