FedUpUSA

Archive for the ‘ponzi scheme’ Category

It is one thing (what thing that is we are not sure, but we have heard others say it, so like all good lemmings we will say it too) for Rick Perry to call Social Security a ponzi scheme. After all he is some crazy, foaming in the mouth conservative, as uber-Keynesian liberal Paul Krugman may call him. And that’s fine. What confuses us, however, is why Social Security would be called a ponzi by the same liberal noted previously: none other than Paul Krugman himself.

Exhibit A, from a distant 1997, which perhaps one would have expected to remain buried (source):

 

 Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today’s young may well get less than they put in).

This coming from the same person who a year ago said the following much anticipated truism, and has in the interim become a caricature of himself:

 

 So where do claims of crisis come from? To a large extent they rely on bad-faith accounting. In particular, they rely on an exercise in three-card monte in which the surpluses Social Security has been running for a quarter-century don’t count — because hey, the program doesn’t have any independent existence; it’s just part of the general federal budget — while future Social Security deficits are unacceptable — because hey, the program has to stand on its own.

 It would be easy to dismiss this bait-and-switch as obvious nonsense, except for one thing: many influential people — including Alan Simpson, co-chairman of the president’s deficit commission — are peddling this nonsense.

 And having invented a crisis, what do Social Security’s attackers want to do? They don’t propose cutting benefits to current retirees; invariably the plan is, instead, to cut benefits many years in the future. So think about it this way: In order to avoid the possibility of future benefit cuts, we must cut future benefits. O.K.

 What’s really going on here? Conservatives hate Social Security for ideological reasons: its success undermines their claim that government is always the problem, never the solution. But they receive crucial support from Washington insiders, for whom a declared willingness to cut Social Security has long served as a badge of fiscal seriousness, never mind the arithmetic.

 And neither wing of the anti-Social-Security coalition seems to know or care about the hardship its favorite proposals would cause.

The only question we have for the Nobelist: is some form of affective disorder a necessary and sufficient condition to espouse the virtues of government dumping endless capital in what said Nobelist himself calls a Ponzi scheme, and just how would the overlord, John M. Keynes, fell about this?

h/t John Poehling

ZeroHedge

Grrr….

U.S. stock futures fell, indicating the Standard & Poor’s 500 Index will trim its weekly gain, after President Barack Obama’s $447 billion plan to boost jobs failed to bolster confidence in the world’s largest economy.

….

President Obama channeled the national frustration with the economy that threatens his political standing and challenged the U.S. Congress to pass a $447 billion jobs plan tilted heavily toward the Republican prescription of tax cuts.

The president, speaking before a joint session of Congress, demanded six times that lawmakers act “right away” on a plan that would boost spending on infrastructure, stem teacher layoffs and cut in half the payroll taxes paid by workers and small business owners.

Riiight.  Let’s turn Social Security into even more of a Ponzi scheme (can we stop with the “prepaid” lie when the movement is to cut the payroll tax that you allegedly pay in?) and start talking about how we got here and how we fix the structural problems that led us into this rathole in the first place.

Bloomberg, amazingly, is starting to figure it out and actually put it in print.  In a stunning editorial they said:

Would you give money to a compulsive gambler who refused to kick the habit? In essence, that’s what the world’s biggest banks are asking taxpayers to do.

…

At the same time, bankers are campaigning against regulators’ efforts to address a root cause of the problem: Big banks’ addiction to excessive leverage, or to using borrowed money to boost their shareholders’ returns. In a recent flurry of letters to the Basel Committee on Banking Supervision, which is in the process of setting new rules for the largest global institutions, various banking groups warn that higher capital requirements — tantamount to putting limits on leverage — will reduce credit availability and stunt the economy’s growth.

Did I actually read that?  In Bloomberg?

Wow.

Remember, I’ve been pounding the table on one dollar of capital for years.  It’s the only way to stop this crap, because it forces banks to hold one dollar of actual capital against any unsecured lending, no matter how it’s done.  It does not differentiate between a credit card (unsecured) and an OTC derivative (unsecured); if the position is not secured by a marked-to-market asset that can be seized and liquidated (that is, demonstrably provable value with a clean chain of title) every night, it’s an unsecured loan and must be funded in cash by an investor or through retained earnings.

