"There is danger from all men. The only maxim of a free government ought to be to trust no man living with
power to endanger the public liberty." - - - - John Adams

Tuesday, January 10, 2012

The Ponzi Planet

Ponzi Scheme  - The state creates the illusion of freedom from risk to satisfy its self-indulgence, at least until the Ponzi moment arrives
  • United States only remains "solvent" because Congress keeps raising the debt ceiling.
  • Old debts are paid with new ones, with borrowers giving not the slightest thought to repayment.
  • The Ponzi moment arrives when the last shred of confidence has been gambled away and no one buys bonds anymore.

Today's world has become a Ponzi planet.

Countries around the world, particularly in the West, are hopelessly in the red, with debt rising every day. Even worse, politicians seem paralyzed, unable -- or unwilling -- to do anything about it. It is a global disaster that threatens the immediate future.

Carlo Ponzi, a dishwasher from Parma, Italy, immigrated to the United States in 1903, he had $2.50 in his pocket.  He created the pyramid scheme where those at the top make all the money and everyone else is broke.

Economists use the term "Ponzi scheme" to describe a disastrous mechanism in which someone pays off old debt by constantly taking on new debt. The repayment of the debt -- the most recent loans, plus interest -- is deferred into the distant future, fueling an eternal process of debt refinancing.

It's the classic pyramid, or snowball scheme, practiced by thousands of con artists after Ponzi. The most spectacular case was that of New York financier Bernard Madoff, who was responsible for losses of about $20 billion by 2008. Snowballs are set into motion, becoming bigger and bigger as they roll along. In the worst case, they end in an avalanche that takes everything else with it reports Der Spiegel.

Western economies have not acted much differently than the fraudster Madoff. In 2011, they were virtually inundated with bad news and old sins. Almost everyone -- in Europe and in the United States -- has been living beyond their means, from consumers to politicians to entire countries. Governments have become servants to the markets upon which they have become dependent.

Graphic: Debt in the industrialized world.
Red section is national debt above the economic output of industrialized countries.

Debt is "Snowballing"

On an almost weekly basis, the reports have become more worrisome and the sums of money involved more staggering. Many are now concerned that, as 2012 begins, the snowballs will only get bigger -- and roll faster:

  • There are the banks in Europe, which will have to repay about €725 billion in combined debt in 2012, including €280 billion in the first quarter alone. With the private market largely off-limits to them, the banks have had to rely on the European Central Bank (ECB) to bail them out. The ECB is now lending them fresh money -- as much as they want -- at minimal interest rates.
  • There is a country like Italy, which has an exorbitant amount of debt to service at the beginning of the year. About €160 billion in debt will mature between January and April; the total for the entire year is about €300 billion. The government in Rome is already having trouble finding buyers for its bonds.
  • There is the ECB, which is creating billions essentially out of nothing. On an almost weekly basis, it is acquiring bonds that no one else would buy from Portugal, Spain and Italy and, in the process, it is turning into a reluctant financier of nations. This financial aid already amounts to €211 billion.
  • There is the European Commission, whose president, José Manuel Barroso, supports the use of so-called euro bonds. These bonds, which would be issued jointly by the countries in the monetary union, would amount to an accumulation of collective debt on top of national debts.
  • There is the €440-billion euro bailout fund, of which €150 billion are already promised to Greece, Ireland and Portugal. But because this amount is still not enough, the finance ministers have decided to "leverage" the fund, a seemingly harmless term for bringing in additional lenders, thereby multiplying the volume of credit.
  • And then there is the United States, which only remains solvent because the Congress in Washington keeps raising the debt ceiling. The American government already owes its creditors about $15 trillion. Stay tuned for the next installment.

Living on Credit

Old debts are paid with new ones, with borrowers giving not the slightest thought to repayment. This has been going on for a long time, far too long, in fact. It was only with the eruption of the financial crisis in 2007 and the outrageously expensive bailouts of banks and economies that many people realized that the entire world is living on credit.

"Debt is rising to points that are above anything we have seen, except during major wars," economists at the Bank for International Settlements (BIS) concluded in a recent study. "The debt problems facing advanced economies are even worse than we thought."

The state creates the illusion of freedom from risk to satisfy its self-indulgence, at least until the Ponzi moment arrives: when the last shred of confidence has been gambled away and no one buys bonds anymore.

Were a business owner to run a business in the same way, he or she would soon be forced to declare bankruptcy. "Family business owners borrow money to invest it.

Usually the government borrows money to consume today," says German business leader Goebel. And, he adds, "while a businessman takes on the risk and liability for his company, in the case of countries, it is almost always the next generation that suffers."

(Spiegel - International)

Graphic: Per capita debt in selected countries.

1 comment:

Mitch Feierstein said...

Fantastic article! In fact, I have written a book titled Planet Ponzi on precisely this topic. I would be happy to send you a promotional copy! It’s available in the USA on Amazom.com and will be on Kindle in the USA soon. My website is www.planetponzi.com. Best. Mitch