Saturday, January 3, 2009

Pyramid Plunder

All the old paintings on the tombs
They do the sand dance don't you know
If they move too quick
They're falling down like a domino
--Bangles

Ponzi schemes have scored lots of mainstream media attention recently due to the ongoing Madoff saga. The idea behind a Ponzi, or pyramid, scheme is that early members are 'funded' by newcoming contributors who at some point are left holding the bag. It's a way to commit fraud.

At purportedly $50 billion, the Madoff scheme is being billed as the largest Ponzi in history. It's not even close. The size of the Madoff fraud pales in comparison to many government-run Ponzis.

The classic example is Social Security. Like Madoff and his early 'investors,' current Social Security recipients are being funded by taxes taken from today's workers (who resemble the latecomers to Madoff's scheme). There are no 'reserve' Social Security assets as these have previously been withdrawn and spent elsewhere. As more and more folks seek to draw from Social Security in the future, there is no way that there will be enough fresh inflows from new contributors to cover all users. At some point, late arrivers to the system will be screwed.

So, while government officials howl that the Madoff situation 'obviously' suggests that markets need more oversight, hopefully the irony is not lost on you.

For these same bureaucrats preside over the largest Ponzi portfolio in the world.

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