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Articles that didn't Get Published in Global Outlook Issue # 13 - Annual 2009 |
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Is the Global Economic Meltdown the Result of a Giant Ponzi Scheme? |
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The news that Wall Street money manager Bernard Madoff was arrested has many people wondering just what happened. Prosecutors claim he defrauded investors of $65 Billion through a pyramid scheme. There are several types of pyramid schemes. Madoff used a Ponzi Scheme which is a particular type of pyramid scheme. The name goes back to Charles Ponzi |
BY IAN WOODS
Who was Charles Ponzi? Charles Ponzi was an Italian immigrant who figured out how to make a million dollars in six months. That was back in Boston in 1920. Profits were supposed to come from exchanging international postal reply coupons (IPRCs) bought in Italy at a discount and used to purchase US stamps at four times the value. The stamps where then sold for a handsome profit. This was a form of arbitrage, or profiting by buying an asset at a lower price in one market and immediately selling it in another market where the price is higher, which is not illegal.
Ponzi canvassed friends and associates to back his scheme, offering a 50% return on investment in 45 days. The great returns available from postal reply coupons, he explained to them, made such incredible profits easy. He started his own company, the “Securities Exchange Company”, to promote the scheme. He promised 50% interest (return) on investments in 45 days or “double your money” in 90 days.
About 40,000 people invested about $15 million all together; in the end, only a third of that money was returned to them. By July 1920 he had made millions. People were mortgaging their homes and investing their life savings. Most did not take their profits, but reinvested. Ponzi was bringing in cash at a fantastic rate, but the simplest financial analysis would have shown that the operation was running at a large loss. As long as money kept flowing in, existing investors could be paid with the new money. In fact, new money was the only source Ponzi had to pay off those investors, as he made no effort to generate legitimate profits.
Ponzi lived luxuriously: he bought a mansion in Lexington, Massachusetts with air conditioning and a heated swimming pool, and brought his mother from Italy in a first-class stateroom on an ocean liner.
The Boston Post ran a series of article on Ponzi and reported that the number of postal reply coupons needed to produce such fantastic returns was 6 times more than the number that were in circulation. That on Ponzi’s Securities Exchange Company. Ponzi paid out $2 million in three days to a wild crowd outside his office. He canvassed the crowd, passed out coffee and donuts, and cheerfully told them they had nothing to worry about. Many changed their minds and left their money with him. However, federal agents raided the Securities Exchange Company and shut it down. There was no large stock of postal reply coupons and Ponzi was soon under arrest, with a Federal indictment. His liabilities were estimated at $7 million.
In the end he pleaded guilty and went to federal prison after being charged with 86 counts of mail order fraud, ironically to send postcards to his ‘investors’ telling them of their fantastic profits. Fourteen years later, he was released from jail and deported to his homeland, Italy, as he hadn’t ever become an American citizen.
How Does a Ponzi Scheme Work?
In a Ponzi scheme the schemer acts as a hub for the victims, interacting with all of them directly. The Ponzi scheme claims to rely on some esoteric investment approach, like insider connections. It often attracts well-to-do investors. In Madoff’s case, he was once chairman of the NASDAQ. Alleged victims include director Steven Spielberg, actor Kevin Bacon and real estate magnate Mort Zuckerman.
The reality of the scheme is that the return to the original investors is being paid from incoming investments, not from profits.
One reason the scheme initially works so well is that early investors, those who actually got paid, often reinvest their money in the scheme, thus the schemers doesn’t actually have to pay out much, they just need to show statements indicating a return has been paid.
But the schemes usually come to one of three ends:
The promoters and the funds vanish, or
The scheme collapses under its own weight, or
It gets exposed.
In this case, court papers indicate Madoff exposed the scheme by telling two senior employees that he’d defrauded investors.
What are the Parallels between a Ponzi Scheme and the Debt-Based Fractional Reserve Money System?
1. There isn’t enough money in the system to cover all bets.
In a Ponzi scheme, there is never enough money to pay all investors back, much less any profit. Because new investors’ money is used to pay off any of the original investors who want to cash out and/or take their profits.
In the Banksters’ scheme, there is never enough money on deposit to cover all the customer deposits. And yet we are told our money is safe with them. Meaning there is not enough cash, coin, silver or gold to back up what they say is on deposit.
In the Banksters’ scheme, there is never enough money in the system to pay the interest on all outstanding debts. That’s because all the money that is in the system is based on loans. New loans put new money into the system. However it is only the principle amount of that loan that is created, not the interest. Meaning that if all loans were paid back to the banksters there wouldn’t be enough money in the system to pay back the interest owed. There would be a short-fall not only of the simple interest owed, but the compound interest owed, which doubles every so many years based on the interest year. (Using the rule of 72, if you were to receive a loan of $100 with compounding interest at a rate of 6% per annum, the rule of 72 gives 72 divided by 6 % = 12 years for the loan to double to $200, that’s providing you didn’t pay back any of the principal.)
So to give you a very rough idea of what that means, assuming there are a lot of loans out there that have generated a lot of compound interest, we could say that if we, as a one very large group of consumers, hypothetically repaid all our debts to the banksters tomorrow, we would allegedly still owe them an equivalent amount of money (or more) in interest than what we borrowed in the first place. And that money wouldn’t exist because it was never created. So the banksters have it nice. They could then claim they had the right to seize all the collateral we had put up to secure the loan and any assets they had a lien on. Nice work if you can get it.
This you might find a little upsetting. But wait there’s more.
