A Ponzi Scheme applies to any investment scheme where the promoter offers crazy returns to attract investors. If you invest your money in such a scheme, you might even get it back – plus some crazy rate of interest – as long as there’s still a flood of money from new investors. But the scheme is still as bankrupt as heck and, once the flood of new money dries up, the entire scheme collapses. And that’s the planet we live on now. Everyone’s borrowing, no one’s paying. And one day, the merry-go-round will stop.
You know that scene in Mr. Smith Goes to Washington? The one where the good guy, Jimmy Stewart, stands up in the Senate protesting the graft and corruption he sees all around him. He’s not as smart as the other Senators. He was only elected by accident and knows that he’s not properly qualified to sit in the legislature of the United States.
But still. He’s Jimmy Stewart. He knows right from wrong and he knows that graft and corruption is wrong, no matter how slick the justification or how nice the suit. He makes a long, wonderful, stirring speech – if you haven’t seen the movie, you ought to – and he keeps coming back the fundamental point of common sense. At one point, he says, ‘Either I’m dead right, or I’m crazy!’
And he’s not crazy.
This blog is the same. I am, as it happens, a hedge fund manager who’s spent thirty years working in the financial markets. As a result, I know a lot about the world’s financial system and how it works. But you don’t have to be a technical wizard to understand these things. The government of the United States owes 100% of American GDP. That’s insane.
The Federal Reserve is charged with preserving the value of the currency, but it has printed trillions of dollars in new money. When inflation is galloping away. And the Fed doesn’t even know where those trillions have disappeared to. That’s insane.
The Congressional Budget Office tells us that Medicare spending is going to bankrupt the budget. (You can see their chart of federal debt here.) We’re not talking about a few bucks of overspend, but a cost tsunami which will utterly destroy every fiscal rule ever invented. That’s insane.
The Tea Party crowd want us to cut taxes, even though we don’t have enough revenues to cover our expenses as it is. And a tax cut when the nation is in deficit is really a tax increase, because you have to pay the money back again, and with interest. More insanity.
And Wall Street bosses pay themselves extraordinary bonuses even though their stock prices are tanking. That’s not capitalism as I ever understood it. You can call it insanity if you wish, or criminality if you prefer. Either way, I don’t like it.
But these things aren’t confined to the United States. In Britain, we see the same thing: investment banking bosses trashing their company’s share price, bankrupting the government, causing a massive recession – and walking away as multi-millionaires.
The Greek government has been obviously bankrupt for years, but it’s taken till now for Europe to recognize the fact.
The European Union announces a ‘rescue plan’ that will impose vast costs on the ‘strong’ governments, but which has obviously failed within a couple of days of the announcement.
It’s all insane. And not just insane – it’s wrong. Ethically, financially, and socially wrong. Much of it is also, in my opinion, illegal and should be punished by long terms in jail.
This blog is about these issues. It’ll shout out when politicians and bankers do things wrong. It’ll cheer on those rare occasions when politicians get things right. We’ll also talk about the dollar in your purse, the pound in your pocket. The value of your savings is under threat and, as a professional investment manager, I’ll share with you my philosophy on how to preserve your savings from destruction. These are dangerous times and they’re only just starting.
Planet Ponzi – the massive build-up of debt, the total loss of political transparency – had caused multiple casualties across the world. The failure of banks, the huge rise in government debt, the failure of business, the loss of jobs, the pressure on real incomes – all these things stem from the same dark causes.
But there’s one consequence greater than any of these things. In the last few weeks, democracy has taken a pasting. For all Berlusconi’s faults (and there are many), he was the democratically elected leader of his country. The new Italian government does not boast a single elected politician. The Italian people have had nothing to do with choosing the direction of their country. Given that their nation has faced no more serious issues since the Second World War, this is a somber thought indeed.
It’s the same thing in Greece. George Papandreou may not have been a perfect leader, but he was the country’s elected leader. When Europe presented Greece with an ultimatum, Papandreou’s first instinct was to take that offer to his country. The future of the Greek people would be defined over the next ten years or more by these matters: Papandreou was right to consult his nation. As soon as the ‘international community’ got wind of those plans, he was promptly rebuked, he left office – and a new government took power without an election.
In the United States: the same thing. The budgetary ‘super-committee’ was set up in the wake of the debt-ceiling vote to define a budget strategy for the US government. That is: party apparatchiks chose – without election or public consultation – the men and women who will plan the nation’s fiscal future. Again: a total absence of democracy, a total lack of transparency.
And what happens? What emerges from this process? Answer: failure. The politicians in America, as in every country, are chosen in order to debate and solve the leading issues of the day. They need to solve those issues through open debate and place themselves in front of the electorate sufficiently often that the electorate can express a view.
In America, our political process has shown itself, so far, incapable of this basic task. To speak bluntly but fairly: American democracy is, at the present time, failing the nation.
Even in the countries, like Germany, that are not a part of Planet Ponzi, democracy seems close to collapse. Why should the German people be asked to bail out their southern neighbours and not get a vote on it? Why should the ECB pile into buying Italian bonds – probably illegally – and yet the people of Europe have no say on these things? Why should the British government refuse a Euro referendum, simply on the grounds that the leaders might not like the answer?
The solutions to Planet Ponzi are simple. More democracy not less. Less debt, not more. At the moment, we have things – tragically – the wrong way round.