— Bible-based commentary on vital issues of the day —

America’s Ponzi Economy

Why the nation’s present model is collapsing

and destined to fail totally.

This article’s purpose is to shed light on such economic phenomena as to why America’s debt has ballooned; why its financial infrastructure has collapsed; why, in spite of fix upon fix, the Social Security system still needs repairing.  Why America deficits keep increasing; why the nation’s chief export is debt; why most home buyers are hurting; in short, why everything is in such dire financial straits.

Many factors combine to make U.S. and international finance complex, and I lay no claim to comprehensive understanding nor offer impressive credentials.  However, I do have God’s Word and Spirit in my corner — plus business experience dating to 1941 when two sisters and I gathered and redeemed pop bottles for their two-cent deposit (a nickel for big ones).  Common sense tempered by biblical wisdom, is what I offer.

At a glance.  Many of the privileged Americans born from 1945 onward trashed traditional values and have routinely lived beyond their means.  Chucking fiscal and moral Great-Depression-earned restraints of their parents, they lit into two-job, two-car families, bigger homes and RVs as though God had given them keys to the mint.  Jettisoning conservative values, they exchanged God for gold, family for fun, Spock for spank, cash for credit, savings for debt, respect for rebellion, wisdom for wantonness, giving for greed and piousness for paganism.  Though not its entire problem, this renegade crop took over the nation, managed and led much of its affairs for the last 40 years.

Let’s first identify the terminal illness infecting America’s institutions and economy: greed and selfishness, the fruit of godlessness; not unique to the U.S. nor surprising to anyone of thinking age.  However, in recent decades, demonic greed has been uncaged and mercilessly preys on this nation through persons, corporations and its government.  So much and for so long, free market dynamics have mutated into a flawed form assuring economic ruin.  Worse, the nation’s thinking — warped by selfishness and creeping socialism — has produced a “me-first” entitlement mentality to which politicians have eagerly catered.  Further, the very idea of a sustainable consumption-based economy insults common sense and begs the charge of fraud to its perpetrators.  Underlying all the nation’s ills, it does appear the just and patient God of the Bible, has withdrawn His hand of blessing from post-Christian America, as long ago forewarned.¹

The Ponzi scheme

Greed is personified by Charles Ponzi, the 1903 Italian immigrant who cheated about 40,000 investors out of 15 million dollars in 6 months.  His scheme preyed on fallen man’s innate greed and get-rich-quick vulnerability.  He promised investor’s a whopping 50% return on investment in 45 days, or money doubling in 90.  In the end, they received but a fraction of that.  Though Ponzi didn’t invent the idea, he became notorious for using it to separate the unwary from their money.  By raking in so much so quickly, the technique has become synonymous with his name.

Its fraudulent claim was that profits derived from investments, but didn’t.  Investor “earnings” came from the proceeds of later investors — the balance used by Ponzi.  It was a rob-Peter-to-pay-Paul-to-enrich-Ponzi scheme.  It worked so well that by 1920 just prior to the Depression, he became a well-known Boston millionaire.²  Being germane to today’s economy, it’s useful to know what made Ponzi’s scheme so successful (for himself) and also what caused it to fail.

Ponzi attractions

A Ponzi’s first appeal is high profit.  Another, word-of-mouth advertising.  Thirdly, a general aura of success.  Fourth, a sense of exclusivity; an inside track others don’t know about.  Combined, these factors provide a powerful lure to invest.  In principle, it’s what drives pyramid, multi-level marketing scams and “bubbles;” they form the bait for investors.  “Profit” checks to same validate the hoax and legitimate looking earnings statements help keep them locked in.  Indeed, many invest even more.  All these create an upward spiral of growth, cash inflow, apparent wealth and a sense of euphoria; especially for the schemer.  However, just as spring brings fresh new leaves — fall’s frost is inevitable.  Beautiful foliage gives way to cold, laying bare a tree’s bony skeleton and ugly knot holes.

