The United Ponzi States of America

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The United Ponzi States of America
January 20, 2009 | From theTrumpet.com
If you thought Madoff’s Ponzi scheme was bad, don’t look now, but you’re in one.


ROBERT MORLEY
Anyone can work a simple swindle. But you need to be a special kind of con man to bilk billions from otherwise intelligent people. Bernard L. Madoff was one such man. Charles Ponzi was another. But the biggest fraud and scam master of all goes by the name of Uncle Sam.

Just what does a person have to do to make his name synonymous with fraud? Charles Ponzi, the father of the “Ponzi scheme,” knows. Unfortunately, so does Uncle Sam. And taxpayers across America are about to find out.

In 1903, a destitute Charles Ponzi stumbled upon a way to make some quick cash by taking advantage of the postal system. When the postal service sent letters overseas, it was common for senders to include an international reply coupon. This coupon could be exchanged for postage back to the country from which the letter was sent. Charles found out that due to exchange rates, you could purchase postal reply coupons cheaply in some foreign countries, then send them back to the United States to swap them out for American stamps of higher value. Then you could sell the stamps.

For a while, Charles made a good living gaming the system at taxpayer expense. Because of the laws at the time, it was perfectly legal.

Then, Charles decided to recruit investors into his scheme with the promise of 50 percent returns. Investors would give him their cash, and sure enough, Ponzi would deliver on his promise.

Charles even signed up recruiters who brought in clients from around the country interested in taking advantage of his fool-proof investment strategy. People sent him millions—huge sums in those days. For him to receive more than $250,000 a day was not unusual.

But things went bad. Instead of working his “system” to make money for his investors, Charles instead began paying out the returns for old investors with the new money that kept coming in from new investors—as opposed to doing so with profits. This was the Ponzi scheme.

For a while, Charles kept up the appearance of a successful entrepreneur. If anyone became suspicious or uncomfortable with his investment, Ponzi immediately gave him his money back—thus keeping his reputation intact. At first, paying out money was not a problem. Eager new investors were sending him tons of it. As long as there was an ever-increasing supply of new suckers, new money could be used to pay profits to older investors. Anything left over went toward fancy clothes, gold-handled canes, and living the high life.

Problems arose when a newspaper reporter did the math. Charles Ponzi had to be moving more than 160 million postage tickets a year to pay back all his investors. But since there were only around 27,000 postal reply coupons in existence globally, the reporter knew the truth. Ponzi was running a scam.

But here is perhaps the most astounding part of the whole swindle.

Even after Ponzi was mathematically proven to be a fraud—on the front page of the Boston Post—many intelligent people refused to believe it. They still thought of him as a legitimate businessman. The morning the story broke, investors still lined up around the block from his office to give him more money. Mr. Ponzi boasted that the day the story ran, he took in a million dollars from investors. Their faith was unshakable.

Mr. Ponzi’s charisma and rock-solid reputation, combined with the fact that he was making so many of his early investors rich, blinded people to the clear fact that his whole system was not only an unsustainable fraud, but it was also on the verge of collapse.

New investors who actually did the math began to shy away. Investigators began poking around Ponzi’s “business.” Ponzi’s already shaky bulwark buckled. Then the whole tower of fraud collapsed in a heap of zero balances. People lost millions. And Charles Ponzi went to jail, and down in history as the father of the Ponzi scheme.

The hallmark of the Ponzi scheme, just like all pyramid schemes—was that it was predicated on ever-increasing amounts of new investment dollars from subsequent investors to pay the 50 percent returns promised to investors. Actual profits just weren’t there. As a mathematical probability it had to fail.

Unfortunately, 100 years later, investors are still seduced by this get-rich-quick scam.

One Bernard Madoff is just the most recent high-profile example of a con man who used his stellar reputation to steal billions. A Wall Street insider, Madoff founded and became chairman of the Nasdaq stock exchange. Victims recount Madoff’s ability to make people believe that he was doing them a favor by allowing them to be part of an exclusive investment community. The promise of apparently consistent market-beating returns did the rest. Madoff looked so good that he was able to dupe people—including multibillion-dollar professional investors and institutions—out of their money. He didn’t even advertise: People came to him.

Just like Ponzi, Madoff used new investment money to pay returns to earlier investors. The biggest difference was that instead of offering 50 percent returns, Madoff offered around 12 percent—so the pyramid scheme was able to last a lot longer and grow bigger. But just like Ponzi, once his true character was revealed, the scam quickly collapsed—all $50 billion worth.

On the individual level, little has changed since Charles Ponzi’s days—technological trickery aside. Fraud is just measured in the tens of billions now.

But unfortunately, for America as a whole, something big has changed.

Is it possible you are a victim of a con man promising mathematically impossible returns and don’t even know it? Each day Americans shell out money, collectively, to the tune of billions of dollars—and many will not see a penny of it ever again. Yes, the economy is one great big Ponzi scheme, built upon many small Ponzi schemes. And mathematical probability guarantees that one day—and sooner rather than later—you will wake up and find your money gone.

If you find that assessment incredible, just ask Bill Gross, the managing director of Pimco, the world’s largest bond fund. As a financial insider who has acted as an agent for the Federal Reserve, Mr. Gross knows what he is talking about. According to Gross, the entire U.S. economy is a Ponzi tower waiting to fall. He calls it “our Ponzi-style economy.”

When the world’s biggest bond fund manager—whose investments are dependent on the value of the dollar—says the U.S. economy is a Ponzi scheme, people should wake up and take notice.

Social Security is probably the most blatant example of how the government has turned the economy into an unsustainable Ponzi scheme.

