Great Depression Online Archive Issue:

The Biggest Ponzi Scheme of All

Great Depression Online
Long Beach, CA
December 23, 2008

Inside This Issue You Will Discover…

*** An Exclusive Ponzi Scheme
*** Fraud and the Cycle
*** The Biggest Ponzi Scheme of All
*** And More

An Exclusive Ponzi Scheme

“‘It’s impossible to get in, but we can get you some if you’re nice,’” reported the New York Times last Friday.

The words were spoken by an anonymous Swiss Banker, summarizing the archetypical sales pitch of “exclusivity” that was typical of a Bernie Madoff investment opportunity.

By now you’ve undoubtedly heard the story of Madoff and his $50 billion Ponzi scheme.  For years Madoff paid out robust and steady returns to investors.  But to do so, in classic Ponzi form, he used the inflow funds of other investors.

Here at the GDO, we aren’t all that interested in the particulars…the intricate network of connections around the world channeling new funds into the scheme.  Nor do we care about the many big names and multimillionaires and billionaires who were swindled.  That’s not our beat at all.

~~~Warning: The Current Economic Crisis Will Worsen~~~

Warning: The current economic crisis will worsen and more and more people will become homeless, jobless and broke.  There is however a way you can protect yourself, your home and your assets starting today.  It’s all outlined in “The Insider’s Guide to Surviving the Recession.”  Learn all about it here: The Insider's Guide to Surviving the Recession.

~~~~~~~~~~~~~~~~~~~~~~~~~

Instead, we look to the moral undertones of the story for instruction.  What can we learn from it?  And how can we ensure that we’re not hoodwinked by such a ruse too?

Fraud and the Cycle

In his masterpiece, Manias, Panics, and Crashes, Charles Kindleberger dedicates a chapter to The Emergence of Swindlers.  Here we quote directly from the section titled Fraud and the Cycle…

“We believe that swindling is demand-determined, following Keynes’s law that demand determines its own supply, rather than Say’s law that supply creates its own demand.  In a boom, fortunes are made, individuals wax greedy, and swindlers come forward to exploit that greed.  The position is occasionally expressed elsewhere that sheep to be shorn abound and need only the emergence of effective swindlers to offer themselves as sacrifices: ‘There’s a sucker born every minute.’” 

During the recent boom, we’ve witnessed numerous financial contrivances founded on faith in cheap available credit and ever expanding asset prices spring to life, burgeon into towering edifices, and crumble under their own corpulent weight. 

Outlandish ploys like zero down negative amortization stated income liar’s loans, A-rated subprime Collateralized Debt Obligations…and their insurance policies, Credit Default Swaps.  There was also the reemergence of the Leveraged Buyout phenomenon…where purchase of a controlling interest in a company’s equity is financed through borrowed money, with the assets of the acquired company used as collateral for the borrowed capital.

What these had in common was the greedy delusion that somehow, someway you could get ‘something for nothing’.  Madoff’s Ponzi scheme emerged, in essence, because it was demanded by the greed of the boom. 

Who knows how many other dubious proposals will be exposed as the bust advances?

The Biggest Ponzi Scheme of All

Remember mutual funds?  Weren’t they supposed to be the golden ticket to a millionaire retirement? 

Do you know anyone that’s going to enjoy an affluent retirement because they have a 401K invested in mutual funds?

Whether you consider the idea that we could all get rich investing in mutual funds to be a Ponzi scheme is differentiated by several shades of gray.  Fundamentally, for this to work more and more people – with more and more money – would have to throw good money at the stock market in perpetuity.  Does this not have a hint of Ponzi to it?

Still, it is possible to make a fortune in stocks.  But that takes getting out the pencil and paper, learning how the businesses you invest in operate, making phone calls, visiting sites, and on and on.  In other words, to make a fortune in stocks, you’ll have to work for it.

But that’s another story.  For when it comes to the retirement lifestyle that many are expecting, there are many unwanted surprises lingering just beyond the horizon.

For example, the biggest Ponzi scheme of all, that will wreak havoc on the most innocent people, is Social Security.  As it currently operates, there is no Social Security fund.  Rather, in Ponzi fashion, promised benefits are paid out by freshly collected revenues…with any additional revenues going to fund other government programs.

Yet it’s projected that by 2017 more benefits will be paid out than Social Security garners in revenues.  How this difference will be funded is predictable…the government will print the money.

And the results will be equally predictable.  They’ll be devastatingly disastrous.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  With all the banks going belly up, Wall Street in crisis, and Main Street in disarray now is the time to brush up on your history of financial crisis.  In fact, in Charles Kindleberger’s practical classic, Manias, Panics, and Crashes – A History of Financial Crisis, you may learn something that will help you preserve your life savings and dignity in the process.  Learn more here: Manias, Panics, and Crashes - A History of Financial Crisis.

P.P.S.  Look for the “Special Christmas Edition” of the GDO to arrive in your in-box a day early – on Christmas morning.

 

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