Tuesday, September 21, 2010

The National Ponzi Scheme

First a definition of a Ponzi scheme...from wikipedia...not the whole paragraph they provide.

A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned.

Ok. Clearly Social Security fits this definition. You pay in, the government rips off the trust, and now it must be funded by a reduced and subsequent demographic of younger "investors." It has never made any "profit." Somehow a job reduced structural environment with declining demographics must pay for the boomers. That cannot work and unlike a pure Ponzi- your contributions are never voluntary.

Now let's look at the stock market. Does the stock market fit the definition of a Ponzi scheme?

Yes. People buy stock hoping that it will appreciate and at some future point- subsequent investors will buy that appreciated stock. We agree to this Ponzi scheme- in fact- it is legal. What happens when stock doesn't appreciate? What happens when the great lie that everyone has been told finally gets exposed?

Well, historically speaking, up until 1999 the stock market had always appreciated. Like housing. So for most of the 20th century the urban legend was true. But then a couple of odd things happened.

The market quit growing. From 1999 to 2010, a period of ten or eleven years, there has been no appreciable rise in equities. I'm not talking individual Apple type stocks. I'm talking about the major averages. A decade, even by fund manager standards, is a long term time horizon.

Then another odd thing happened. Nearly every private and public fund failed to adjust to this new reality. Year after year, actuaries continued to maintain that these funds would make anywhere from 7-9% annualized returns in the stock market. Certainly they did. In fact here's a table of 200 public funds that are continuing to base their funding ratios based on a world that changed- even though the people running these funds apparently haven't picked up on that change yet.


Then one last thing happened. The money that is used to transfer our wealth into this stock market has been inflated. Created out of thin air and thus any value it might have still had- has been diluted further still by a FED that is buying all of the debt our government issues. Debt that we guarantee the world we will pay with money that doesn't exist nor will it ever likely exist. Remember our money can only be created when we take on debt. It is a debt instrument.

So what's wrong with this picture? Well, we have a rather nasty hybrid Ponzi scheme. It's called the stock market. All of your wealth is being transferred into a stock market with money that has no value. Into a market that has been dead money for the past 11 years. And as a few more years go by, all of those 8% actuarial assumptions, are going to have to come down to perhaps 3 or 4% and begin to reflect reality. Taxpayers are going to have to foot the bill for pension shortfalls. And at the same time, taxpayers are going to have to pay those trillions of debt via treasuries that we have sold to China, Japan, the UK, and the FED. With interest. And continue to hike taxes to pay for the continuing operations of a government gone berserk.

Are you starting to get the picture? We are on the leading edge of a perfect storm. An economic storm that will bring this country to it's knees in less than 10 years. It's not a matter of if any longer.

You see, there isn't going to be any wealth leftover to buy stocks. That's how Ponzi schemes always end. They run out of investors. And that is precisely what is going to happen, what's been happening, in the national Ponzi scheme. You are left with one question if you are relying on funds invested in the market for your long term security.

Do you really believe, in an era of diluted dollars, higher taxes, and a country that has farmed all of its jobs overseas, that the stock market has the capacity to appreciate? And even if it did, just who would we sell that appreciated stock to? Would looking at the last ten years make a difference to you? This game is over. Nobody has accepted that reality including the fund managers still projecting ridiculous 8% yoy returns.

The stock market didn't start out as a Ponzi scheme, but it has damn sure turned into one.

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