General Question

SquirrelEStuff's avatar

Is the US government running the same exact Ponzi scheme as Bernard Madoff?

Asked by SquirrelEStuff (9171points) December 18th, 2008

“In Madoff We Trust

As the multi-billion dollar Ponzi scheme orchestrated by Wall Street insider Bernard Madoff unravels in the media spotlight, the nation is being presented with a rare opportunity to understand the true nature of many of our most cherished financial structures. Hopefully we have the wisdom to connect the dots.

Although the $50 billion loss engineered by Madoff is truly a staggering accomplishment (and was done using old-fashioned fraud rather than the mathematical wizardry that has characterized Wall Street’s recent larcenies) the size of the scheme pales in comparison to the multi-trillion dollar Ponzi structures run by the United States government. In fact, rather than looking to jail Madoff, President-elect Obama should consider making him our new Treasury secretary. If not that, at least make him the czar of something!

Madoff’s inspiration came from Charles Ponzi, the Italian-born American immigrant who promoted an investment plan in the early 1900s’ that traded postal coupons. Rather than paying investors from legitimate investment returns, Ponzi hit upon the innovative idea of paying out early investors with money collected from new investors. By creating an illusion of success, interest in his investment plan ballooned. Over time the schemes have become known by many other names, such as chain letters or pyramid schemes. They are united by the fact that they always fail in the end.

When the influx of new investors inevitably slows to the point where distributions to current investors can no longer be maintained, investors look to withdraw funds. When this happens, the entire structure falls apart. The profits received by those who “invested” early as well so any funds skimmed off by the promoter, are offset by all the losses of those who came late to the party.

To a large extent, the same concept has driven the major asset bubbles of the last decade. Given the ridiculously high valuations that were assigned to tech stocks and real estate during their respective booms, the only way the bubbles could be perpetuated was if newer “investors” could be found to pay even more outrageous prices (the greater fool). But when these new buyers balked, the whole structure crumbled. Although there was no Ponzi or Madoff to orchestrate these manias, the entire financial and economic apparatus of the country had successfully convinced the public that “investments” in tech stocks and condominiums were bullet proof and that the supply of new buyers was endless.

Unfortunately, the Ponzi economy doesn’t stop there. A chain letter is no more viable when run by governments than when run by private citizens. However, government orchestrated pyramids have the advantage of required participation. As a result, they can maintain the illusion of viability for several generations. But the longer such schemes operate the larger will be the losses when they ultimately collapse.

The Social Security Administration runs its “trust funds” with precisely the same methods used by Madoff and Ponzi. As money is collected by from current workers, the funds are then dispersed to those already receiving benefits. None of the funds collected are actually invested, so no investment returns are ever generated. Those currently paying into the system are expected to receive their returns based on the “contribution” made by future workers. This is the classic definition of a Ponzi scheme. The only difference is that Ponzi didn’t own a printing press.

The United States Government runs its own balance sheet based on the Ponzi principal as well. Our national debt always grows and never shrinks. As existing debt matures, proceeds are repaid by issuing new debt. Interest payments on existing debt are also made by selling new debt to investors. The whole scheme depends on an ever growing supply of new lenders, or the willingness of existing lenders, to continue to roll over maturing notes. Of course, as was the case with Madoff, if enough of our creditors want their money back, the music stops playing.

In Madoff’s case, the rug pulling was provided by the huge financial losses suffered by some of his clients in other non-Madoff investments. When enough of these clients looked to sell some of their apparently well-performing Madoff assets to help offset such losses, the scam collapsed. The same thing could befall the United States Government. Now that China and our other creditors are looking to spend some of their U.S. Treasury holdings to stimulate their own economies, look for a similar outcome with even more dire implications.

The main difference is that while Madoff took elaborate steps to conceal his scheme, the U.S. government operates in broad daylight. It truly is amazing how faith in government is so pervasive that many can believe that politicians will succeed where private individuals fail, and that governments are somehow immune to the economic laws that govern the rest of society. Like those unfortunate to have been duped by Madoff and Ponzi, the world is in for a rude awakening.”

