I subscribe to a newsletter which gives a brief rundown of the news from a Christian perspective. The Pour Over offers some motivational quotes, some scripture and then covers some current events for awareness. It was recommended to me by my sister. I’d give her a pitch right here, but she hasn’t followed my advice to develop her own brand yet, so I won’t overwhelm her social media unexpectedly. Usually I just enjoy The Pour Over while sipping my coffee, but something I read on Friday morning’s newsletter two weeks bothered me:
Bernie Madoff, the infamous Ponzi schemer, died on Wednesday at the age of 82 while serving his 150-year prison sentence. Madoff defrauded celebrity clients, charities, and retirees out of $65 billion and became so hated he wore a bulletproof vest to court. His scheme remains the largest known white-collar crime in history.
This simply isn’t true. I don’t mean the dying part, or the Ponzi scheme part. I don’t even intend to mince words that it is $65 billion dollars. The part I take issue with is that they call it the “largest known white-collar crime in history.”
Not even close.
A Ponzi scheme is defined as “a form of fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors.” It was named after Charles Ponzi who had a legitimate business engaged in arbitrage of international reply coupons for postage stamps.
If you don’t even know that that means, that makes several of us. I know what arbitrage is, and what postage stamps are, but I have no idea what a reply coupon is. Ultimately, it is irrelevant. It was a business that provided value and attracted investors.
Ultimately, Charles Ponzi started to divert new investor money to earlier investors and himself. This basically meant that their great returns on investment were just stolen money from other investors. He wasn’t the first to devise a scheme like this, but his scheme became famous and was widely publicized causing most of them since to be named after him.
Remember that I said most, as it will be addressed shortly.
Under normal conditions, investors would send money and managers, such as mutual fund managers, essentially re-invest the money and get returns on that investment. In practice, they may take a percentage of the returns, or perhaps a fee from the investor for managing the money, maybe even a combination of different ways to be reimbursed for their services.
The point is, all investors are to be treated equally. Each dollar should be treated the same. There are clearly opportunities for changing the pay structure as investors have more invested, but the way they are managed and invested should be irrelevant.
Ponzi schemes take money from those new investors, and rather than re-invest them, they are funneled to the earlier investors. All of that money is lost to the new investors.
Stolen.
Ponzi schemes are theft. They are a voluntary payment made under false pretenses. These new investors give their money up under the conditions of getting it invested and hoping for a return, but their money is simply turned over to other, usually more wealthy investors. There is never any hope of return for the newer investors unless the scheme continues long enough that even newer investors have filled in behind them and they are now involved in the theft from those investors.
Complicated schemes like this are not unique, but they really boil down to the fact that they are merely theft.
Why aren’t all Ponzi schemes considered the same? I mentioned earlier that most schemes of this nature have been named appropriately, but that means there are some that aren’t.
Exceptions require a rule and the rule is that those schemes are named after Charles Ponzi. The exceptions arise when certain privileges are granted to some entities that we do not afford to others.
Readers will know exactly where I’m going with this argument.
Government is allowed so many privileges and authorities that cannot morally be rationalized. We still rationalize them.
Social security, by design, is a Ponzi scheme. Ida May Fuller was the first recipient of social security. Her lifetime contributions to the Social Security Administration totalled $24.75. Over the course of the remaining 35 years of her life, the payments totalled over $22,800. In fact, her first monthly payment was $22.54
You read that correctly. She was almost completely refunded her contributions over slightly more than 2 years on her first monthly payment. After her second month, she had already received an 82% return on investment. Over her lifetime, that “investment” returned over 92,000%.
A hallmark of Ponzi schemes is that they promise and provide extremely huge returns. Even the most nefarious of them could only dream of a 92,000% return.
This isn’t abnormal. Other than the tiny fraction who passed away shortly after retirement, most of the early recipients received far more from the system than they ever paid in. To make matters worse, the system continues to make payments despite holding no reserves from those who previously paid in. The entire system is funded by those who are making payments having their “investment” funneled to today’s recipients.
To say it differently, new contributors (investors) are having their money taken by old contributors (investors) who got in early and are the benefactors of the system.
Just like a Ponzi scheme.
So what gives? Why doesn’t the Social Security Administration get upended as the scheme it is?
Government makes the rules. It is really that simple. When there are shortfalls in the budget and payments are unable to be made, which is guaranteed in the system, rather than lawsuits being filed for the lies that the system perpetuates, they simply raise taxes the hard way, but actually raising the legal taxation on income or capital gains, or they use the nefarious version of taxing in the form of inflation and the creation of new money.
The effect is ultimately the same. Money is funneled from those currently earning income to those who are not currently earning income.
The only difference is the monopoly the federal government has on the creation of money, and the monopoly they hold on violence. Their ability to steal value from you, to extort you at will, and to essentially threaten you with imprisonment or death if you resist, is the only thing that separates them from Charles Ponzi.
This is not an original argument. Don Smith and Charlie Read wrote a book about it here, and they weren’t original either. I don’t need to claim originality in this post, because too many people haven’t actually read the point or considered the possibility that they are play part in the greatest scam in American history. They also haven’t considered to the potential that they are not going to be benefactors of this scam, but are actually the victims. At this point, we are all victims. Denial is sad.
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