That ends all systemic risk and it also ends all the threats from the banksters.  It prevents arbitraging (and extorting) governments and citizens, in short.

But what it does not do is prevent the market intermediation function, it does not prevent lending for any purpose (although it will make speculative lending expensive) and it does not prevent the essential payment-clearing process that banks engage in every day – and which is, in fact, essential to modern society.

There is no job growth in America, as I’ve noted, because there is no reason for an entrepreneur to grab for the brass ring.  Capital formation has been destroyed by the banksters and Bernanke.  Until this distortion is ended, and it is clear that doing so will require that Bernanke be removed from office and the banksters stripped of their political power through whatever means are necessary there will be no meaningful entrepreneurship funded with capital formation because there is no capital formation happening.

Borrowing is not the same thing as saving, and funds from borrowing are much less efficient at building sustainable businesses than that formed from capital.

Capital must always come from economic surplus – that is, what you produce in excess of what you consume.  It cannot come from any other place.  Attempting to replace capital formation with lending always fails – not only is there a mathematical problem that precludes this strategy working on a durable basis (the basic law of exponents) such a replacement causes gross misallocations of capital.  Until the people of this nation and indeed all nations tell the banksters to stuff it up their behinds and refuse to accede to their demands and threats, forcing the insolvent out of business as we should have years ago, the economy will not recover.

Not here, not over in Europe, not anywhere.

Wake up America.

This is pure gold.  Rick Santelli can’t seem to get Mr. Friedman to define ‘Ponzi Scheme.’  You know, if it walks like a duck and quacks like a duck…..

CNBC

On the eve of the Fed’s new round of money printing, PIMCO’s Bill Gross sounded the alarm about how our public debt is financed. Pacific Investment Management Company, LLC. is the world’s largest private bond investor. This quote is from his Run Turkey, Run—

Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a Ponzi-like characteristic. Granted, the U.S. has, at times, paid down its national debt, but there was always the assumption that as long as creditors could be found to roll over existing loans — and buy new ones — the game could keep going forever.

Sovereign countries have always implicitly acknowledged that the existing debt would never be paid off because they would “grow” their way out of the apparent predicament, allowing future’s prosperity to continually pay for today’s finance.

Now, however, with growth in doubt, it seems that the Fed has taken Charles Ponzi one step further. Instead of simply paying for maturing debt with receipts from financial sector creditors — banks, insurance companies, surplus reserve nations and investment managers, to name the most significant — the Fed has joined the party itself. Rather than orchestrating the game from on high, it has jumped into the pond with the other swimmers. One and one-half trillion in checks were written in 2009, and trillions more lie ahead. The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need — as with Charles Ponzi — to find an increasing amount of future gullibles, they will just write the check themselves.

I ask you: Has there ever been a Ponzi scheme so brazen? There has not. 

When most Americans think about Ponzi Schemes, I’m sure it’s Bernie Madoff who comes to mind, not federal government financing. Bill Gross describes the similarities well, but you should also read this more formal definition from the Securities and Exchange Commission—

What is a Ponzi Scheme?

A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.

Why do Ponzi schemes collapse?

With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.

How did Ponzi schemes get their name?

The schemes are named after Charles Ponzi (shown above left), who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s. At a time when the annual interest rate for bank accounts was five percent, Ponzi promised investors that he could provide a 50% return in just 90 days. Ponzi initially bought a small number of international mail coupons in support of his scheme, but quickly switched to using incoming funds to pay off earlier investors.

Government bond issuance differs from run-of-the-mill Ponzi Schemes created to rip-off investors for private gain. In the government case future economic “growth” is assumed to pay for current financing needs, as Bill Gross points out. Taking a benign view, we might look upon such debt financing as a Ponzi Scheme undertaken for a good cause—higher standards of living in the future.

