Carlo Ponzi, Alias Uncle Sam

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by Gary North GaryNorth.com

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Carlo "Charles" Ponzi was a con man who was the Bernie Madoff of his era. For two years, 1918 to 1920, he sold an impossible dream: a scheme to earn investors 50% profit in 45 days. He paid off old investors with money generated from new investors. The scheme has been imitated ever since.

Every Ponzi scheme involves five elements:

  1. A promise of statistically impossible high returns
  2. An investment story that makes no sense economically
  3. Greedy investors who want something for nothing
  4. A willing suspension of disbelief by investors
  5. Investors’ angry rejection of exposures by investigators

Strangely, most Ponzi schemes involve a sixth element: the unwillingness of the con man to quit and flee when he still can. Bernie Madoff is the supreme example. But Ponzi himself established the tradition.

The scheme, once begun, moves toward its statistically inevitable end. From the day it is conceived, it is doomed. Yet even the con man who conceived it believes that he can make it work one more year, or month, or day. The scheme’s designer is trapped by his own rhetoric. He becomes addicted to his own lies. He does not take the money and run.

This leads me to a set of conclusions. Because all Ponzi schemes involve statistically impossible goals, widespread greed, suspension of disbelief, and resistance to public exposure,

All fractional reserve banking is a Ponzi scheme. All central banking is a Ponzi scheme. All government retirement programs are Ponzi schemes. All government-funded medicine is a Ponzi scheme. All empires are Ponzi schemes. All Keynesian economics is a Ponzi scheme.

But there is a difference between a private Ponzi scheme and a government Ponzi scheme. The private scheme relies on deception and greed alone. A government Ponzi scheme relies on deception, greed, badges, and guns.

SOCIAL SECURITY

Political liberals in the mainstream media get very upset when somebody speaks of the sacred cow of Social Security as a Ponzi scheme. They go gunning for any political figure who uses the phrase "Ponzi scheme" in relation to Social Security. This is because they know that such a politician is a conservative, and they want to see him defeated at the next election.

It doesn’t matter whether politicians say the naughty words or not; the Social Security system is a Ponzi scheme, and it will go bust.

Medicare is a vastly larger Ponzi scheme, and it, too, will go bust. In fact, it will go bust with such an impact on the federal budget that it will pull down the Social Security system with it. In fact, if the promises are not broken to the oldsters who are dependent upon Medicare and Social Security, the deficits in the Medicare system will bring down the entire federal government. The government will default on all of its debts. Anybody who bought that debt will then wind up as helpless as the people who have become dependent upon Social Security and Medicare.

The people who are dependent upon Social Security don’t want to hear this. They want to tell us that they paid into the system, fair and square, and therefore we owe them the money. Well, I am in the system, and I paid into the system, and I’m going to cash my checks from the system, but I will be glad when the system goes belly up.

ETHICAL CAUSE AND EFFECT

Why should the thought of the bankruptcy of these Ponzi schemes cheer me up? Because I believe in ethics. I am horrified by the thought of a completely unethical system being successful over time. The longer the day of reckoning is delayed, the more people will be lured into it. I wish the system would go belly up sooner than later, because fewer people will become dependent on it if the system goes belly up sooner rather than later.

Sadly, the people who believe that it is ethical to stick a gun in the belly of one man and take his money, in order to support someone else, are in favor of the Social Security system. They want it to keep going forever. They want the moral corruption of coercion to continue.

The initial motivation for sticking the gun in a man’s belly was political rather than charitable. Chancellor Otto von Bismarck in the 1880s rammed the first old age retirement program down the throats of German politicians because he knew that this would undercut the liberals, which it did. The reasons were not based on charity. The reasons were political. They were justified by arguments favoring state-funded charity, but it was all a con job, as all Ponzi schemes are.

But Social Security is vastly more corrupt than a Ponzi scheme, because a Ponzi scheme involves no coercion and a lie, whereas Social Security involves massive coercion and a much bigger lie. I will shed no tears when the system goes down.

The theologian C. S. Lewis once described as totally evil a world in which food would make people hungry. In other words, food would have the same kind of addictive power as heroin. The more you eat, the more you want. This is what Social Security and Medicare do. These systems are addictive, and the longer they operate, the larger the number of people who become addicted to them. The more you are dependent on the system, the more dependent you will become on the system. The weaker you get because you are dependent on the system, the more you are dependent on the system. This is the equivalent of Lewis’s food that makes people hungry.

