by Gary Christenson, Miles Franklin:
Charles Ponzi was a charming con-artist who operated a century ago in the United States and Canada. He should be the patron saint of central banking, commercial banking, “borrow and spend” politicians and Keynesian economists.
Charles Ponzi enticed investors to place money into his investment scheme (100% return in 90 days), skimmed part to pay his luxurious needs, and used remaining money to pay prior investors. The system collapsed when people realized his postal reply coupon investments could not produce sufficient profits to repay investors.
More recent “Ponzi” examples include Bernard Madoff and many others, plus Alan Harper in season eight of “Two and One Half Men.”
GOVERNMENTS ALSO USE PONZI SCHEMES. They engage in similar plans and declare them legal. As with private plans, they work until they collapse, although their government granted legal status increases their longevity.
Charles Ponzi created a model used by central bankers, Keynesian economists and politicians. Consider systems that are similar to Ponzi schemes:
a) SOCIAL SECURITY: Current workers are taxed a percentage of their wages. Retired workers collect benefits from taxes paid by current workers in a “pay-as-you-go” process. The government already spent previously collected taxes. Social Security functions like a Ponzi scheme.
b) SOVEREIGN DEBT: The U.S. government spends nearly a trillion dollars more than its revenue – every year. It borrows the shortfall, which we call deficit spending. Debt is rolled over as new revenues repay older debts—Treasury notes and bonds. Since 2008 much of the new money has been “printed,” not collected from taxes or other sources. Total debt has doubled every eight to nine years for decades. Creating trillions of dollars (from nothing) increases prices and the cost of living. Consider these examples of prices from the 1930s, 1950s and 1978.
3. FRACTIONAL RESERVE BANKING: In this simple example a bank receives a deposit of $1 billion and creates $10 billion in credit. The bank lends $10 billion to a hedge fund or corporation and collects interest on $10 billion.
Fractional reserve banking works until too many depositors want their deposits returned at the same time (bank run), or the bank loans default. (Think 2008 crisis, Cyprus 2013, or Greece). Unfortunately, the depositor is an unsecured creditor of the bank and his deposit is no longer “his money” but a liability of the bank (Cyprus 2013). The bank might not return the deposit. FDIC and government guarantees go only so far.
IN THE END…
Ponzi schemes eventually fail because they are not based on viable business models. Are the following workable business models?
a) Will enough new investors buy Treasuries so that ever increasing Treasury debts will be “rolled over” – forever?
b) If the number of workers paying taxes to Social Security is flat or declining, can taxes from those current workers support a rapidly increasing number of retirees?
c) If bankers create dollars practically without limit in a fractional reserve fiat banking system, will the value of dollars stay constant? Of course NOT! The increased number of dollars in circulation devalues existing dollars and increases prices. A cup of coffee that costs 5 cents before massive currency creation might cost $5 or $50 afterwards.