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14 Answers

dalepetrie's avatar

Nice try, Sean Hannity. I say that because that’s the exact argument (only far less complete and coherent) he was trying to make earlier this week.

There are big differences here.

One is that in a Ponzi scheme, the money is taken out by the person running the scheme…our government is not taking a “cut”.

Two is that in a Ponzi scheme, there is not enough money to pay out what is required. Social Security is indeed solvent, despite strong efforts by the right wing to convince people it’s not.

Three, the government’s ability to collect taxes is not the same as a schemer’s ability to obtain investors. I understand that some people are under the impression that Social Security will run out of money any day, but I believe the last figure I heard was that it’s solvent until at LEAST 2039, just based on collected funds, and projected collections and payouts at current rates. Now, the government, unlike as schemer, has the ability to adjust tax rates. One big OBVIOUS place to adjust it would be to stop it from being a regressive tax. Right now we ONLY collect taxes on the first 102k in income.

Now there is an argument that these people will never get as much out of the system as they pay in, but they’re not SUPPOSED to. The whole point of Social Security is to create SECURITY for our SOCIETY. It’s like insurance….insurance on your financial security to keep you from falling through the cracks. So hey, everyone pays in…if you do better you pay in a little more, this way it doesn’t hurt any individual all that much, and the benefit is a benefit to all of society.

So no, Social Security is not a Ponzi scheme. That’s another right wing lie, because you know what the next argument is?

“Let ME keep MY money, I can spend it better than some bureaucrat.”

Then we start talking about how we should “privatize” Social Security, so we can invest it ourselves and get a bigger return.

But investment is about taking risks and possibly gaining rewards for so doing. But there are winners AND losers in the stock market. All this does is to allow investment moguls (some of who are dishonest like Bernie Fucking Madoff!!!!!) access to this huge pile of money…and no longer do we have a system where if you get sick or die or retire you and/or your family are taken care of. Instead, you’re screwed if you didn’t invest intelligently and/or get lucky.

So, you want to say, OK, this is all a scheme and will fall apart, OK, suggest something else. Suggest a way that we can ensure that people don’t fall through the cracks financially when met with an unexpected tragedy or upon reaching an advanced age. Do we get rid of it and just say, fuck ‘em….let them figure it out for themselves, if you can’t make enough money to save for a rainy day, then just starve, we don’t care. Or do we turn all the money over to the Wall Street moguls who have zero integrity and will rob you blind by any means necessary, in which case you are also screwed?

Social Security has been a damn good thing in this country for 70 years, the only people who get no benefit from it are the people who have made a pretty damn good life for themselves and now there is this ONE thing that they can’t exploit to make money off of.

Don’t believe this garbage, please.

SquirrelEStuff's avatar

You are correct. The government is not taking a “cut.” However, the federal reserve and all other debt we owe also has compounded interest. Remember, all money is debt. All debt has interest.

Social Security, Medicaid, and Medicare, by the time the baby boomers retire, will be paid $55 trillion. Who knows how much the economy will grow. Social Security needs growth to keep money flowing into it. Here is the former Comptroller General of the Federal government talking about this very issue almost a year ago.

Three. Correct again. The government FORCES people by law to play into the Ponzi scheme. Again, you say Social Security is solvent based on current rates. That may change. Again, it depends on growth. The whole point of social security sounds great, but it has been used as another fund to build this empire that is now being used against us.

I agree about winners and losers. I’m not that mad at Bernie. Sure he schemed alot of money, but in the process, he gave people “happy” lives by making them rich. Maybe now these people will realize that the material things dont matter when shit hits the fan and people in America are looking for food. Regardless, Im more mad at our government for the last 100 years for scheming us out of alot of money, while killing millions of people all over the world and subsidizing corporations who now control the supply and price of almost all necessary resources and food.

Just think of the social security of the world if we put half as much money into helping people as we did killing people, oppressing people, and torturing people. My suggestion is we put all resources into renewable so we can give the world energy and the internet so everyone can educate themselves in some way.

