March 28, 2010

Dishonoring Charles Ponzi

One cannot libel the dead, and for this Senator Lindsey Graham (Supercilious, S.C.) should be grateful. Ponzi, in an act of magnificent chutzpah, once sued one of his earlier detractors, who wrote that he was running a, well, Ponzi scheme. Ponzi won in court, a $500,000 judgment for the impertinence of smearing his bad name. In those days tort law required the defendant to prove the truth of his charge (as the English system still does), and Ponzi's detractor, while exactly right, couldn't prove it.

Anyway, Graham criticized the health care bill on the basis of its "Ponzi scheme" characteristics. If I understood his rambling, drawling remarks, he was directing attention to the budget cutting claims of the bill's proponents, and specifically to the $570 billion in "cuts" from Medicare which will offset the cost of the new legislation. Graham said that this half trillion will have to be made up somehow, so that the bill is not "deficit neutral" and will raise the national debt by at least this amount.

Couple of technical points: (1) Who's even going to notice a half tril at this point? I thought we were talking real money. And: (2) This is not really a Ponzi scheme. It's a shell game, which is one of the two gambits used by the federal government to conceal its essential insolvency.

The other game played by the federal government is, in fact, a Ponzi scheme, and that is the basic financing of the entire federal operation. Ponzi pretended to speculate in "postal coupons" (as Bernard Madoff pretended to invest in the stock market) in an early arbitrage scheme of playing the differential between Italian and American prices. In reality, Ponzi was simply using the investments of later investors to pay earlier investors, deploying the word of mouth of the earlier investors about their fabulous "returns" to generate an ever increasing pyramid of suckers. The scam was brilliant in its simplicity and elegance, and Ponzi lived the high life while it lasted (which was not long, not nearly as long as Bernard Madoff, which gives you an idea how lame modern securities enforcement is - the modern SEC had the original Ponzi scheme as a model and still couldn't figure it out). One tends to forget that even the simplest ideas need an original, a genius who comes up with the concept, and Chuck was that man.

The public part of the national debt is $8 trillion, and the United States is completely dependent on later "investors" to keep itself current with existing debt holders. If any sizable fraction of bond and bill holders suddenly demanded their money on maturity, the USA would be revealed as a bankrupt. This insolvency has been exacerbated recently by the pathetic reality that the actual tax revenues received by the U.S. government are not much more than the current budget deficit (about $2.2 trillion in income versus $1.5 trillion in deficit). This is roughly equivalent to an individual making $100,000 per year who increases his debt by $67,000 every year.

This is the reason that the USA likes talking about Greece's problems so much, as noted in a recent mindbelch on these pages. Anything to distract us from the essential absurdity of the situation we are in.

An example of a shell game played by the United States entails the "quantitative easing" employed by the Federal Reserve to tide us over until this little hiccup known as the Great Recession passes. This one is beautifully intricate and dazzling in creating the impression that anything other than money printing is going on. The Fed would like to simply e-mail a million bucks to every American and be done with it, but Weimar/Zimbabwe hyperinflation concerns stay the Chairman's hand. So instead the Fed "limits" itself to about $1.6 trillion in the form of (a) participating in the Treasury market (snake eating tail department) and (b) buying up mortgage-backed securities guaranteed by Fannie & Freddie (that moribund couple).

Cynical observers such as Chris Martenson have noted that these two programs are used in tandem. The Fed's purchase of about $1.3 trillion in dodgy MBS sludge is part of the "cash for trash" program where holders (such as banks in the Primary Dealer category [the Fed's Kool Kids Klub]) are relieved of this worthless stuff in exchange for Treasuries, which the Fed and Treasury conjure out of thin air. The banks then have something they can actually sell at par value and can use to buy, oh let's see, Treasuries at a regular Treasury auction. The Fed, using its "power" (self-granted) to buy Treasuries under QE, then relieves the banks of the very Treasuries they just purchased (Martenson compared the CUSIP numbers of the bonds purchased to prove this thesis). Often the turnaround is just a few days, so no elaborate scheme to conceal is felt necessary by the scammers. The Treasury also now has its "Supplementary Financing Program" (SFP), through which it raises "money" by selling short-term Treasury bills and handing the money over to the Fed to use to buy more MBS from distressed banks, which is a way of extending QE without calling it that.

I get a kind of motion sickness when I try to follow all of this, or try to figure out what just happened. Intuitively you sense that it's all crazy, that all the Fed/Treasury are doing is playing an elaborate game of make-believe. So Lindsey, who is, after all, involved as a Congressperson in the federal budget process, should probably cool it on the Ponzi allegations. He's beyond Charles Ponzi's reach at this point, but China is looking on with a jaundiced eye that is a new form of Yellow Peril.

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