As we recall from 2008, there were a lot of investment funds and business models that had merely been cleverly disguised ponzi schemes - Fannie Mae, Lehman Brothers, Madoff etc. When the crisis hit in 2009, worldwide economic growth slowed, which left even more erstwhile business and economic models high and dry, unable to generate their accustomed high level of profits. This of course drove more economies and businesses to the ponzi model in order to get back to the good old days of unsustainable high income. Taken in the bigger picture context of a planet with 7 billion people in which the top 1% have twice as much wealth as the bottom 90%, then it can come as no surprise that the ponzi model is now ubiquitous. In an overwhelming drive for mass consumption, even the capital itself gets consumed...
The Globalized Economic Ponzi Scheme
As per the theme of this blog, the world economy is a ponzi scheme in as much as it requires a steady flow of workers and savings from the Third World back to the developed nations in order to sustain bilateral trade. This continuous flow of wealth from the poor to the wealthy is of course by no means stable. Workers in the developed countries become ever-more debt levered while their skillsets and wages become ever-less competitive relative to workers in the developing nations. And the motives or drivers behind this global scheme are clear - multinational corporations and their billionaire sponsors sought to monetize the gap in the standard of living between the developing and developed nations, by setting up a massive industrial arbitrage between the two trading blocs. And of course, not a small number of corporate stooges and overpaid yuppies benefited from this arbitrage as well, even though they ultimately put themselves out of jobs, whether they realize it yet or not.
The U.S. Ponzi Scheme
On a smaller scale, the United States itself has morphed into a ponzi scheme. The early pioneers and builders of this country were some of the hardest working and most industrious people in the history of the planet. However, eventually America's success relative to the rest of the world became comparatively mitigated, as other nations wanted a piece of the American Dream for themselves. Inevitable resource and labour competition led the American economic juggernaut to hit a stall point - around the early 1970s. But, then along came the current generational leadership - the Baby Boomers - who implicitly realized that the easiest way to increase their wealth was not to innovate or grow the economy organically - it was to liquidate jobs and industries. That is really all the past 30 years of Supply Side Economics ever was - history's largest liquidation sale. Once again, one generation of "investors" makes a huge profit throughout its ownership period but then near the end of its ownership period aka. retirement, decides to liquidate the assets at the expense of all future generations. Look at Detroit for a glimpse into the future. That city is a poster child for failed or non-existent U.S. industrial policy. Workers can blame companies and vice versa, but ultimately that industry was taken over by foreign competition, with nothing to fill the void. The U.S. car industry just happened to be the earliest victim of Ponzi Capitalism. The Japanese got big chunks of the car industry, and Americans got cheap Sony Walkmans and low interest rates in return. To this day, Japan runs a 2:1 trade surplus with the U.S. And as far as Detroit, now pensioners are suing the city to make good on their obligations, but unfortunately there is no more money. The current generation of ever-dwindling workers can't shoulder the burden of the massive retiring bulge. It's like suing a poor man for being broke.
The Stock Market Ponzi Scheme
Not withstanding a huge run since the late 1930s, the stock market of course has morphed into a massive ponzi scheme. The early investors are the corporate insiders who control the corporate treasury and the disbursement of new shares. They disburse new shares to themselves through grants or stock options as they dilute the share holdings of the public at large. The general public toil away at their regular jobs and put their savings into stocks thereby allowing the ponzi to grow and to subsidize even more dilution. Insiders have taken hundreds of billions out of the market market in the past decade all while the average 401k retirement plan barely breaks even. Apologists would say that the *market* has intrinsic value and that it's not an empty asset-less ponzi scheme. That is true to a point, however, the valuation of today's companies is premised on the first and second schemes mentioned above, both of which have artificially inflated profit margins to the highest level in history. So there is no way that current stock market valuations can be maintained in the face of a slowing global economy. Meanwhile, more importantly, we all know that today's stock prices only indicate what the marginal seller can get for their holdings. If everyone tries to sell at these prices, the markets most certainly will collapse.
The Social Security and Medicare Ponzi Schemes
From the beginning, these programs held no assets - one generation paid for the next. Which was all well and good until there was a demographic bulge - aka The Baby Boomers. However, for a time, the system was in "surplus" as the mighty Boomers contributed amounts to the fund exceeding what their parents' generation took out of it. Alas, that "surplus" was systematically raided by Washington, first by commingling the money with general revenues to create fictitious "balanced budgets". Then it was raided as a "rainy day fund" i.e. take some and put it back. Nothing was ever put back. Then it just got spent. So now of course, there is no surplus, and the generations coming after the Boomers have high unemployment and massive student loans, thereby exacerbating the ever-increasing shortfall.
The Canadian Real Estate Market Ponzi Scheme
Just to be fair and spread the joy around a bit. Likely one of the biggest pyramid schemes in the world right now exists in the real estate markets of those countries that didn't see a bust back in 2008. For some reason, they took all of the free money dopium that was set loose after Lehman and ploughed it into their housing markets. You can't make this shit up. First they all congratulated themselves for avoiding the 2008 housing bust, then they all set out to create one for themselves. In Canada, add the demographic factor of having a tidal wave of Chinese immigrants buying their way into the country by investing in real estate and voila, another ponzi scheme is born. Again, the key attribute indicating that it's a ponzi scheme, is realizing that without an influx of new capital there is no way that the current price levels can be maintained. As shown recently, all of the commodity producing countries have price/rent/income metrics well above historic levels. Only a fool assumes that there won't be reversion to the mean in those countries, when there was reversion to the mean in every other country in the history of mankind. And there is nothing like a deadly combination of massive leverage, high prices, and non-recourse mortgages to send the middle class bungy jumping with a noose. As I pointed out months ago, Canada's system is far more lender friendly than the U.S. system which is borrower friendly by comparison.
The Company I Work At Is A Ponzi Scheme
The reason I wrote this post is because I just found out that my own company is a ponzi scheme. It's legally a corporation, but operates like a partnership - very similar to a law firm. All profits are disbursed annually. When new partners join, they pay into the equity pool which magically grows at a predefined rate of 10% per annum. Of course, there are no tangible assets (or cash) backing this mythical rise in equity, it's all based on accounting gimmickry. When senior partners retire, their equity stake is paid out using current profits and from equity buy-ins of younger partners. Well, as you can imagine, this business model works great when the economy is growing, but as soon as it stalls out, the senior partners realize that there is no way they can all get paid out in the same timeframe without killing the company. This is very similar to how most law firms operate.
So ironically, I could be the victim of yet another ponzi liquidation in the not too distant future. As you can imagine, I am somewhat stressed out; however, my only consolation is knowing that I won't be the first ponzi victim, nor will I be the last...
So ironically, I could be the victim of yet another ponzi liquidation in the not too distant future. As you can imagine, I am somewhat stressed out; however, my only consolation is knowing that I won't be the first ponzi victim, nor will I be the last...
