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A Ponzi Scheme

Entry 1871, on 2017-08-15 at 10:57:08 (Rating 3, Politics)

Everyone has heard of Ponzi schemes, right? If not, here's the dictionary definition: a form of fraud in which belief in the success of a non-existent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors. It is named after Charles Ponzi who set up elaborate money-making ventures based on the system in the early 1900s.

Typically the first few people involved in the scheme promise to pay huge returns to the "investors" and when these are demanded they are paid from the initial investments made from other investors. It can never last, of course, but the original perpetrators usually try to get out before it all turns bad.

A related scheme is known as a "pyramid scheme". In these the early "investors" are paid a fee by those they recruit and a lesser amount by those the recruiters recruit, etc. It works as long as new people are recruited, but the "deeper" into the scheme you are the less you will get and the more you will be paying those at the peak.

A unique feature of these schemes is that the organisation or individual running the scheme doesn't actually need to do anything apart from run the scheme. They don't need to sell anything or provide any service, for example. The scheme is entirely about shuffling money from one place to another (generally from the "suckers" who sign up late to those who were involved in the initial setup of the scheme).

As we all know, there are some pyramid schemes which also sell products (I'm sure we can all name some) but that is more or less just a cover for the dishonest underlying structure.

I was thinking about this recently and realised that there are many aspects of our modern economic system which make it look like just another Ponzi scheme. The economy only works well while there is "growth" or "increased efficiency or productivity", yet these aims are totally unsustainable in the long term, and even during the short period that they are sustainable they are often undesirable.

In New Zealand a major election issue is immigration. New Zealand allegedly has a healthy and growing economy - and some stats support this view - yet the vast majority of people don't feel as if they are doing well. How is this possible? Well basically it gets back to the fact that this alleged "growth" we see in our "rock star economy" is all fake. It is primarily due to increased population, provided by immigration, and no real progress has been made at all.

Unfortunately for the politicians supporting this scheme, it cannot last. Like most rock stars our economy will crash and burn when the excesses of its existence overtake any worthwhile contribution it is making. Eventually everyone will realise they are just being ripped off by a giant Ponzi scheme. But by that time the people in government who have created this situation will probably be gone.

Of course I should point out two things here. First, a pyramid scheme is probably a better description that a Ponzi for the economy, but Ponzi just sounds cooler so it better serves my rhetorical narrative; and second, the economy isn't a pure Ponzi or pyramid scheme and almost everyone would admit that it works well in some ways.

Despite the obvious and numerous faults in capitalism, for example, it does produce the goods and services the First World needs to maintain its lavish lifestyle. As I have pointed out many times in the past, the system is grossly inefficient, poorly focussed, and generally corrupt, but I would never claim it doesn't have some good points as well, especially for the original investors in the Ponzi or the people at the top of the pyramid (AKA the 1%).

But it will fail because indefinite growth is impossible and because the 99% who support the people at the top of the pyramid will eventually catch on to what's really happening and rebel. It's not a matter of if, but when. Like all Ponzi schemes it will fail and it will probably happen through catastrophic collapse rather than a careful restructuring.

When it happens it won't be pretty, just like poor old Charles Ponzi's slow and painful decline and death after all his wonderful and elaborate schemes failed.

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