However, sometime in the last decade—we had a balanced budget in the year 2000—government debt financing grew disproportionately large just as the structural basis for economic growth was being undermined (e.g. by the Housing Bubble, by growing Medicare costs). With growth in doubt, as Gross said, there is no longer a sound basis for continuing the previous arrangement. The typical “benign” Ponzi Scheme governments routinely engage in has thus become a malignant cancer in the United States, and may now be perceived as a danger to those vested in it (listed below).

Ponzi Schemes collapse when participants refuse to roll over their investments, seeking to cash out instead. Alternatively, a Ponzi Scheme will collapse when new participants can no longer be found, and current investors refuse to up the ante. However, that’s not a problem in the case of our federal government now that our Central Bank has stepped in as the buyer of last resort.

Who are the major investors in the biggest Ponzi Scheme ever conceived? 50plusfinance.com took a recent snap shot. Here are the top 15 bond holders in reverse order by amount invested as of June, 2010—

15. Taiwan:  $130.2 billion
14. Hong Kong:  $137.8 billion
13. Carribean Banking Centers:  $159.1 billion
12. Brazil:  $165.0 billion
11. Oil Exporters:  $226.6 billion
10. Insurance Companies:  $260.6 billion
  9. Depository Institutions:  $273.7 billion
  8. United Kingdom:  $448.8 billion
  7. State and Local Governments:  $534.7 billion
  6. Pension Funds:  $643.8 billion
  5. Mutual Funds:  $648.6 billion
  4. Japan:  $836.6 billion
  3. China:  $868.4 billion
  2. Other Investors/Savings Bonds:  $1.266 trillion
  1. Federal Reserve and Intragovernmental Holdings:  $5.345 trillion

The amounts shown here are subject to constant change, so current numbers may differ for each type of bondholder. I described intragovernmental holdings in detail in my post Ten Trillion And Counting.

Most of you have probably seen various “dollar collapse” scenarios. There are more and more of these kind of stories surfacing on the internet now that the Fed is debasing the currency and monetizing the debt, public spending remains out of control, and Fed funds rate is stuck at the zero bound. I don’t simply dismiss such stories, but only want to remind you that each of them is a variation on the same theme— the collapse of the Ponzi Scheme Bill Gross describes.

I’ll take a closer look at dollar collapse scenarios in the near future. Until then, enjoy the weekend!

The Decline of the Empire

As if there was any doubt before which way the arrow of control, and particularly causality, points in America’s financial system, the following stunner just released from Bloomberg confirms it once and for all. According to Rebecca Christie and Craig Torres, the New York Fed has issued a survey to Primary Dealers, which asks for suggestions on the size of QE2 as well as the time over which it would be completed.

It also asks firms how often they anticipate the Fed will re-evaluate the program, and to estimate its ultimate size. This is nothing short of a stunning indication of three things: i) that the Fed is most likely completely paralyzed due to the escalating confrontation between the Hawks and the Doves, and that not even Bernanke believes has has sufficient clout to prevent what Time magazine has dubbed a potential opening salvo into a chain of events that could lead to civil war: in effect Bernanke will use the PD’s decision as a trump card to the Hawks and say the market will plunge unless at least this much money is printed, ii) that the Fed is effectively asking the Primary Dealers to act as underwriters on whatever announcement the Fed will come up with, and thus prop the market, and, most importantly, iii) that the PDs will most likely demand the highest possible amount, using Goldman’s $2-4 trillion as a benchmark, and not only frontrun the ultimate issuance knowing full well what the syndicate of 18 will decide in advance of what the final amount will be, but will also ramp stocks on November 3 to make the actual QE announcement seem like a surprise.

 This also means that the Primary Dealers of America, which include among them such hedge funds as Goldman Sachs, such mortgage frauds as Bank of America, such insolvent foreign banks as Deutsche, RBS, UBS and RBS, and such middle-market excuses for banks as Jefferies, are now in control of US monetary, and as we explain below fiscal, policy.

