Social Security, Ponzi Schemes, and Leprechaun Economics

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by Gary North

Recently by Gary North: Why Ron Paul Never Fit in on Capitol Hill


I want to discuss an article. I may be exaggerating, but I regard this article as the most sophisticated exercise in terminal naiveté that I have ever read. It is an intelligent article with respect to the problems that it lays out. It is dealing with the Ponzi scheme economics of the modern world. Certainly, I am in favor of articles that discuss modern government economic policies as Ponzi schemes. I have been doing this for over 45 years, and I see no reason to stop now, especially since we are 45 years closer to the end of the Ponzi schemes.

Yet at the same time, I am always dismayed to see an article written about the inevitable Ponzi scheme collapse of the modern economic world that begins with some version of this assurance: if we act now, we can solve this. It is not too late. The article begins as follows:

Fortunately, there is still time to act. But leaders from all social sectors–government, business, organized labor, environmental and other stakeholder groups–need to act decisively and quickly in order to secure future economic prosperity, social cohesion, and political stability. It is in the nature of Ponzi schemes to collapse suddenly, without warning. No one knows what event may send the developed world and the global economy as a whole back into crisis.

I have heard some variation of this assurance for over 45 years. In fact, if a book on Social Security, Medicare, and the unfunded liabilities of the U.S. government is published by a major publisher, or if an article appears in a journal aimed at establishment intellectuals, it will have the obligatory disclaimer. It will not be published unless there is this assurance somewhere in the article. There are no articles published by respectable scholars or respectable columnists on the Ponzi scheme economics of the modern world that do not include such an assurance. Anyone who insists on the fact that there is going to be a collapse, that these schemes will end in default, and that there is no possible statistically way of avoiding this, will not get his article published in a respectable magazine, newspaper, or book.

This is why I always look for the disclaimer. If there is the disclaimer, I know that I am about to read utter poppycock. It may be highly footnoted poppycock. It may have lots of charts. If it is written by somebody trying to get tenure, it will be filled with arcane mathematical formulas. But it does not matter what the content is, or what the structure is, the article is total poppycock.


The key poppycock indicator is the word “we.” Readers are assured that if we take immediate steps, courageously, systematically, and if we continue to implement the writer’s recommended program of reform, there is still hope to avoid the chaos and devastation that is the inevitable result of every Ponzi scheme in history.

Why is this poppycock? First, because of the nature of every Ponzi scheme. The scheme that Charles Ponzi invented was doomed from the beginning. There was no way statistically that that scheme would not collapse, leaving devastation in its wake. Whether we are talking Charles Ponzi or Bernie Madoff, from the day the deception began, there was no possible way that the scheme would not run aground on the shoals of statistical reality.

The scheme could not have been stopped at any time. The participants in the scheme, from the day they got into it, would not consider the possibility that they had been completely conned by someone who sold them a story that was based on a statistical impossibility. This is a true Ponzi scheme. A Ponzi scheme must end with losses for all but the participants who got in early and got out early. The only people to win in a Ponzi scheme are the people who recognize it as fake, who get in early, get out early, take the money and run. They spot it as a fraud from day one; therefore, they have an exit strategy.

The astounding thing about Ponzi schemes is not that there is an endless supply of suckers, including sophisticated investors, who believe in it. The astounding thing about Ponzi schemes is that their originators seldom disappear with the money, never to be seen again. Charles Ponzi is the classic example. If he had taken the money, which was in the tens of millions in an era in which the dollar was worth 20 times as much as it is today, and if he returned to Italy, from which he had arrived, he would have made out like the bandit that he was. But he stayed in the game until the bitter end. So did Bernard Madoff. The originators know that the thing cannot possibly end well, and yet they are unwilling to take the money and run. They believe their own impossible promises. This, I do not understand.

The essence of the Ponzi scheme is not simply its statistical unsustainability. The essence of the Ponzi scheme is that it is like an addictive drug. Once someone enters into it, he finds it psychologically impossible to face the reality of the unsustainable statistics of the program. He refuses to get out in time. His participation in the scheme fundamentally changes his outlook toward reality. He is no longer capable of being persuaded that he has made a fool of himself by entering into such a scheme. This includes the founder of the scheme. The essence of the Ponzi scheme is not statistical; it is psychological. It creates belief in that which is statistically impossible, and the degree of belief is so strong that anyone who points out the statistical impossibility of the scheme risks being cut off personally by the victim. Ponzi scheme economics creates the classic attitude: shoot the messenger.

What also is astounding about Ponzi schemes is that the messengers never understand the nature of the psychology which undergirds the Ponzi schemes. The messengers come before the victims of the scheme, and they lay out their evidence. Their evidence may be fairly simple, or it may be highly sophisticated. But the person who lays out the evidence is also suffering from terminal naiveté. He thinks that he can bring people to their senses by means of evidence. He thinks that he can persuade someone who is the victim of a Ponzi scheme to change his ways right now, to get out of the scheme immediately, to take out his money if he can, or at least stop putting any new money into it. He thinks he can get a rational response from somebody who is knee-deep, waist-deep, or armpit-deep in a Ponzi scheme which has, on paper, made him rich.

Why should the victim pay any attention to a messenger who comes to him with a twofold message: first, he is going to lose all of his money; second, that he was an idiot for believing in the scheme in the first place. The messenger does not actually tell the victim that he was a fool to get into the project, but that is the inescapable implication of his criticism. This is fully understood the victim. He has no interest in the stack of papers or graphs or formulas that show that the scheme in which he has invested his money is statistically impossible to fulfill, and worse, that such a scheme would only appeal to somebody who is terminally nave.

