The Ponzi Scheme. Bernie Madoff points out the fact that our government is running the best one ever.

According to Wikipedia, “A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors.”

The irony of Bernie’s statement is clear, and we can believe him. The truthfulness of anything anyone says declines in direct proportion to the value of what they stand to gain by saying it. Since Bernie stands to gain nothing, I believe him 100%.

Also, he is obviously the best person to ask about how a Ponzi Scheme is run and if he thinks the government is running one.

Government Ponzi Scheme explained in a nutshell

The Government has a $1.5T deficit. They have no money. In order to stay open for business everyday, they need to take on debt. To take on debt they sell bonds to other countries. Those countries give us money to buy the bonds, we use that money to pay for government business and in return, we pay those countries interest on those bonds every month. According to the government, the interest expense last month it was $21 billion, or $750,000,000 per day…just to pay the interest on the debt, not even the principal.

Each month the interest payments on all bonds outstanding and the principal on some of them come due and we must pay them. But we have no money. So we issue more bonds and use the money we get from selling those new bonds to pay the interest and the principal that’s due on the old bonds. If that isn’t a Ponzi Scheme, I don’t know what is.

China was 70% of our bond purchases, now they are 30%. To make up the difference, The Fed now buys the bonds with money it prints itself. In other words, we are printing money to buy our own debt and printing money to pay the interest payments we owe to the previous bondholders like China and Japan.

This creates inflation as the volume of money increases, devaluing every dollar already in circulation. This acts the same as a tax. The government raising your taxes by 10% is the same as them devaluing your money by 10%. You either have 10% less money to spend for a gallon of milk or it takes 10% more money to buy the gallon of milk. There is no end in sight to this inflation as long as The Fed keeps printing money.

How does this end? The same way all Ponzi Scheme’s end. VERY BADLY.

Here are the possible outcomes:

1. Default on the debt we owe countries that have bought our bonds.
2. Repay the old bonds with new bonds at a higher interest rate. (We can’t do this without raising interest rates and The Fed will not do that).
3. Raise taxes on everyone.
4. Cut government spending.
5. Some combination of the above in large volumes that will make a difference and improve the situation.
6. Some combination of the above in small volumes that will not make a difference and only slow down the coming disaster.
7. Continue this Ponzi Scheme until the entire economy collapses.

Knowing our government, #6 will be their choice. Nothing works better than kicking the can down the road and letting it become someone else’s problem.

Can it get any worse? Yes…it can, and it will

What happens when China that went from 70% to 30% of bond purchases buys even less?

Since this is just payments on the interest, what happens when we have to pay the principal back? Anyone can pay the minimum on their $10,000 credit card debt, but how do you pay it when all $10,000 comes due at once as it does with bonds? What will we do then?

Thanks for reading. The Government spent just over half a million dollars to service this debt in the time it took you to read this single post on my blog.

Categories: Economy, Headlines, National Debt, Taxes

Tags: bernie madoff, government ponzi scheme, ponzi scheme, printing money is a ponzi scheme, social security is a ponzi scheme