It also means that the Fed has absolutely no confidence in its actions, and, more importantly, no confidence in how its actions will be perceived by the market which is why it is not only telegraphing its decision to the bankers, but is having its decision be dictated by them, an act so unconstitutional it would be seen as treason in any non-Banana republic! This is the last straw confirming that the only ones left trading the market are the Fed and the PDs, passing hot potatoes to each other, and the HFTs, churning the shit out of everything else to pretend someone is still trading.

And the saddest conclusion is that this is the definitive end of US capital markets: not only is the Fed’s political subordination a moot point, but the Fed, and the middle class’ purchasing power via the imminent dollar destruction that is sure to follow as the PDs seek to obliterate their underwater assets by raging inflation, is now effectively confirmed to be a bitch of Lloyd Blankfein and his posse.

The official explanation for this unprecedented incursion by the banking crime syndicate in US monetary policy is as follows:

Avoiding Disruption

Treasury officials say they want to avoid any disruption to the $8.5 trillion market in U.S. government debt, the world’s most liquid, as the Fed weighs restarting large-scale asset purchases. The Treasury also doesn’t want to give any impression to investors, particularly those based overseas, that it might be coordinating with the Fed to finance the national debt.

“Treasury debt-management decisions are designed to deliver the lowest cost of borrowing over time and are entirely independent from monetary-policy decisions made by the Federal Reserve,” Mary Miller, assistant secretary for financial markets, said in an e-mail to Bloomberg News yesterday. Before joining the Treasury last year, Miller was head of global fixed- income portfolio management at T. Rowe Price Group Inc. in Baltimore.

The Treasury is scheduled to hold its quarterly meetings with bond dealers tomorrow, ahead of the department’s Nov. 3 refunding announcement.

Fill in the blank: the Fed has essentially given PDs the option of $250BN, $500BN or $1 trillion in monetization over six months. It is now absolutely clear that the PDs will pick the biggest number possible… which incidentally amounts to $2 trillion per year, and is precisely what Goldman’s downside case was, as we presented previously.

The New York Fed surveyed primary dealers required to bid in U.S. debt auctions. It asked dealers to estimate changes in nominal and real 10-year Treasury yields “if the purchases were announced and completed over a six-month period.” The amounts dealers can choose from are zero, $250 billion, $500 billion and $1 trillion.

Of course, since a $2 trillion purchase over 1 year means the Fed will have to monetize every single bond issued, the SOMA limit will have to be raised, another prediction we made months ago:

The Fed is unlikely to buy up the entire supply of new securities, although it may adjust its internal guidelines of how much it can hold of any given issue. The Fed limits itself to owning no more than 35 percent of any specific security it holds in its System Open Market Account, or SOMA.

“Our Treasury strategists point out it could also cause pricing distortions along the curve, if, for example, the Fed continues to target a 40 percent purchase concentration in the 6-10 year maturity bucket, as it has in its recent purchases,” analysts at JPMorgan Chase & Co., including Alex Roever, wrote in an Oct. 22 research report. The report predicts the Fed will buy about $250 billion a quarter during the easing campaign.

How about $500 billion?

And, incidentally, since the “independent” Treasury will be forced to issue more debt to fill all the demand for $2 trillion over the next 12 months, as there is not enough debt in the pipeline to fill $2TN worth of demand and prevent the entire curve pancaking at zero (i.e., the 30 year yielding precisely 0.001%) it also means that the government will be forced to come up with more deficit programs, which also means that primary dealers will now also determine US fiscal policy.

Which begs the question, why is anyone pretending that the political vote on November 3 matters at all?

Below are the 18 banks that, in a completely separate vote, will henceforth rule America, regardless of what particular puppets end up in the Congress and Senate:

BNP Paribas Securities Corp.
Banc of America Securities LLC
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Capital Markets America Inc.
Deutsche Bank Securities Inc.
Goldman, Sachs & Co.
HSBC Securities (USA) Inc.
Jefferies & Company, Inc.
J.P. Morgan Securities LLC
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
Nomura Securities International, Inc.
RBC Capital Markets Corporation
RBS Securities Inc.
UBS Securities LLC.

ZeroHedge