2. The schemer acts as a hub for the victims
In a Ponzi scheme the schemer acts as a hub for the victims, interacting with all of them directly. Whereas, in a multilevel scheme, those who recruit additional participants benefit directly. Failure to recruit typically means no investment return.
In the debt-based money system, the Banksters hire loan officers to approve every loan. They get paid a salary and perhaps a bonus. But if they don’t make a loan one week, they still get paid, because they are working for the Banksters, not themselves.
3. The scheme claims to rely on some esoteric investment approach.
The Ponzi scheme claims to rely on some esoteric investment approach, like insider connections.
In the bank created money scheme, the Banksters rely on the public’s ignorance of where they get their money from. When you realize that the money that the banksters loan us is created out of thin air, as an entitlement or endowment, or gift, or free ticket to financial freedom, from their buddies in Parliament or Congress., one begins to see behind the curtain of this corrupt confidence money system where, simply put, each bank has a printing press in the basement and churns out enough money to loan to those of us who have an asset that can be collateralized. In some cases that is a house, a car, or a business. In most other cases it is ourselves when we accept the responsibilities of a credit card. Can you think of a better business to be in, where the cost of goods sold is zero? And you can benefit from the “eleventh wonder of the world” ... compound interest?
Now if that doesn’t that make you mad, you are either too confused to understand the workings and implications of this magnificent Ponzi scheme and how we are being taken for a ride big time, or you are a bankster and enjoying the free ride!
4. It often attracts well-to-do investors.
Charles Ponzi’s scheme was so successful, people were mortgaging their houses to get involved.
Bernie Madoff allegedly bilked director Steven Spielberg, actor Kevin Bacon and real estate magnate Mort Zuckerman.
The Banksters suck in anyone with an income stream or enough bucks to put down a deposit. Poor people can’t play.
5. The return to the original investors is paid from incoming investments, not from profits.
The reality of the Ponzi scheme is that the return to the original investors is paid from incoming investments, not from profits.
Ponzi made very little, if any money investing in the international postal reply coupons. Any pay outs to existing investors came from the new investors. One reason the scheme initially works so well is that early investors, those who actually got paid, often reinvest their money in the scheme, thus the schemers doesn't actually have to pay out much, they just need to show statements indicating a return has been paid.
In the fractional reserve money system, the Banksters rely on inflation to keep the ball rolling. That way they can keep money flowing into the system to help cover the shortage of money caused by the missing interest component. Without built-in inflation the system would grind to a halt simply because the amount of money in the system shrinks when loans are paid off. That means that the economy wouldn't have enough credit money to keep up with the growing demands of the nation. It would mean that new loans would be very hard to get. The central bank's roll is to keep inflation steady at some target rate, not too high as to cause stagflation and not too low as to cause hyperinflation where our money becomes worthless. But inflation itself is a hidden tax, because it has less and less buying power over time. The more money in the system, the less valuable it is.
In the Banksters' scheme, the Banksters do nothing at all to increase the value of property, unlike a laborer who builds a house, or assembles a car. They don't drive one nail into a board, or dig up one shovelful of dirt to help build that house. They "facilitate" the lending and borrowing of money to help build things. They are a parasite to the economy offering no real value to it. In fact, they suck blood out of it, by demanding interest on money they create out of thin air.
In practice, Banksters need 3 to 10% cash reserves to be able to create their loans.
Consumers are under the impression that the Banksters make their profit on the 'spread' between what they charge loaners and what they pay depositors. But that is misleading when you realize that they can loan out 10 times what they hold in deposits. So that a 5% spread in reality translates into a 50% gross profit. That's why you see banks on every major corner in every major city.
So the return to the depositors is primarily paid from the privilege of leveraging incoming deposits into interest-bearing loans, not from profits generated by "the interest rate spread" as we are led to believe.
6. The scheme usually comes to an end in one of three ways:
The promoters and the funds vanish, or the scheme collapses under its own weight, or it gets exposed.
In the case of Charles Ponzi, it soon became apparent that the amount of money he had supposedly invested in international postal reply coupons was way more than the total value of all coupons in circulation.
In the case of Bernie Madoff, court papers indicate he exposed the scheme by telling two senior employees that he'd defrauded his investors.
In the case of Scotiabank in Argentina, they closed their doors to investors and vanished.
In the case of the current financial crisis, the credit system is maxed out, personally and governmentally. The trillion dollar bailouts are fast making the American dollar worthless and the system is about to collapse, due to a lack of qualified borrowers.
In the case of this article, the writer is trying to expose the scheme as a fraud bigger than any other.
Conclusion
Going back to the original question: Is the Global Financial Meltdown the Result of a Giant Ponzi Scheme? Yes.
Are bankster bailouts going to solve anything? No.
What will? Monetary reform -- replacing the Banksters' debt-based money system with a government created debt-free money system regulated by us, not them.
But before we can ever achieve that we need to reform the most fundamental thing of all ... the corrupt decision-making process we are witnessing and suffering from in our nation's capitals . our system of mis-representative democracy.
Going One Step Further
Let's take it one step further ...
Is the current economic meltdown a false flag operation?
These guys are smart, really smart.
They knew the system was bound to collapse sooner or later.
That's the way it's been since the beginning of time. But, of course, the average person doesn't know that because they haven't studied their history. Look at Rome, look at Greece, look at Babylonia.
But they have a bigger plan ... it's called winner takes all . a Global Monetary System run by the secretive Bank for International Settlements in Basel Switzerland.
The Monopoly Men want it all.
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Ian Woods is editor and publisher of Global Outlook. All rights reserved. Copyright belongs to the author.
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