Why Ponzis always fail

Although their flawed design destine all Ponzis to self destruct, most are first brought down by the law.  In the meantime, anything that disrupts cash flow can cause them to collapse: fewer investors, frequent investment withdrawals, bad publicity, economic recession or a slip-up by the schemer.  A current example of a world-wide Ponzi undone by both this recession and a loose tongue, is Madoff’s.

Early last December, Bernard (Bernie) Madoff, who’d been a highly regarded Wall Street investment guru, was charged with securities fraud and arrested. For years he’d been a wizard, who, in good times or bad, produced a very healthy 11% profit for his clients.  With that, and his skill at impressing with complicated financial jargon, he attracted many wealthy clients and investment fund managers.  They, in turn, promoted him with evangelistic fervor as one who could all but walk on water.  Being the founder and then, non-executive chairman of the NASDAQ stock market, he was highly respected and had a well-oiled money mill affording him such perks as an $8 million pad on swanky Palm Beach and all that money could buy.

However, he had merely taken Ponzi’s method to a vastly greater size and sophistication.  Madoff’s downfall quickly followed after privately admitting his investments were a “big lie;”  on December 11th, he was arrested.³  Preliminary estimates of investor losses run to $50 billion, making it the largest fraud in history (so far disclosed).  Though the full scope of this scam is yet to be measured because he targeted non-profit investment funds (for their stability) many charities world-wide have lost everything.  Lives will likely be lost as well.  For openers, on December 23rd, after learning he had lost $1.5 billion, one of the scheme’s biggest investors threw himself in front of an oncoming train.⁴

In summary: Ponzis lead investors to believe their money will be secured in legitimate fiduciary instruments from which they’ll receive a return in the form of interest or dividends. In truth, Ponzis use current investment income to write phony profit checks — then steal the rest.  Another characteristic is that investors lose everything.  Because the scheme is constructed entirely on paper and not hard assets or collaterally backed, when a Ponzi collapses, there’s nothing left to redeem.  Ponzis are parasitic in nature and do not create wealth.

Social (in)Security

America’s SS “insurance” system now comes into view, being founded in 1935 as part of President Roosevelt’s Great Depression-inspired “New Deal.”  It has since formed the backbone of our society’s financial “safety net” for retired workers. It is the largest government program in the world and biggest federal expenditure at 7% of GDP.⁵

Here’s what a 1936 SS pamphlet said: “After the first 3 years — that is to say, beginning in 1940 — you will pay, and your employer will pay, 1.5 cents for each dollar you earn, up to $3,000 a year ... beginning in 1943, you will pay ² cents, and so will your employer, for every dollar you earn for the next 3 years ... And finally, beginning in 1949, twelve years from now, you and your employer will each pay 3 cents on each dollar you earn up to $3,000 a year.  That is the most you will ever pay.”  The pamphlet also said, “Beginning November 24, 1936, the United States government will set up a Social Security account for you.”⁶

My, my, my — how things do change, though we don’t fault “change” itself.  Monumental changes in our society have required all institutions to keep pace.  However, that is not to say all change is good.  Applied to the Social Security system, the result has been questionable (not unlike changes that took this nation off the gold standard).  The SS system has since morphed from its originally intended insurance program, to one that, operationally, is a Ponzi.  The main difference being that a Ponzi guy is guilty of grand larceny, whereas with the government, it’s called “misappropriation of funds.”  Now, it’s important to understand, this assertion in nowise carries with it the suggestion that the U.S. government is intentionally swindling wage earners, or that it will.  In fact, it’s rather remarkable that the Social Security system is still serving it’s intended purpose at all.  But there’s a big problem looming.

Like a Ponzi, Americans have always been led to believe SS monies are held in trust.  Implicit is interest ... from which earnings are drawn; namely, monthly benefits to retired workers who paid into the insurance fund.  Naturally, taxes and benefits periodically would need adjusting so that benefits are always drawn from the fund’s interest, not principle (corpus) the way well managed trusts operate.  Is that the way the Social Security “trust” works?  Not at all.

