What Is a Ponzi Scheme?

by Mitch Feierstein about 1 year 11 months ago

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 to 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.

In Italy, we see Silvio Berlusconi, the political world’s greatest idiot, presenting an ‘austerity budget’ to Parliament which would make him personally €750 million richer.

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.

19 Responses to: What Is a Ponzi Scheme?

  1. Laurie says:

    Dear Mr. Feierstein,
    Thanks for taking the time to explain a Ponzi scheme. You’re diagram really helped out.
    Your wealth of knowledge is extraordinary. Thanks for sharing it with all of us!!!!!

    • Mitch Feierstein says:

      Excellent, glad our graphics help everyone visualize the true depth of these issues.

  2. karl says:

    So in such an insane environment – which could collapse at any moment, what does one do with one’s savings?

  3. Colin says:

    Hello Mr Feierstein. I listened to you on talksport radio a few nights ago. I am looking forward to reading your blog and buying your book.

  4. Paula W says:

    It might not be captalism as you understood it, but obviously captalism is set up to enable them to create the ponzi scheme…otherwide they would never have been able to do it. Margaret Thatcher, George Bush, and in New Zealand Mr Douglas all bought in dergulation…part of the enabling, which THEY set up.

  5. Delfin says:

    Keep up the good work, I’m trying to spread your message here in Stockholm

  6. zobac says:

    I really love your blog. I bookmarked it and will be checking back in the near future. Thanks a bunch!

  7. John Asquith says:

    Mr Feierstein I saw your interview with Max Keiser on RT a few days ago. I found it really interesting and decided to look up your website. You are providing a valuable service for those of us who are disillusioned with the constant diet of false positives being pushed by the mainstream media.
    Many thanks for your thoughts and insight.

  8. Shelton says:

    Hello Mitch. I watched you on the Keiser Report last week. I have a question about the London property bubble. When the financial crisis hit in 2008, the wealthy of the world started buying prime London property as a safe haven asset. Even to this day, 80% of prime London property is paid for in cash. When the next BIG crash comes, will this buying behaviour continue? Would the flight to safety not repeat itself?

    People argue that London prices will be kept afloat because of its status as a safe haven and that the population is growing massively. If the London property market crashes, what will happen in New York, Paris, Cambridge, Brighton etc.

    Thanks and keep up the good work!

    • Mitch Feierstein says:

      Thanks Shelton,
      Paris is already crashing – Canada thanks to Ex Goldman’s Mark Carney will crash as will all the other highly inflated property markets for example NYC, CA etc, no lessons learned from 2008.
      The FT reported this week that £122 billion of property in England and Wales is held through companies in offshore tax havens where ownership is difficult to trace. A portion of these funds is likely to be “laundered” money sanctioned by a detached political culture, detailed in Planet Ponzi, which created our zero regulation regime – in part motivated by the UK’s 2015 elections. The property bubble’s contribution to the “GDP” figures is significant. As far as “Cash” buyers – much of the cash is; 1) The mainstream media talking heads illustrating their ignorance and 2) Sleazy property brokers “Hyping the markets higher with misinformation”. Many foreign banks offer mortgage products on London property and just because it’s not evident does not mean these properties are not highly leveraged elsewhere. Hope this helps.

  9. Gary Moten says:

    Mr. Mitch Feierstein,
    Thanks for your honesty. How does one find you on the web? or any other way for that matter. At some point the dollar will collapse and be no more? I read a book some time ago, can’t think of the name at this time. But, it speaks of where to park your money, and investments to own / not own, etc… any thoughts?
    Thank You Sir

    • Mitch Feierstein says:

      Hi Gary,
      Thanks for your Email.
      Each portfolio depends on the objectives of the individual investor combining their associated risk tolerances.
      Speaking from my seat – I view equities as very overvalued and go into detail on my site and in Planet Ponzi.
      There is “no one size fits all” – Planet Ponzi provides readers with the tools necessary to do research enabling them to avoid potential disasters ahead!
      WE will be launching a product that will help every investor in the near future..
      Hope this helps.

  10. Kevin says:

    I’m reading Planet Ponzi now. I recommend it. It seems that the essence of a ponzi scheme is that investment returns do not come from the value of the investment, but rather from additions to the ponzi fund. For personal “investments” in the stock or bond markets, this implies that the returns do not come from production or success of the enterprises invested in. Instead the returns are from additions to the pool of money that supports the so-called market. It is nearly impossible to see how this works, but statistics that show declining real value of wages and inflation adjusted declines in real GDP imply that investments in stocks and bonds should decline instead of appreciate. I recall a saying about swimmers and the outgoing tide, but there should be some way for ordinary investors to identify the most and least ponzi-ish investments.

  11. dee garmon says:

    I first saw you on Keiser Report and have been following it since then.
    Keep up the good work.

  12. Jon Golding says:

    What a great relief to finally discover (and meet today fortuitously) a real,reliable, highly reputable author and authority on my core subject and interest. Not to mention ‘brave’ to speak out in the public’a best interest. I sincerely hope his word will spread and wake up the dumbed down masses, hypnotised by the institutions.

  13. jay watts says:

    As we financially evolve, I like to think of it in a positive sense rather than a doom and gloom catastrophe. A monetary shake up that favors a basket of currencies – euros, pounds, yuan, rubles, yen, rand and dollars makes much sense. Mitch’s mantra Transparency, Oversight, Regulation and Accountability should be on the lips of all our elected representatives as should a copy of Planet Ponzi be on all their night stands.