As part of my work associated with the bankruptcy that I am working on, I have been preparing a report for the Bankruptcy Court highlighting how this entity was a Ponzi scheme. And, I am stunned by the similarities with fiat currency.
The AICPA describes a Ponzi scheme as follows (AICPA Consulting Services Practice Aid 97-1, Fraud Investigations In Litigation And Dispute Resolution Services, page 75/100-31)[R1]
“A Ponzi or pyramid scheme is usually any venture wherein earlier investors are repaid principal plus interest with funds provided by later investors. There may or may not be a legitimate business purpose for the venture, but the need for capital creates and continues the scheme. Often, unusually high investment returns or other inducements are offered by the promoters to attract investors.”
Think about fiat currency. Since the beginning of the credit cycle circa 1933, anyone with access to credit has been rewarded – taken out by later investors. And, the US government has been paying earlier taxpayers with later taxpayers while implemented an unsustainable program – social security.
The AICPA identifies three common characteristics of a Ponzi scheme (AICPA Consulting Services Practice Aid 97-1, Fraud Investigations In Litigation And Dispute Resolution Services, page 75/100-31[R1]):
i. The business activity depends on outside investor money;
ii. The investor money is not used according to the stated purpose. Some of the investor money is used to pay the returns promised to earlier investors; and,
iii. The business enterprise lacks profits sufficient to provide the promised returns and, therefore, depends on an ever increasing supply of investor money.
Again, think about fiat currency. The entire period that I have data (1960), there has not been a single 12 month period where M2 has declined and only 1 period (4 consecutive months in 1994) when M3 declined (when they still reported it). With fiat, to maintain the growth of debt, the fed encourages miss and mal investment – anything to maintain the growth rate of debt. So, investor money (use of proceeds from debt issuance) does not go to the growth of productive assets (industry). Thus, the business enterprise lacks profits from productive activity, lacks the profits from productive activity and therefore depends on an ever increasing supply of fiduciary media.
In addition, Floyd v. Dunson, 209 B.R. 424[R5, pg 7] and Lake States Commodities, Inc. v. Sellas, 272 B.R. 233[R6, pg 8] identify elements of a Ponzi scheme which are consistent with the AICPA guidance as follows:
i. Deposits were made from investors;
ii. The Ponzi operator conducted no legitimate business as represented to investors;
iii. The purported business of the Ponzi operator produces no profits or earnings, rather the source of funds is the new investments by investors; and,
iv. Payments to investors are made from other investor's invested funds.
Again, the similarities of Ponzi to fiat (the overall impact of fiat) are simply overwhelming. Ponzi operators conduct no legitimate business as represented to investors – in terms of growth of productive assets. Notice how GM, Ford and GE are now finance companies with manufacturing divisions – and the US as a whole is consuming capital at an alarming rate. The highest and best use of funds is share buybacks? The source of funds is the new investments by investors – think of the private equity mania.
Finally, the Association of Certified Fraud Examiners (“ACFE”) also provides relevant guidance for an analysis of Ponzi Schemes. According to the 2006 ACFE Fraud Examiners Manual, one category of Ponzi schemes is a “product front.” Within product fronts, “speculations” are a common occurrence and are discussed as follows (Association of Certified Fraud Examiners, 2006 Fraud Examiners Manual, pages 1.733 – 1.738[R2]):
“Speculation frauds don't always start out as cons, but when their rollercoaster dips, many speculators find it too tempting to hang on and ride – they figure they can phony their way through the crisis, and pick up again later. Again, it's math that usually dooms these players. They simply can't make money fast enough to feed the deficits. They need a payoff so big nothing short of a miracle – or more fraud – will suffice.”
Think about this one – with David Stockman trying to phony his way through a crises - or Enron, or Worldcom. How many more companies are in crises, but are barely able to keep the façade intact – for now. Businesses that started out as legitimate concerns only to evolved into frauds. I am guessing that all the doubling down in derivative activity will provide a virtual cornucopia of this type of activity.
Now another interesting phenomena of Ponzi schemes is that the moment that the rate of growth of investor money does not continue to increase, the entity is invariably in trouble (which was certainly the case with this company). In the same manner, think about how the fed is doing anything and everything to maintain debt growth. Here's what happens to the Ponzi entity is that the cash balance stays low, but the payout to others invariably catches up with new investors. Sound familiar? With the US having a negative savings rate, and debt growth has continued to grow.
And the Litigation Services Handbook, Second Edition (1995), Weil, Wagner and Frank, page 23-8[A52];
“…investors are encouraged to leave their principal and earned interest income in the hands of the program promoters, to be rolled-over into new programs.”
Principal and interest are then “rolled- over” which “conserves cash and delays the inevitable collapse of the scheme.”
Again, doesn't this sound exactly like the fed – enabling and encouraging every method possible to conserve cash by, suspending settlement of securities, allowing for GSE insolvency, and encouraging every possible avenue of bailout. Or in the context of keeping everyone ‘on board' with fiat, with high levels of debt, ‘investments in the desired asset bubbles of real estate, stocks and bonds – all the while trying to discourage speculation in commodities – especially gold. Round and round fiat goes, where it stops, only the Goldman Sachs & the fed know.
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