Every Ponzi scheme is a daisy chain. It is a daisy chain of people who have this sign on their backs: I am terminally nave. This includes the founder, the victims, and the messengers who come before the victims to try to warn them that they have gotten into a statistically impossible scheme that could only have been promoted by a confidence man.

The messenger wants the victim to believe that there is hope if he takes effective action now. What hope? He can get his money back. But all the others can’t get their money back. There is still hope for him, but not for most investors. Maybe he will still come to his senses. Therefore, the messenger is as terminally nave as the victim of the scheme. That is because the essence of a Ponzi scheme is not statistical; it is psychological. It is the belief that there are great benefits without great risks, that there are above-average profits without above-average risk. In short, there is a pot of gold at the end of a rainbow.

The victim of the Ponzi scheme believes that the man who sold him on the scheme is a real live leprechaun who is going to lead him and all of the others in the program to the pot of gold at the end of the rainbow.

When you deal with somebody who believes in pots of gold at the end of rainbows, and who trusts salesman who are obviously in the leprechaun-imitation business, you are not dealing with somebody who is going to respond favorably to carefully prepared refutations of the statistical plausibility of the scheme.


For over four decades, I have come before people and warned them of the statistical impossibility of the Social Security System and the Medicare system. Never have I implied that the system could be reformed. I have denied the political possibility of any such reform. Never have I warned the person to try to get out of the system. Why not? Because it is compulsory, and inherent in the nature of modern citizenship.

We live in a Ponzi scheme economy. This means that we live in a society in which the vast majority of voters have adopted leprechaun economics, and have re-elected leprechauns on a regular basis since 1935 in the United States, and since 1889 in Germany.

I have always come with this message: “You may be able to escape the worst effects of the Ponzi scheme, but only if you take active steps now that will enable you to escape a system that has been imposed on you by law, for which you are not personally responsible.”

When you come to the victim of a Ponzi scheme with this message, namely, that he was forced into it, and therefore he is not the victim of his own terminal naiveté, you have at least an outside possibility of persuading him. He may begin to take steps to evade the worst aspects of the inevitable collapse that the Ponzi scheme will produce in the lives of virtually all members of society. He does not think you are calling him a dupe of politicians, even though that is what he has been.

Only a tiny fraction of the population will be willing to listen to such a warning. That is despite the fact that they believe in the system, participate in it enthusiastically, and do not believe that it is going to blow up in their faces. They are nave. Only a tiny fraction of the population is ready to listen to the story of the Ponzi scheme, and only if there is a least an outside possibility that they, personally, will be able to escape the worst effects of the inevitable breakdown of the scheme.

Tell a man that he personally has hope, and he may listen. Tell him, in effect, that the vast majority of his neighbors and peers are terminally nave, and victims of a political con job, and he may listen. He has always suspected that they are not too bright anyway. He has always suspected that he is brighter than they are. So, he may be willing to listen.

This is why it never ceases to amaze me that sophisticated economists with academic degrees go to enormous trouble to present cogent analyses regarding the Ponzi scheme nature of the present economy. They spend lots of time amassing evidence of the Ponzi scheme nature of the modern economy, and then they try to tell their readers that there really is hope for the economy if “we” act now. There is clearly no possible hope for the economy. That is because Ponzi schemes are based on leprechaun economics. Nobody gets into one of these schemes who is not from the beginning a believer in leprechauns. They want access to the pot of gold at the end of that government-guaranteed rainbow.

Here is the bottom line. Most voters in the United States since 1935 have believed that the federal government is in fact staffed by well-meaning leprechauns whose only real interest is in providing voters personally with a pot of gold at the end of the rainbow, either at the age of 62, with early retirement, or later, if the voter wants to maximize access to that pot of gold. We have in the West an entire civilization, which we call Western civilization, which is based on leprechaun economics.

Occasionally, a Charles Ponzi or a Bernie Madoff comes along and takes advantage of this faith in leprechaun economics on a personal basis. It is not just that middle-class people and working class people believe in government leprechauns. It is that very rich and sophisticated people believe in SEC- approved leprechauns. This, by the way, includes everybody in the SEC, which regulated Madoff. Why? Because the moment they approved the leprechaun who was selling the Ponzi scheme, they got sucked into it to. To admit at this late date that they had been completely conned by a man like Madoff is to imagine that they will turn away in horror at their own stupidity and naiveté, admit that they were completely conned by this man, and say they are really sorry that everybody who put any money into this man’s hand is going to lose everything they have given him. That would be a $50 billion admission of error. Anyone who thinks that a government agency is going to make this kind of admission before the program is forced into the bankruptcy by the market is himself terminally nave.

From the top to the bottom, from East to West, once one of these schemes begins, it always goes over the cliff. The statistical inevitability of the scheme always asserts itself, because the psychological inevitability of the scheme asserts itself. Almost no one has sufficient self-awareness to overcome his own ego in the name of personal economic self-interest. Almost nobody has a strong enough ego to admit that he had been taken in by this con man. For those few people who do have a strong ego, and who are willing to admit that they have been taken in, their personal self-interest is not in informing the SEC about the con job. Their personal self-interest is in getting whatever money they can out of the system, before everybody else finds out. So, there is almost no incentive whatsoever for anybody who is participating in the system to take personal steps to end the system prior to the inevitable explosion. Once started, a Ponzi scheme cannot be stopped by well-meaning messengers.


We now come to the heart of the matter, economically speaking, which is economic theory.

The first principle of modern economics is that people make decisions in terms of their personal self-interest. The second principle of modern economics, far less known, is that all decisions are made at the margin. When you accept the truth of these two principles, you can be sure that any prescription or solution that is offered by the enthusiastic bringer of the message, whoever he may be, or how many degrees he has after his name, does not know what he is talking about if he uses the word “we.”

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

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