Generational Dynamics Forum - New Site

The greatest Ponzi Scheme the world has ever seen!

How is money created you might ask?
I deposit 100 dollars in a bank.
The bank loans 10 times my deposit creating 1000 in new money out of thin air.

Thats how money is created & the money supply increases.This is how the purshasing value of the dollar decline and the value of the USD drops!

How is money destroyed?
I default on my 1000 loan. The bank loses 1000 dollars.The money supply shrinks by 1000 dollars and money disappears out of thin air.This is how the value of USD rises as its supply on the market shrinks.

This is why the economy experiences DEFLATION or a rise in the purshasing power of the dollar as the # of dollars in circulation shrinks as debt is destroyed and defaulted on.

All that money thats created out of thin air is new debt. Its created through the fractional reserve banking system and through derivatives created outside the banking system and is destroyed through the defaults on banks and derivative debt when this new debt cannot be expanded for the reasons talked about in the past.

This is why stocks, real estate and Commodities that where artificially inflated with 30 to 1 leverage or even 100 to 1 leverage loses their value during the bust cycle as money is destroyed with debt defaults.

This is why gold is probably going back down to under 300 an ounce, silver to under 4 dollars an ounce, crude to under 10 dollars, gas to under a dollar and so on and so on when the dollar rises in value to probably 110 to 165 in the next few years due to the distruction of money as the pyramid scheme of 30 to 1 or 100 to 1 debt leverage is unwound.

This is why real estate is probably going to drop 70% or more in value from the highs of 2005 and stocks could go down 80% or more from the highs of 2007 in the next few years.

This is why cash is going to be the best investment around as less of it is available and it can then buy gold, stocks and real estate at 1 to 20 cents on the dollar and the dollar rises to unimaginable heights as debt and money is being destroyed and the scheme collapses.

Can the goverment stop a 30 to 1 or 100 to 1 debt and money pyramid scheme from collapsing under its own weight when no more people with money can be found to support it any more?

In December 1919 a certain Mr. Charles Ponzi of New York initiated an "investment" scheme in which he put up $150 dollars and got ten friends to do the same. He promised his friends a 50% return on their "investment" in 90 days. He then got a second set of friends, many times larger than the first, to put up similar amounts and promised them the same "return on investment" that he had promised the original group of "investors." With the money he collected from the second set of "investors," he paid the first set back their $150 dollars plus the promised 50% "return" ($75 dollars). Naturally, the original investors were thrilled and enthusiastically began promoting the scheme. The process was quickly repeated with the second set of "investors" - and rapidly mushroomed from there.
The intrigue was simplicity itself: give Ponzi money and in 90 days (and usually much sooner than that) he would give you your money back plus 50%, plus 10% to the recruiter. There was only one problem with the scheme: while the originators and early participants were handsomely paid off from the cash flow of those they recruited, the last ones who were brought into the scheme found that there was no one left to be recruited, and the cash flow stopped - leaving them "holding the bag." Before the scheme broke down, however (in May of 1920 - six months after it began), Ponzi had made more than a million dollars. Whether Ponzi knew it or not, what he had done was formulate or give expression - so to speak - to much of the thinking which lies behind today's New World Economic Order.
GREED
The driving motivation behind the scheme, from top to bottom, was greed. Everyone - from Ponzi on down to the last "investor" recruited - knew that in the end someone would be left "holding the bag;" that people would get hurt; and that some would be hurt very badly. They didn't care! - just so long as it wasn't them. Most who involved themselves in the scheme felt that they could get "in and out" of the pyramid before it collapsed - and "to hell" with those who were "dumb" enough to get caught.
Needless to say, it took very coldhearted people to push the scheme, and very greedy and selfish-minded ones to participate. The scheme Ponzi devised is today called a "Ponzi Pyramid." It's called this because if one were to chart out the scheme on a piece of paper it would resemble a pyramid with the originator(s) perched atop the pyramid and the losers sitting at the bottom. Money flows from the bottom of the pyramid to the top.

Let's say there's a new pyramid scheme hitting town and J.Q. Citizen is itching to join the immensely profitable fun. But dang it, he doesn't have any money to speculate with. If only somebody would loan him some capital to play with....
A pyramid scheme, also known as a Ponzi Scheme after "financial innovator" Charles Ponzi, exploits the "something for nothing" greed inherent in human nature. A handful of speculators are persuaded to invest some capital, which is then distributed to a larger circle of new speculators as "profit." The "pyramid" of enticing new investors by distributing the previous speculators' money as tremendous "profits" continues ever higher until the pool of new speculators is exhausted.

At that point the pyramid collapses and the last "layer" of speculators--the latest and largest--discovers their "investment" is worthless, as the pool of "greater fools" has been drained.

