View Full Version : US Dollar: The Ultimate Ponzi Scheme

Friday, October 14th, 2005, 03:27 PM
I guess most of us know what a "ponzi" scheme is - or at least we think we do. The definition is a bit elastic, for if you stretch it too far, then even Amway becomes one! However, there is general agreement on what a ponzi scheme is. Basically, if you get people to invest $100 and promise them $1000 back - funding these repayments from the $100 payments of future clients, then you're running a ponzi scheme.

It's where the so-called returns on an "investment" are actually made possible by future investments. It's also known as a pyramid scheme. If it takes ten new clients to reimburse the return on the first client, then it will take 100 new clients to reimburse the next ten- and so on. If such a scheme grows in a simple exponential manner - 10 to the power 1, 10 to the power of 2, 10 to the power of 3, etc - then it takes only ten layers to include nearly twice the population of the earth! Naturally, this can't go on indefinitely - and the ponzi scheme collapses. Witness a recent-times spectacular example in Albania - where the whole population was caught up in various schemes - and ultimately the whole nation went broke!

According to PJ O'Rourke ("Eat the Rich" at your local book store or www.amazon.com), the reason so many Albanians got suckered in was, "People
did not believe these were real pyramid schemes. They knew so much money could not be made honestly. They thought there was smuggling and money
laundering involved to make these great profits. The Albanians didn't believe they were the victims of a scam. They believed they were the perpetrators..."
And here lies a telling "truth". If one doesn't believe one is a victim of a scam - then one will happily go along with it.

Illegal vs Immoral

As you would expect, ponzi/pyramid schemes are illegal in most countries. Governments in some jurisdictions go to great lengths to crack down on any
suspected scheme - witness the US government's court case against Fortuna Alliance a few years ago.

In fact, it's almost as if the government is overly concerned about the existence of these schemes - judging by the amount of energy they expend in trying to expose them.

Now, I'm sure you're a good, upright citizen and would never think of participating in an illegal ponzi scheme. But what about a legal one?

"Not me!" I hear you say. But are you sure? The fact is that just about everyone is participating in one - especially if you have money in various mutual funds. How is this? It's simple. One of the most "honoured" and secure investments is the Government Bond, the T-Bill (Treasury Bill) - or any other name governments give the bits of paper they issue in return for cash - which they do with individuals, funds and banks.

A government bond is a rock-solid investment right? On the face of it - yes. But take a closer look. A government bond is a promise to pay a greater amount than you put in - after a certain length of time. This is not like purchasing stock in a Company - where the company expects to make profits - where your stock will increase in value if they do make a profit (or decrease if they don't).

No, a government bond is secure, because it is guaranteed to be redeemable at a future date. Governments, unlike most companies, don't make profits. They can only pay you out of the future revenues from future bond issues and tax receipts - i.e. future taxpayers. Get the picture?

The National Pyramid

Think of the whole population (and future generations) as being part of one huge pyramid. You invest $100 in government bonds and in ten years receive $1,000 back. The extra $900 interest is paid for by the government's issuing more bonds. This cycle goes on and on. It's the way the USA got lumbered with its trillions of dollars of indebtedness. Just like in your average ponzi scheme, your government needs a constant flow of new suckers (read taxpayers) to fund the ever increasing cost of redeeming due bonds. And the only way to fund it is for the government to borrow more money by way of the same bonds. And these financial instruments are considered risk-free!?

Even if you don't have your own Bonds - or participate in Mutual Funds that do own them - you are still being "suckered" (to use PJ O'Rourke's phrase). For you are a taxpayer who is funding this scam. No wonder taxes are exorbitant! Your hard earned money is being filched so the government can fund the various welfare schemes that have been in turn funded by borrowed money from people just like you - wanting to make a buck on a secure investment. Owning a government bond, directly or indirectly, is your legal title to part of one of the world's greatest cons - the legal (rather than illegal) ponzi scheme. It wasn't always that way.

The Gold Standard

Such financial shenanigans were not so easy when the developed world was on the gold standard - as this required that all money be backed 100% by an actual commodity - gold in this case.

As Alan Greenspan (Governor of the US Federal Reserve) said many years ago: "Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited."

"The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which -through a complex series of steps -the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets."

In other words, it won't be long before the "chickens will come home to roost". And if you morally object to participating in ponzi schemes - then you should also withhold your hard earned cash from the government.

Source: The Offshore Black Book