A POLITICAL REVOLT

Because the Social Security system, like the Medicare system and Medicaid, has the characteristic of addiction, politicians cannot break it. Neither can the people who are dependent on the programs. Inevitably, the systems will continue to grow until such time as they threaten the bankruptcy of the entire government. At that point, there will be a political revolt. Younger people, meaning voters who are paying into the system, will send people to Congress specifically to cut the spending on the three Ponzi schemes. They will make it clear to elected representatives that if they do not find ways to cut spending, they will not be re-elected. Politicians will get the message.

The first people to be cut will be physicians. The government will cut payments to hospitals and physicians. This will create a shortage of medical care. The lines to get treatment will get longer. The quality of the care will be reduced. But, at some point, the government will have to find other ways to cut the expenditures. It will be political criteria that decide exactly how the various programs will be cut. But they will be cut.

One of the most amusing phrases that we hear today about the evils of Social Security is this one: "We are placing a burden on our children." This slogan is so nonsensical that I find it difficult to believe that anyone could believe it.

First, we are not placing a burden on our children. We are placing a burden on ourselves. The government is borrowing money to pay for the systems. We are therefore raising our level of indebtedness. Our children are not going to be burdened with this; we are going to be burdened with it when the kids get smart enough to pull the plug. They are going to stiff the creditors who have bought Treasury bonds and Treasury bills, and that means the banks that have bought them, the money market funds which have bought them, the retirement funds which have bought them, and anyone else who has bought them, including the Chinese central bank, the Japanese central bank, and the other central banks of the world.

Of course, the other central banks will be playing the same game, and all the other voting blocs in foreign nations will be moving against the geezers. Around the world, the same Ponzi system is in operation, and around the world they are all going bankrupt. There is not one of them that will survive. So, it will be a question of who pulls the plug first. Who stiffs the creditors first?

Congressmen hear the phrase about the immorality of burdening our children and grandchildren, and they know that the phrase is nothing but political hype. If they really tried to cut spending on the Ponzi schemes, and justified this by the fact that they were doing something effective to keep from stealing from children and grandchildren, they would be out of office after the next election. It’s all crocodile tears. The geezers want the money, and they don’t give a hoot about the children and grandchildren. They’re going to get their checks, one way or the other, by hook or by crook they will stick their hooks into Congress, and Congress will do their work for them.

We can’t pass on any obligations to our children and grandchildren if our children and grandchildren will be in a position to reject the transfer. There is nothing legally that compels our children and grandchildren to continue to pay into the system. We can scream bloody murder about how we paid in, and how the kids owe us, and how we are going to make certain that the kids fork over the money, but the kids already have the votes.

Here are the reasons why the kids don’t simply pull the plug now. First, the kids want to pretend that somebody else is going to pay for their parents, especially the parents who are in retirement homes, or need costly medical care. The Ponzi schemes seem like good ideas, because those voters who think that somebody else is going to pick up the tab are willing to increase the tab. They still think that somebody else is going to pay for the free lunch of Social Security and Medicare.

The next reason why they pay is that the government threatens to send out IRS agents to compel them to pay. They’re afraid of dealing with IRS agents who carry guns. They don’t want to go to jail. They don’t want to be fined. So, they keep paying into the system, because they think they have no choice but to stay in the system.

Third, they have the illusion, which a lot of them are losing, that someday they will be the beneficiaries of the system. But it is getting clearer to larger numbers of them that this is not going to be the case.

So, when the day finally comes when the burden of paying into the system is greater than the expected benefits to be received, younger voters are going to instruct Congress to pull the plug. There is no way around this statistically. The present value of the unfunded liabilities of Social Security, Medicare, and Medicaid is $222 trillion. There is no way that this is ever going to be paid off. It is statistically impossible for the government to continue to pay off the systems.

There will be great weeping and gnashing of teeth when the plug gets pulled. The Gray Panthers will be outraged. The AARP will organize campaigns to get the geezers’ noses back into the trough. But, ultimately, there are more young voters than old voters, and the young voters will ultimately vote their economic self-interest. They’re going to pull the plug.

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Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 31-volume series, An Economic Commentary on the Bible.

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