Amazingly, J.Q. is approached by someone willing to lend him $500 to join the pyramid scheme--and they only want $3 a month! J.Q. is incredulous--after all, earlier speculators have doubled their investment, and are hurrying to put their ever-increasing "equity" back to work in new speculation--it's a "no lose" proposition. Here is a lender who doesn't even demand J.Q. put up any of his own cash, and yet all the profits will flow to J.Q.

Talk about an easy decision. J.Q. borrows the $500, sets aside $20 to pay the monthly interest of $3 and then immediately buys into the scheme. Sure enough, he quickly "earns" a big profit, which emboldens him to borrow another $500. Imagine getting to leverage $1,000 for only $6 a month! It's like a printing press for free money.

The profits are so amazing that J.Q. "doubles down" and borrows another $1,000 and "invests" it. The monthly payments are only $24 and he's making way more than that with the borrowed $2,000. In fact, he's making so much easy dough that he peels off $500 for some spending money. To his astonishment, the lender is still willing to loan him another $500 for the same $3 a month in interest. Where the lender is getting all this cash is unknown, but it's the greatest "no brainer" deal J.Q. has ever seen.

The profits start slowing, and J.Q. becomes slightly nervous. There are rumors of people getting out, and then rumors of people not being able to pull their money out. J.Q. finally joins the horde rushing to cash out but it's too late: there are no buyers. J.Q. is busted, and with a heavy heart he informs the lender he can't make the monthly interest payments any longer--he's broke.

The lender is none too pleased, but as the saying goes, "you can't get blood out of a turnip," and J.Q. reckons that it was a pretty dumb move to loan him all that money even though he never put up a dime of his own money.

Then J.Q. sees on TV that his lender has approached the government to cover the money which the lender lost lending to speculators in the pyramid scheme. This doesn't seem quite right to J.Q. After all, nobody forced them to loan $500 for $3 a month. They were idiots to loan all that money for so little return and no guarantees.

Add three zeros to these numbers and you have the Housing Bubble in its purest essence. Lenders were lining up to give J.Q. $500,000 "no document, no down payment" mortgages for only $3,000 a month. With home prices shooting up by 10%, 20% or even 50% every year, who would be dumb enough not to take the money and "invest" it?

And who would be dumb enough to risk such huge sums for so little return? Lenders who could sell off the loans as "safe investments," that's who. And who would be dumb enough to buy the risky debt for such pathetic returns? It turns out lots of institutions lined up to do so, despite the blatant obviousness of the pyramid scheme and the risks of loaning money to people who had none of their own money in the game.

Now the lenders and the fools who bought the risky debt are demanding the "gummit" step in and buy the bad loans via the FHA or Fannie Mae or whatever, anything, just do it, man, we're getting killed out here.

Interesting, isn't it, how little sympathy there is for J.Q. losing his shirt via speculating with OPM (other people's money) in the housing bubble, and how little animosity is being generated as the "big boys" who staked J.Q. his gambling wad with OPM demand that the government cover their own gambling losses.

What is the difference between J.Q. and the lenders who staked his gamble? Weren't they both speculating in the same pyramid scheme? If J.Q. is expected to suck it up and take his losses, then shouldn't the lenders and the fools who bought the risky loans also take their lumps?

Those of us who valued real estate based on time-tested business fundamentals such as rental-income-to-value ratios and the like showed that the housing bubble (and now the commercial real estate market) was a pyramid scheme based on the expansion of the pool of speculators to include millions of people who would, under common-sense lending risk analysis, be unable to borrow vast sums of leveraged capital.

Now the pyramid scheme has collapsed, as it inevitably would once the pool of "greater fools" (oops, I mean home buyers/speculators) was emptied. Everyone who could buy in bought in, and that left only sellers suddenly anxious to "cash out." It is the nature of pyramid schemes to end this way, and the monstrous size of the housing/real estate bubble pyramid scheme is the only difference between it and any previous scheme.

Those who chose not to speculate should not be paying for the losses of those who did. Isn't that simple enough?

http://www.oftwominds.com/blogmar08/pyramid.html

jecht8 - You had the same identical posting ("Stop the madness") in four different
places. I combined all four into a brand new thread for you.

http://generationaldynamics.com/forum/v ... ?f=14&t=68

John

I do not agree with your view on deflation. On a short term yes , but in the long run no.
We see now in the world how governements really throwing money to banks. It looks like that 1 billion dollar is peanuts. So where is that money coming from ? The printing machines from the FED/ECB ? What is the value of all that 'new' money ?

All that money must create (hyper)inflation , no ? I suggest that you visit this website : http://www.goldonomic.com/ and give your comments on it.

Today's GD blog post was quite an angry and depressed rant, but I think factually it is correct, which makes me angry and depressed.

