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Say what you want about him, but Bernie Madoff was a guy who knew how to keep the party going. For years, he ran one of the largest private-sector Ponzi schemes in history and always heeded the golden rule of financial scams: make sure your inflows are greater than your outflows.
He was finally done in when redemptions exceeded new investments. He didnt have enough cash to pay out investors, and he wasnt able to scam more people into paying in to the scheme. As a result, Madoff finally had to admit that the whole thing was a total fraud.
Governments around the world are in similar situations right now with their own public sector Ponzi schemes. Faced with failed auctions, declining demand, and rising yields, politicians are having to resort to desperate measures.
Like any good scam artist, theyre appealing to the masses first; all over Europe, governments are sponsoring new marketing campaigns suggesting that its peoples patriotic duty to buy government debt.
In Spain, theyre actually issuing instruments called Bonos Patrioticos, or patriotic bonds. Ad campaigns say that the bonds are good for you, good for the future.
In Ireland, theyve issued Prize Bonds which carry a 0% interest rate; instead of receiving interest, bondholders are entered into a weekly lottery contest. Naturally, lottery winnings are only possible as long as people keep buying the bonds pretty much the definition of a Ponzi scheme!
In Italy, theyre rolling out the countrys sports celebrities to encourage everyone to buy Italian sovereign debt.
Whats ironic is that Italys dismal balance sheet is almost universally acknowledged. Its as if everyone knows the country has almost no chance of making good on its obligations, but they still feel the need to willingly throw away their hard earned savings for the greater good of political incompetence.
Thing is, its not the millionaire sports stars, wealthy business leaders, or political elite who are buying these bonds at least, not in anything beyond a token, symbolic amount. Its the average guy on the street who really stands to get hurt when the government finally capitulates.