Social Security may have been a good thing for a little while. But like all Ponzi schemes, as well as empires, they come to an end. I put about 125 a week into Social Security. I am 26. I’ll be damned if I ever see it. If i do, i wonder if it’ll be worth anything.

I will continue to believe this “garbage” because I have talked about it and watched it all happen for the past 3 years.

dalepetrie's avatar

I think you need a little faith. If Obama does what I believe he will do, he will reinstate teh payroll tax after 250k, and that alone will result in solvency of the system indefinitely.

And you may THINK you’ll never see it, but if you ever become unable to work, you’ll be so thankful that you and so many other had to put that $125 a week into this system. I know someone who developed congestive heart failure at age 35 at a time when she was raising 2 daughters on her own…she’d worked VERY hard her entire life and none of her situation was within her control. Without Social Security, I have no idea what would have happened to her and her family. Yes, you might be 70 before you can get a decent benefit from it, but we have a LOT of lead time to make adjustments when we see problem signs. I’m honestly not worried about it, I think all the worry that is out there is a direct result of Republican talking points taking hold, telling us that the government is not as efficient spending our money as we could be and therefore we should all take “personal responsibility”. Unfortunately, you can take personal responsibility and life can steamroll you, I’ve seen it happen more than once.

jasongarrett's avatar

The government isn’t taking a cut, but their expense ratio is awfully high.

laureth's avatar

The government borrows, in the form of bonds sold to people like you and me. And when the bond comes due, they sell another bond for enough to pay me, plus the interest, plus enough to keep the government running for a little while.

Sounds like a Ponzi scheme to me.

Mizuki's avatar

@ Dale—great answer

dalepetrie's avatar

Thanks Mizuki!

SquirrelEStuff's avatar


Have faith?

Do you remember my biggest argument for the debt problems in this country? It’s the Federal Reserve.

From some of our past conversations, you did give me a little faith that Obama might bring change. However, the appointment of his top two economic leaders being from the Federal Reserve, any little faith I might have had is completely gone. That and the fact that many of his team are from either bush or Clinton. Where’s the change?

laureth's avatar

@chris: You may think that bringing in inexperienced, fresh faces is the way to enact change. However, I’ve heard that one of the first things people learn when they get to Washington is that it’s almost impossible to change it. Do you think that repeating the mistake of bringing in greenhorns is the best way to make something new happen, or is bringing in experienced soldiers who know the system the best way to fight for change?

dalepetrie's avatar

Where’s the change? It’s in the leadership. These people don’t just have carte blanche to push their own agendas. They follow the direction of the Commander in Chief. If you have a leader who is telling you to do one thing, and you elect a new leader telling you to go in a completely different direction, that’s change. Have you never worked for a company where you had one boss then got another boss and you don’t even feel like it’s the same job?

People are screaming like “this isn’t the change I can believe in.” Well, calm down, give it a chance to work. The President’s role is vision and decision making. He can go ahead and just appoint a bunch of ideogogues to push his agenda, or he can go the way Obama did, and appoint a whole bunch of smart, competent, and highly experienced people who can step in and know what the score is and give him GOOD information based on experience, not just on their own ideological leanings. If we went the way people on the left are screaming they’d like us to go, we’d have a bunch of inexperienced liberals who basically have big dreams but nothing to back it up.

I am imminently confident in Obama’s choices, and I’m wiling to give it a chance, rather than condemning him before he even takes office. That point of view seems just as much “my way or the highway” as the last 8 years, and that’s exactly what we DON’T need.

SquirrelEStuff's avatar

I think George Carlin said it best.

Ort's avatar

You could argue that our entire global economic system is a Ponzi Scheme since it largely fails to measure social and environmental costs. When the US consumption rate greatly exceeds the carrying capacity of of the Earth (we’d need 5 Earths if everyone consumed like we do) and we have the nerve to encourage other people to raise their GNP and “standard of living” to our level, we are setting ourselves up as a planet for a disaster. Madoff is small potatoes in this context and we’re all in on it. (Are you ready to live like they do in Gambia or Nepal?)
…sigh… But will I still be able to Fluther?

BBQsomeCows's avatar


the USA government is running these ponzi schemes:

social security


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