The fed collects $--- billion in SS taxes from 163 million workers and pays $--- billion to 50 million folks, leaving a surplus of $--- billion, after overhead.7  Now, this is where things go awry.  Instead of the surplus being held in an interest-bearing trust, SS’s entire income goes directly into the Fed’s general Fund.  The SSA is then issued IOUs for the surplus; special treasury notes that cannot be traded or sold on the open market.  No hard assets are pledged for all that cash and there’s no actual trust fund and no interest.  Imagine selling your house to a buyer who pays you in a script, redeemable only by himself.  Huh?!

Arguably, this ‘buyer’ is good ol Uncle Sam himself.  Who or what can provide a more secure investment?  (God!)  Let’s track this a little further.  Again, instead of benefits being paid from trust earnings, they come right off the top of Social Security income.  Ponzi, in purest form! It’s Ponzi because wage earners (investors) are led to believe otherwise. There are no investments from which to draw interest and after pay outs, no money held in trust.  Uncle Sugar spends it all.  Welcome to the world of Ponzi economics on a grand scale!  (Bet you and I would be thrown in jail if we tried this.)

Stay with me now because it gets even more interesting.  Remember, we are not saying this is a planned scam; it’s just the way things have changed.  A football analogy terms it, “moving the goal posts” after the game has started.  Ahh change!

If you’ve been around for a couple of  score, you realize that the SS system is forever in need of fixing, otherwise (at least we’re assured) the sky will surely fall.  Matters related to this cyclic hand-wringing are: 1) paycheck income, 2) value of the fictional IOU trust fund, 3) an aging population and, 4) a steadily declining work force.  Massaging these factors allows for making projections; most notably, how long until income and pay outs coincide.  This is of paramount concern because that’s the point at which its $2.2 trillion mythical trust fund must be tapped ... in about 7-8 years.  But, wait: that money doesn’t really exist; it’s just an accounting exercise.

Hmm. This suggests that if the “fund” were to disappear ... it wouldn’t make a bit of difference!  In fact, it would reduce bureaucratic bean counting.  But if SS paycheck withholdings are dumped into the General Fund from which benefit checks are written, and the surplus is used for other purposes, that means SS is just another tax and the Fed’s been skinning us for more than benefits require.  Not nice!  Hey; the SS system isn’t “broken,” as we’ve been told.  It’s been embezzled!

Now what?! Never fear, Uncle Sam has options: 1) cut benefits, 2) up payroll taxes, 3) raise other taxes or, 4) tap its reserves.  You likely realize 1-3 are political anathema, likened to a subway’s “third rail” electrocuting buss.  So, guess which is likely to be chosen?  Ri-i-i-ght: the nation’s “cookie jar.”  Who cares where the money comes from as long as it keeps flowing? (so says today’s mentality).  Uncle Sam has deep pockets, so what’s the  problem?  Just this ... THERE IS NO RESERVE! What often gets overlooked by rank and file me-firsters and socialists is that Uncle Sam is broke.  Many still cling to the fallacious idea that America is a wealthy nation.  Huh?  If our poverty were not so imminently catastrophic, that bit of fiction would be hilarious.  Even we dinosaurs who remember when this nation really was rich, must “get over it” and face reality.

