America's Get-Rich-Quick Scheme

In 2004, the Maryland State Lottery did almost $1.4 billion dollars in sales – and that’s just in one state. This could only mean one thing – not only are Americans desperate to get rich – but they wish to do so without lifting a finger. The Mogambo explores…

I had a few frequent-flyer miles from an airline, I forget which one, but I DO remember that all the damn airlines seem to have some "policy" against letting drunk and abusive passengers get MORE drunk and abusive, and it always involves the co-pilot coming back to my seat and kicking me in the groin for some reason, although NONE of them is able to show me where it actually says that in writing.

But the miles had gone bad, see, now that I don’t fly much, not that I don’t want to, you understand, but if YOU think it is easy getting on an airplane with one of these Justice Department ankle-monitor alarms beeping like crazy and people supervising my community service sentence are screaming, "Stop that man!" then you must be a rookie to the system. But instead of just cheating me out of my frequent-flyer miles, I was offered the opportunity to subscribe, absolutely free, to some magazines for, apparently, about six months.

So you can imagine my delight when I got, in the mail, Money Magazine, because on the cover is a photo of two people, one standing, one sitting, on either 1) a beige shag rug that is covering something, or 2) a congealed mound of puffed rice or wheat or something, I’m not sure which. But there is no explanation or hint of it anywhere in the magazine, and I know because I looked.

Ponzi Schemes: Getting Rich in America

But this is not about how Money Magazine is covering up some dreadful secret with an old rug, almost surely in violation of some little-known provision of the Patriot Act, and it wouldn’t surprise me a bit to learn that the Homeland Security Department is already on the case. But this is about these two people posing on the cover. One is a pretty young Asian-American woman and the other is a handsome Hispanic-American male, ditto on the young side, for which I am both jealous and hateful, as MY youth is far behind me and these two complete strangers are showing off how they are still young and beautiful and apparently rich! It’s not fair! They are, I assume, the pictorial representation of the magazine’s feature article, "Getting rich in America. The strategies that work now. P 98".

You can imagine my excitement as my trembling fingers scrambled to turn to page 98. "Getting rich in America"! Man! These guys are talking my language! I am already IN America, so I already have something going for me as I save those transportation costs! This is going to be so great! Upon reaching page 98, I quickly scan the article. I scan it because, although I would certainly like to be rich, I’m an American, and as such I don’t want to waste ten whole minutes of my valuable time actually reading some dumb article. I want it now! I want everything now! But I quickly find out that if I want to be rich, (and you might want to write this down, because it was the thrust of the featured article in the magazine, so it must be important!), I should get more education, speculate in houses, and start my own business. Man! That IS easy! Golly! Thanks, Money Magazine!

But although the advice was mere pedestrian fluff, towards the end of it, we get this interesting paragraph. "So does that 1999 way of getting rich, the stock market, matter anymore? Yes, but definitely not as a quick way to wealth. One of the reasons that people thought you could get rich in a hurry buying stocks a few years ago was that many people did. The S&P500 returned about 28% a year for the five years that ended in 1999. That party, of course, is long over."

Wow! This is Money Magazine declaring, as an apparently a commonly acknowledged fact (as I glean from their use of the phrase "That party, of course, is long over") that the stock market is a loser, as a way of getting rich quickly, anyway. But if you take the speculative money out of the market, what is left to cause the froth that sends prices up so high? And how can they be held at these heights without that speculative money?

Ponzi Schemes: "The Bursting Asset Bubbles"

A guy named Sam Vaknin, Ph.D. has written "The Bursting Asset Bubbles – Introduction (Part 1)" on the GlobalPolitician.com site, and it is a nice essay about how bubbles in assets are not new, they always burst, and many other bad things about bubbles, and that is why you never read of anybody but central bankers waxing ecstatic about bubble economies and how they love to foster bubble economies, and that is why they cannot recognize that a bubble is a bubble (and that is why they continue financing them) until after it bursts (when they will step up their financing of them to prevent "deflation" of the bubble).

He says as much when he notes, "Ponzi and pyramid schemes have been a fixture of Western Civilization at least since the Middle Renaissance." To prove it, he notes the famous tulip-mania that happened in 1634.