I actually am rooting for deflation over inflation since that would preserve at least the value of the cash I have socked away. I know it means I'll loose my pension and maybe some or all of my "stable value" 401K, but I'd rather be left with something rather than nothing. I think Hyperinflation leads to having nothing at all in the end except accounts that aren't worth the paper they aren't printed on.

If John is right and we continue to deflate for several years, I guess I can live with that, and there should be opportunity once its over.

I believe that inflation is going to be our major problem and not deflation. Please note “ On July 31st 1914 the Reichsbank of Germany suspended the convertibility of its notes into gold…….On August 4th 1914 a new law authorised the Reichsbank to discount short-term bills issued by the Treasury, together with commercial bills, as cover for its notes…..thus was initiated a monetary inflation that was without precedent in history

……..the inflation ended (in 1923) on the day that the Reichsbank ceased discounting Treasury Bills”

The new powers and policies adopted by the Fed could be very dangerous. My reading of the Weimar republic's experience suggests potentially ominous parallels. If the Fed embarks on the road of monetising Treasury debt the longer term inflation outlook becomes more frightening.So what we should fear is massive inflation as this is the easy solution for the Fed and president Obama to stabalize the economy.Do you believe they have a choice?

Dear theeconomy,

It is not just your opinion, but on this forum it is "wrong".

A support to your post coming for an very unusual place... (or very usual as well...):

"...
As Monetary Authorities, we have been humbled and have taken heart in the realization that some leading Central Banks, including those in the USA and the UK, are now not just talking of, but also actually implementing flexible and pragmatic central bank support programmes where these are deemed necessary in their National interests.

..That is precisely the path that we began over 4 years ago in pursuit of our national interest and we have not wavered on that critical path despite the untold misunderstanding, vilification, and demonization we have endured from across the political divide.

..Here in Zimbabwe we had our near-bank failures a few years ago and we responded by providing the affected Banks with the Troubled Bank Fund (TBF) for which we were heavily criticized even by some multilateral institutions who today are silent when the Central Banks of UK and USA are going the same way and doing the same thing under very similar circumstances thereby continuing the unfortunate hypocrisy that what’s good for goose is not good for the gander.

…As Monetary Authorities, we commend those of our peers, the world over, who have now seen the light on the need for the adoption of flexible and practical interventions and support to key sectors of the economy when faced with unusual circumstances.
...
"

As it is clear that - the US Federal Reserve had received an unexpected praise from the highly esteemed Dr. G. Gono, the chairman of the Reserve Bank of Zimbabwe:
http://www.rbz.co.zw/pdfs/2008%20MPS/AprilMPS2008.pdf

Looks like the US and UK central banks are in the same league as Zimbabwe.

malleni wrote:Dear theeconomy,

It is not just your opinion, but on this forum it is "wrong".

A support to your post coming for an very unusual place... (or very usual as well...):

"...
As Monetary Authorities, we have been humbled and have taken heart in the realization that some leading Central Banks, including those in the USA and the UK, are now not just talking of, but also actually implementing flexible and pragmatic central bank support programmes where these are deemed necessary in their National interests.

..That is precisely the path that we began over 4 years ago in pursuit of our national interest and we have not wavered on that critical path despite the untold misunderstanding, vilification, and demonization we have endured from across the political divide.

..Here in Zimbabwe we had our near-bank failures a few years ago and we responded by providing the affected Banks with the Troubled Bank Fund (TBF) for which we were heavily criticized even by some multilateral institutions who today are silent when the Central Banks of UK and USA are going the same way and doing the same thing under very similar circumstances thereby continuing the unfortunate hypocrisy that what’s good for goose is not good for the gander.

…As Monetary Authorities, we commend those of our peers, the world over, who have now seen the light on the need for the adoption of flexible and practical interventions and support to key sectors of the economy when faced with unusual circumstances.
...
"

As it is clear that - the US Federal Reserve had received an unexpected praise from the highly esteemed Dr. G. Gono, the chairman of the Reserve Bank of Zimbabwe:
http://www.rbz.co.zw/pdfs/2008%20MPS/AprilMPS2008.pdf

Looks like the US and UK central banks are in the same league as Zimbabwe.

Hi Malleni:
So your argument is just because Dr. G. Gono, the chairman of the Reserve Bank of Zimbabwe praised the US Federal Reserve therefore my inflation argument is wrong? Please rethink your reasoning as you are missing something.
With best regards,
Theeconomy..

silver2008 -

Do you think the fed could/would engage in "quantitative easing" (creating money) to such an extent that the dollars held by the good and hardworking men and women of this country no longer have any value? It would be a way for the fed to steal the wealth of the nation an use it to pay the debt the country owes to other nations.

I hope they wouldn't, but it seems from thier action that they would if they could.

I am interested in you opinion of if its something they can do. I am dumbfounded that the Fed is unrestrained by constitution or law, but that seems to be the case.