Running out of options

The U.S. is broke!  Worse yet; we’ve become the planet’s pariah debtor nation.  Even after years of selling off America’s corporate infrastructure, financial institutions, skyscrapers, etc., we still owe trillions.  Moreover, we are plunging, spiraling ever faster down that black hole of ruin as we now run up unprecedented debt. (We also need reflect on issues associated with selling corporate America to foreigners.  Recall what happened to Wilmington, Ohio when DHL, its main employer,  recently closed its doors?  Some 8000 Americans lost jobs and plunged it into an economic 9/11).  In good socialistic form, extremists have bewitched capitalistic America into believing they can conduct business better than businessmen.⁸

Back to Uncle Sam raising money to buy back some of those $2.2 trillions in IOUs. “But wait, there’s more!” exclaims the politico ... “TBP options” (Tax, Borrow or Print).  Hmm; can’t really do the tax thing because that’s the surest way to become unpopular with me-first voters, and going hat-in-hand to creditor nations for yet more is becoming a real drag.  Got it! crank up the money presses.  Hey guys ... eat, drink, print more paper money, enjoy the band and rearrange deck chairs as the ship of state goes down.  Hush up you Libertarians! :)

Digressing for a moment.  I’m trying to keep this muck light, ‘cause I don’t even like to think about it — no less, drag you into it (sorry).  That aside, scripture calls Christ’s own to be as wise as serpents and harmless as doves (Mt 10:16).  Although we’re not to engage the world’s systems any more than necessary to function responsibly, we should be well enough informed, so with the Spirit’s leading, we can make wise economic choices.  There’s no virtue in ignorance (nor, for that matter, in gnosticism).  Our hope is that, by being informed of all this temporal trash, it will somehow aid your Christian journey.

A collapsing Ponzi

Far more ominous than a Ponzi Social Security system with its bogus trust fund — is the Ponzi U.S. economy.  It is ... and currently in the process of collapsing.  Short of the remote chance of divine intervention (remember Nineveh?) it will utterly fail.  We intend to back up that assertion in the remaining space — but, let’s first do a quick Ponzi review.

What defines a Ponzi? An economic scheme, purportedly based on sound investments that will produce a better than average return for investors.  But, in fact, is a fraud that swallows money like a cosmic black hole.

What keeps a Ponzi going? A steadily growing supply of unwary investors (why SS will never be “privatized”) proof of performance; investor stability; aura of success, a stable economy, a “wizard” and ... a lot of luck.

What causes a Ponzi to crash? A loss of investor confidence, fewer new investors or losing too many existent ones; investment withdrawals; faltering performance; an economic recession, or the law closes it down.

Let’s now see why this nation’s economic model is a Ponzi.

First: the government needs an ever increasing supply of investors to cover its ballooning deficits and keep itself afloat. If that income ceases or drops, the economy is in even deeper trouble because it’s used to pay bills (in fact, in the near future, it might even be used to issue SS checks).  A prime means of keeping it flowing is by selling treasury bonds and T-notes; federal “products” and in this sense, we export debt (It could be likened to borrowing mortgage payment money  by selling shares in the house itself).  In business terms, it’s “dead” money because it is not used productively.  It’s a catch-22 that makes increasing trade deficits perversely desirable, because much of it goes into buying treasury notes.  It’s an unseen way consumerism helps keep the economy afloat and why our nation’s main export is now DEBT.

Bear in mind the market’s Golden Rule: “He who has the gold, makes the rules.”  Foreigners (governments included) give the US treasury cash in exchange for interest-bearing IOUs, typically redeemable upon demand. Nothing earth-shaking about such a transaction; what stock exchanges are about. However, as with corporations, there’s risk attendant to major stock holders; they can push for operational control or own enough to manipulate stock value and wreak havoc.  Therefore, leadership must (to some degree) defer to them.  Likewise, the treasury’s massive debt (stock) holders evokes portentous consequences.

For example: to attract investors, U.S. laws have had to be changed.  I.e., money paid to oil producing nations is coming back as investment capital; some with religious strings.  Namely, with Islamic “Sharia” limits as to how their investment money is spent: it cannot be used for any purpose in America that violates Quran-based, Islamic law⁹ A dark fact which will bear in-kind fruit, as the Brits are painfully learning (post Christian England is on track to becoming a Muslim nation).  Imagine America trying to impose a Christian influence on an Islamic nation?!  Know how they get away with it?  The “Golden Rule” ... they’ve got the gold!