And these get-rich-quick schemes are still happening, and one of them was in Israel, as "More than one-fifth of the population of 1983 Israel was involved in a banking scandal of Albanian proportions. It was a classic pyramid scheme. All the banks, bar one, promised to gullible investors ever increasing returns on the banks’ own publicly-traded shares.

"These explicit and incredible promises were included in prospectuses of the banks’ public offerings and won the implicit acquiescence and collaboration of successive Israeli governments. The banks used deposits, their capital, retained earnings and funds illegally borrowed through shady offshore subsidiaries to try to keep their impossible and unhealthy promises. Everyone knew what was going on and everyone was involved. It lasted seven years. The prices of some shares increased by 1-2 percent daily."

So people were getting rich, and a fifth of the population was now involved in it, all of them trying to get rich. Then, "On October 6, 1983, the entire banking sector of Israel crumbled. Faced with ominously mounting civil unrest, the government was forced to compensate shareholders. It offered them an elaborate share buyback plan over nine years. The cost of this plan was pegged at $6 billion – almost 15 percent of Israel’s annual GDP. The indirect damage remains unknown."

This is not about how Israel is full of people who will fall for a Ponzi scheme, as EVERY country is full of people who will fall for a Ponzi scheme. Why do they do this, you ask? Search me, but the author concludes, "People know that they are likelier to lose all or part of their money as time passes. But they convince themselves that they can outwit the organizers of the pyramid, or that their withdrawals of profits or interest payments prior to the inevitable collapse will more than amply compensate them for the loss of their money. Many believe that they will succeed to accurately time the extraction of their original investment based on – mostly useless and superstitious – ‘warning signs’."

Ponzi Schemes: It’s Not Just People Acting Stupid

But it is more than people acting like idiots. He goes on to say, "Investments by households are only one of the engines of this first kind of asset bubbles. A lot of the money that pours into pyramid schemes and stock exchange booms is laundered, the fruits of illicit pursuits. The laundering of tax-evaded money or the proceeds of criminal activities, mainly drugs, is effected through regular banking channels. The money changes ownership a few times to obscure its trail and the identities of the true owners." People are laundering money in these schemes, too!

But this is not about Ponzi schemes and how people are so stupid that they fall for these idiotic scams time after time and never seem to learn, or how criminals are laundering money, nor is this about how governments using a fiat currency is the biggest Ponzi scam of all, and how we never seem to learn from this either, although it is obvious that every other idiot government in the history of idiotic governments have always started spending too much, and they all resorted to one currency-debasement scheme or another in their dire desperation, that they thus destroyed the currency, and then that destroyed their country.

No, the REAL lesson that I wanted to note was that the government stepped in to bail them out! The winners won, and the government paid back the losers! Which unleashed not only inflation, as the money supply rose, but more stupidities, too!

And speaking of government stupidities that are unleashing more idiocies, United Airlines in unloading its busted pension fund, and sticking it in the PBGC (Pension Benefits Guarantee Corporation), even though the PBGC is itself already $23 billion in the hole from the OTHER busted pension funds that it absorbed! Part of the pain will be felt by the people covered by the plan, as their total promised benefits will be cut by almost a third ($3 billion), but the rest of it will, theoretically, be borne by everybody, as the government sells bonds to pay the retirees through the PBGC, which drives up the money supply, which makes inflation rise, which makes everything worse for everybody. Especially when the other airlines find they cannot compete with the deadweight of THEIR retirement plans. Ugh.

Regards,

The Mogambo Guru
for The Daily Reckoning

May 02, 2005

P.S. The Mogambo Sez: One of the new heroes is John Ruiz Dempsey, who has filed a class action lawsuit against banks "on behalf of the People of Canada alleging the financial system creates money out of ‘thin air’." The lawsuit argues, according to FreeMarketNews.com, that "financial institutions illegally charged interest on money that was loaned to borrowers", as "Banks and credit unions did not actually have the capital that it gave as loans, and didn’t have the right to loan depositors’ money without obtaining consent. Furthermore, the lawsuit claims that money was counterfeited by digitally creating money that never existed."

He is right, of course. Likewise, his suit will fail, of course, as he does not have a prayer in trying to keep the banks and the government from having as much money as they want, to spend and play with as they want.

Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter, an avocational exercise to heap disrespect on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications.