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10. What is a Ponzi Scheme? - from Alternative Economics 101: Tax Your Imagination!

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Which is True? by Steve Consilvio

A p onzi scheme operates on the expectation that someone can give back to you more than what you gave them originally. Rather than two people working cooperatively to create something new, one person makes a claim that the other person believes. It is a "con' or "confidence game' because the victim has faith in the false promises of the operator. It shifts the focus from doing something physically productive to creating wealth via accounting methods. 

The victim of a ponzi scheme is not without fault. They expect to gain something without laboring. Commonsense requires that if you can gain without working, then someone must be laboring without getting paid. There is no such thing as a free lunch, but they are seduced by their greed. The investor convinces themselves that they are the ones at risk, not that they plan to take advantage of others. It is always a bitter surprise when they discover that they were the one getting squeezed. They should have been suspicious of fraud, but they blindly accepted the miraculous: 2+2 can equal 5.

A ponzi scheme mimics traditional business practices. That is what makes them so believable. The nut of the problem, of course, is that our traditional business practices mimic a ponzi scheme. This is the problem we need to fix.

We teach 2+2=4 in math class, and 2+2=5 in business class. We have been conditioned to believe that adding percentages to values is a normal way to count, and the larger the percentage, the better. Business accounting was an intellectual fraud before it became purposeful fraud.

What makes a ponzi scheme successful are the number of witnesses that testify to its validity. Everyone who has experienced the early boom is a firm believer that what they have witnessed is true, and not an illusion. Unfortunately, an equation is false wherever it is applied. If 2+2=5 is wrong in math class, then it needs to be wrong in business class, too. If we operate on the assumption that 2+2=5, then eventually 5=2+2. This boom then bust sequence applies to more than illegitimate ponzi schemes. The cycle occurs in every game of Monopoly. There does not need to be intentional fraud for a scheme to collapse, there only needs to be a flawed mathematical assumption at the outset. The laws of mathematics must balance: (2+2=5) = (5=2+2). Boom = Bust.

The term ponzi originates from the antics of Charles Ponzi (1882-1949), but he was not the first person to engage in skimming while performing a service that involves redistributing the wealth of others. A bank does the same thing when it pays interest on a deposit. In a traditional business, money goes out and product comes in, then product goes out and money comes in. Banking and ponzi schemes have no products. Money goes out and money comes in. 

The difference between the ponzi scheme and banking is that in banking the borrower pays the bank back plus interest. In a ponzi scheme, the new money coming in is believed to being treated the same as a bank deposit. In fact, the alleged interest being paid to a previous investor comes from a new investor. 

Today, most banks offer investment services, clouding the difference between legitimate and illegitimate business. When someone loses money in a ponzi scheme, it is because they are being treated like a borrower. The roles have been unexpectedly reversed. Instead of investors living off the debtors, early investors are living off of later investors. It is a betrayal of the financial caste system. 

People have become conditioned to embrace a double-standard. They do not want to be treated the same way that they have been treating others. Investors are willing to inflict pain on others; they are reluctant to feel that pain themselves. They have been convinced that risk-taking is normal, and that rather than harming others, they are helping the economy, planning for the future and helping others who need credit. They do not see all the consequences of the math.

 Interest acts as a revenue generator for the banker and the investor, the same as the profit percentage applied to a product in  a business generates revenue. Banks also also offer a lot of services for free, unlike traditional businesses. The crux of the problem is that any applied percentage is false. Whether we are on the gaining end or losing end initially is irrelevant. What goes around must come around. No gain can be free or effortless. It has to be taken from somebody else through deception.

Fraud is a potential trap in any transaction. In the trade of a chicken for eggs, the chicken could be sickly or the eggs rotten. A ponzi scheme operates as a mathematical fraud, rather than as a fraudulent exchange of goods, but disappointments are a consequence of forming unreasonable expectations. Expecting 2+2 to equal 5 is to set oneself up for regret. We must all trade to survive, and we must all produce if we are to consume. The gap between our ability to recognize and execute our needs is the opportunity for greed and stupidity to supplant commonsense. 

It is the nature of all monetary transactions, whether by a government, a bank, a business or a ponzi scheme, to claim that the exchange is for the benefit of everyone involved. Everything is promoted as a win-win situation. Ponzi mathematics exist wherever there is money present. Governments are also in the business of promising to deliver more than what it receives. 

These claims seem plausible because inflation has generated mathematical growth (2+2=5). The problem is that the new growth is not sustainable. The same inflation eventually meets 5=2+2. What was gained gets lost, and the new inflation spiral has set a higher bar for survival. The eventual lose-lose is much more bitter than the initial win-win. Poverty compounds as inflation compounds.

When combined with the population boom, there are probably more people living a miserable existence today than at any other time in history. The modern world is not the crown of creation. Not only are the poor miserable, but even those that are doing well struggle. America no longer has an economy based on manufacturing and trade. Many people are employed in ponzi schemes, where they must accept a lie as the truth, and continuously promote false expectations in others. This is a core requirement in advertising, insurance, and the financial services industry. Lies are also part of politics and government, and generically a part of all competitive sales. The only way to sell anything is to raise peoples expectations of why they should buy from you rather than from someone else.

A ponzi scheme offers larger returns than what the bank offers. "It is the best deal." Investing is another variant of buy-low sell-high, only people are selling their money rather than an apple. Once people are conditioned to believe that money can "grow,' one lie can always be bigger than the previous lie, and therefore more attractive. There is a constant pressure for one-upmanship, and to improve on whatever new standard was accomplished yesterday. Just as inflation and debt have no logical limit, neither do expectations. 

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Steve grew up in a family business, was a history major in college, and has owned a small business for 25 years. Practical experience (mistakes) have led him to recognize that political rhetoric and educated analysis often falls short of reality. (more...)
 
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Finally! An article that goes far to expose the de... by Daniel Penisten on Wednesday, Sep 18, 2013 at 3:55:13 PM