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As the
multi-billion dollar Ponzi scheme orchestrated by Wall Street insider Bernard
Madoff unravels in the media spotlight, the nation is being presented with a
rare opportunity to understand the true nature of many of our most cherished
financial structures. Hopefully we have the wisdom to connect the dots.
Although
the $50 billion loss engineered by Madoff is truly a staggering
accomplishment (and was done using old-fashioned fraud rather than the
mathematical wizardry that has characterized Wall Street's recent larcenies)
the size of the scheme pales in comparison to the multi-trillion dollar Ponzi
structures run by the United States government. In fact, rather than looking
to jail Madoff, President-elect Obama should consider making him our new
Treasury Secretary. If not that, at least make him the czar of something!
Madoff's
inspiration came from Charles Ponzi, the Italian-born American immigrant who
promoted an investment plan in the early 1900s' that traded postal coupons. Rather
than paying investors from legitimate investment returns, Ponzi hit upon the
innovative idea of paying out early investors with money collected from new
investors. By creating an illusion of success, interest in his investment
plan ballooned. Over time the schemes have become known by many other names,
such as chain letters or pyramid schemes. They are united by the fact that
they always fail in the end.
When the
influx of new investors inevitably slows to the point where distributions to
current investors can no longer be maintained, investors look to withdraw
funds. When this happens, the entire structure falls apart. The profits
received by those who "invested" early as well as any funds skimmed
off by the promoter, are offset by all the losses of those who came late to
the party.
To a
large extent, the same concept has driven the major asset bubbles of the last
decade. Given the ridiculously high valuations seen by tech stocks and real
estate during their respective booms, the only way the bubbles could be
perpetuated was if newer "investors" could be found to pay even
more outrageous prices (the greater fool). But when these new buyers balked,
the whole structure crumbled. Although there was no Ponzi or Madoff to
orchestrate these manias, the entire financial and economic apparatus of the
country had successfully convinced the public that "investments" in
tech stocks and condominiums were bullet proof and that the supply of new
buyers was endless.
Unfortunately,
the Ponzi economy doesn't stop there. A chain letter is no more viable when
run by governments than when run by private citizens. However, government
orchestrated pyramids have the advantage of required participation. As a
result, they can maintain the illusion of viability for several generations. But
the longer such schemes operate the larger will be the losses when they
ultimately collapse.
The
Social Security Administration runs its "trust funds" with
precisely the same methods used by Madoff and Ponzi. As money is collected by
from current workers, the funds are then dispersed to those already receiving
benefits. None of the funds collected are actually invested, so no investment
returns are ever generated. Those currently paying into the system are
expected to receive their returns based on the "contribution" made
by future workers. This is the classic definition of a Ponzi scheme. The only
difference is that Ponzi didn't own a printing press.
The
United States Government runs its own balance sheet based on the Ponzi
principal as well. Our national debt always grows and never shrinks. As
existing debt matures, proceeds are repaid by issuing new debt. Interest
payments on existing debt are also made by selling new debt to investors. The
whole scheme depends on an ever growing supply of new lenders, or the
willingness of existing lenders, to continue to roll over maturing notes. Of
course, as was the case with Madoff, if enough of our creditors want their
money back, the music stops playing.
In
Madoff's case, the rug pulling was provided by the huge financial losses
suffered by some of his clients in other non-Madoff investments. When enough
of these clients looked to sell some of their apparently well-performing
Madoff assets to help offset such losses, the scam collapsed. The same thing
could befall the United States Government. Now that China and our other creditors are looking to spend some of their U.S. Treasury holdings to stimulate
their own economies, look for a similar outcome with even more dire
implications.
The main
difference is that while Madoff took elaborate steps to conceal his scheme,
the U.S. government operates in broad daylight. It truly is amazing how faith
in government is so pervasive that many can believe that politicians will
succeed where private individuals fail, and that governments are somehow
immune to the economic laws that govern the rest of society. Like those
unfortunate to have been duped by Madoff and Ponzi, the world is in for a
rude awakening.
For a
more in depth analysis of our financial problems and the inherent dangers
they pose for the U.S. economy and U.S. dollar, read my just released book
"The Little Book of Bull Moves in Bear Markets." Click
here to order
your copy now.
For an
updated look at my investment strategy order a copy of my new book "Crash
Proof: How to Profit from the Coming Economic Collapse." Click here to order
a copy today.
More
importantly, don't wait for reality to set in. Protect your wealth and
preserve your purchasing power before it's too late. Discover the best way to
buy gold at www.goldyoucanfold.com. Download
my free Special Report, "The Powerful Case for Investing in Foreign
Securities" at www.researchreportone.com. Subscribe to my
free, on-line investment newsletter, "The Global Investor" at http://www.europac.net/newsletter/newsletter.asp.
Peter D. Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach, CA 92660
Toll-free: 888-377-3722 / Direct: 203-972-9300 Fax: 949-863-7100
www.europac.net
pschiff@europac.net
For a more in depth analysis of the tenuous position of
the American economy, the housing and mortgage markets, and U.S. dollar
denominated investments, read my new book "Crash Proof: How to Profit
from the Coming Economic Collapse." Click
here to order a copy today.
More importantly take action to protect your wealth and
preserve your purchasing power before it’s too late. Protect your
wealth and preserve your purchasing power before it’s too late.
Discover the best way to buy gold at www.goldyoucanfold.com
, download my free research report on the powerful case for investing in
foreign equities available at www.researchreportone.com
, and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp
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