A second concern relates to major creditors such as China.  They hold about two trillion dollars of U.S. trade debt, most in the form of treasuries.  Is there a chance they’ll use it to influence U.S. policy?  Indeed, a cabinet-level Chinese official went so far as to call it their “economic nuclear weapon” with which they can destroy our economy.¹⁰ Consider what happens to the dollar’s value when (not if) they begin cashing them in ... also, when other nations worldwide dump them?  The dollar gets devalued against other currencies.  This not only portends a destructive trade war, but ups the cost of most everything for Americans, because almost everything we buy comes from abroad; even food.  Shopping at Wal-Mart could become like going to Neiman Marcus.  A symbiotic trade relationship (however tenuously) now exists between the U.S. and China.  They need our orders for economic growth, we need their investment for survival; the same situation exists with Japan.  But, for how long?

Why we liken America’s economic model to a Ponzi in collapse.

First: we have lost the world’s trust and respect.  Last fall’s collapse of America’s economic infrastructure revealed just how impoverished we truly are.  Moreover, corruption and greed of the nation formerly looked up to and invested in, is now causing them great hardship (not that they aren’t culpable themselves).

Second: by abandoning free market capitalism and liberty in favor of government managed industries and socialism, we’re in effect, telling others the “American dream” is a “big lie.”

Third: though unable to pay today’s debts or future obligations (scores of trillions) we continue buying foreign goods on credit ... while wisdom and self restraint scream for lowering our standard of living to fit income.

Fourth: we’ve falsely led the world to believe everybody can live on “Palm Beach” without earning the privilege; that it’s possible to consume your way to wealth, rather than produce your way to prosperity.

Fifth: having exhausted national gold reserves, personal savings, the manufacturing base and global good will, the U.S. is down to the “Zimbabwe” option: print more money.  Mind you, every debt-dollar printed decreases each one in your wallet; “inflation.”  Zimbabwe went this route and at last count, their inflation was 231 million percent and they were printing money in 10 billion denominations.¹¹

Sixth: on top of all this, America has perennially handled foreign relations in ways that have alienated most of the world — allies included.

Home of the brave land of the debtor

Behind all is God’s infallible Word: The rich ruleth over the poor, and the borrower is servant to the lender (Prov 22:7). For decades we’ve all heard: “This can’t go on forever” or, “The piper will one day have to be paid.”  Well, that time is now as the world makes its way to America’s barely hinged front door.  Notwithstanding, desperate federal illusionists have one last hat trick: bailout.  The thinking goes like this: “If we can inflate the balloon one more time (and long enough) just maybe we can avoid Chapter 7 bankruptcy.”

Trillions of borrowed or minted bucks injected into the nation’s veins will temporarily up its pulse.  The Dow WILL claw to 9K, gas will race toward $3 and 7% out of work will look real good after what lies ahead, but more debt cannot reverse divine consequences.  By exchanging God for gold and His Church for paganism, the nation has all but sealed its fate.  Bubbles, scams, Ponzis and stimulus’ all have finite lifetimes.  Batten down the hatches; long tough times lie ahead.  But, then again ... there’s Nineveh.

1. Deuteronomy 28:15-57
2. Ponzi Schemes — web.archive.org/web/20051231
3.“It was all one big lie” — Washington Post 12/12/08
4. Madoff investor commits suicide — BBC news 12/23
5. en.wikipedia.org/wiki/Social_Security_(United_States)
6. ibdeditorials.com/IBDArticles.aspx?id=3184707634567
7. ibid
8. Ohio ... devastated by ... job cuts — cnn.com 11/10/08
9.shariahfinancewatch.org/islamiceconomics
10. Does China own us? — answers,yahoo.com 2/08
11. 231 million % ... — Sydney Morning Herald, 1/30/09

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