For instance, there is no money in the Social Security trust fund.

Yes, you and I might have paid into Social Security, but we will never see any of those dollars ever again. All the money currently sent in is used to pay current retirees. And the excess is not saved for future generations. Instead, the government takes it out for general-purpose spending: Think Ponzi’s fancy clothes and gold-handled canes times a trillion.

Just like any other Ponzi scheme, this can only work if there is an ever-increasing number of workers to pay into Social Security. Unfortunately, America has an aging population with 80 million baby boomers now starting to retire. Going forward, there will be a continually shrinking pool of workers to provide for an ever-growing pool of retirees—a classic Ponzi-busting scenario. According to estimates, Social Security is facing a $10 trillion shortfall, an amount that would almost double the national debt.

Medicaid and Medicare are two other Ponzi/Madoff schemes that are expected to provide services for an ever-growing proportion of the population and be paid for by an ever-decreasing tax base of workers. The funding deficit now exceeds $40 trillion. Where is the money going to come from?

America’s whole Social Security safety net is mathematically unsustainable. The model can’t help but crack.

But Social Security, Medicaid and Medicare are just part of America’s Ponzi economy. It gets much worse.

Take a look at our Ponzi-style capitalism at work in the housing market.

As home prices doubled and tripled over the past decade, most buyers probably never thought they were going to become victims of the biggest Ponzi-style scam in history.

Lost in the euphoria of supposed never-ending house-price appreciation was the fact that America’s population was only slowly growing. House prices were not going up because more people needed homes. Prices were going up because waiters and secretaries were buying two, three or more homes at a time to flip.

The housing bubble of course was made possible by certain members of Congress who felt it was their duty to coerce Fannie Mae and Freddie Mac, the two giant government-sponsored lenders, to give loans—also known as subprime loans—to minorities and other “disadvantaged” groups who could not really afford to buy homes in the first place. In other words, Congress created a house Ponzi-scheme by artificially inflating the home buyers pool. Now that these subprime borrowers are defaulting on their mortgages, and banks no longer want to lend to subprime borrowers, there is no new money to enter the housing market—thus a classic Ponzi bust.

Not that all the blame should be on Congress. The Federal Reserve deserves its fair share too. The Federal Reserve artificially lowering interest rates to 1 percent allowed so many more people to purchase homes. And homeowners were only too happy to borrow money they couldn’t afford to purchase homes that supposedly only went up in value. When the Fed was forced to raise rates, all of a sudden a huge chunk of the buying pool disappeared. And those with adjustable-rate mortgages were forced to sell, or lose their house.

The Ponzi housing market had ramifications that spilled out into many other areas of the economy as well. It created a huge misallocation of capital. Homeowners, relying on their rising home equity, borrowed against their homes to eat out, purchase vehicles, and go on vacations. Businesses not realizing that the housing market was a bubble waiting to pop borrowed and spent even more money expanding their businesses to take advantage of rising but unsustainable consumer demand. Home builders also misinterpreted the artificial housing demand as real growth, borrowing billions to construct millions of unneeded homes.

Now that the housing fraud has been exposed, demand for housing has plummeted, prices are cascading, homeowners are defaulting on their mortgages at record numbers, and the banking system is in crisis.

A few years ago it was reported that 40 percent of all job creation in the U.S. was related to the housing industry. Now, as jobs are being lost, the reverse is the case. America will see years’ worth of job creation erased. Just like Madoff’s money, it will be like the jobs never existed.

The stock market is also a giant Ponzi scheme in many respects. Stocks have risen in price not so much because companies have become more profitable, or more efficient, but because more people have 401Ks and other retirement plans that invest in the stock market than in the past. It certainly isn’t the fact that stocks can sustain higher dividends that has attracted more buyers. As was mentioned above, America is aging, and as people retire, there may no longer be an ever-growing pool of “investors” to drive stock prices higher. In fact, when people retire, they tend to sell stocks to live off the proceeds.

But perhaps the biggest U.S. Ponzi scheme of all is U.S. government debt—and therefore the dollar!

“The United States government runs its own balance sheet based on the Ponzi principal as well,” says economic analyst and president of Euro Pacific Capital Peter Schiff. “Our national debt always grows and never shrinks. As existing debt matures, proceeds are repaid by issuing new debt.”

America even has to borrow money to pay the interest payments on the national debt.

As Schiff notes, the entire economy is reliant on an ever-increasing supply of foreign lenders to continue lending us more and more money to finance government spending—spending which the whole economy has become critically dependent upon.

The only reason the U.S. debt sham has gone on as long as it has is because of America’s once-sterling reputation. America had a dynamic production-driven economy, low debt levels, and much smaller government. America also had a reputation for trustworthy governance and regulation.

Those advantages are now gone. And the subprime-induced banking meltdown that originated in America, and has since spread around the world, has irrevocably damaged trust in the U.S. economic model. Uncle Sam’s credibility is under investigation.

As with Charles Ponzi and Bernard Madoff, once the legitimate-businessman sham is exposed, the whole scheme quickly collapses. In America’s case, all it would take is for foreigners to stop lending new money to the U.S.—they wouldn’t even have to pull their previous loans. The whole borrow-and-spend model of the U.S. economy would be exposed as an unsustainable fraud. And the dollar—which the government stopped backing with gold during the 1970s—could see its value evaporate overnight.

Charles Ponzi and Bernard Madoff stole billions of dollars, leaving hundreds of people destitute.

Uncle Sam’s scheme will defraud and destitute an entire nation.

Welcome to the United Ponzi-Impoverished States of America. •