The Ultimate Ponzi Scam
The word "Ponzi" is thrown around with abandon these days, yet few people are likely to be aware of the origin and true meaning of that word - let alone the fact they are probably unwittingly involved in a giant Ponzi scam right now.
"Ponzi" was the name of a real person - Carlo "Charles" Ponzi, who was born in Italy in 1882 and emigrated to the USA in 1903.
For 14 years, Charles Ponzi wandered from city to city, and from job to job, but finally settled in Boston in 1917, where he got a job typing and responding to foreign mail.
It was in this job he was to discover the mechanism that he believed would make him and his investors very wealthy. The idea was this: he noted that in some of the correspondence he received was included an international postal reply coupon - good for using on the letter of reply.
What Ponzi found was that he could cash this foreign coupon in and obtain local currency - and apparently make a profit (as compared with the cost of the coupon in the foreign currency).
For example, he could perhaps buy $100 worth of postal coupons in Italy and cash them in for $600 in the USA.
Ponzi became very excited by this "discovery", and soon worked out that he could make more than 400% on funds employed in this manner. However, he didn't take into account the time delays, exchange fluctuations, and bureaucratic "overhead". But that didn't stop him devising a scheme to offer his idea as an investment opportunity to others.
On December 26, 1919, Ponzi filed an application with the local authorities to establish his business as "The Security Exchange Company" and promised 50% interest within 90 days to prospective investors.
Well, the flood gates opened and eager investors poured in - with a weekly volume of over $1 million in the early days. People of every type were getting in on the opportunity - snatching up promissory notes from $10 to $50,000 in value. The average investor's stake was $300 - a substantial amount in those days.
By 1920 Ponzi was a very rich man. However, it was not because of his vaunted "stamp exchange" scheme at all. No, he was simply paying out investors (after the 90 day period) from new funds coming in from NEW investors. Everybody was happy - as everybody was being paid on time, and this fact lead more people to climb on to the bandwagon. Even the law, which was aware of what was going on, couldn't fault him as no one had laid a complaint, and everyone was being paid on time. That is, until July 26, 1920.
On that fateful day, a Boston newspaper ran a story questioning the legitimacy of the scheme, and from that day on the writing was on the wall. Ponzi was arrested on August 13. An estimated 40,000 people had invested $15 million into his scheme - a huge amount in today's money. And of course, there was no "investment" and no actual returns on those monies, so the bulk of people's money was gone.
Charles Ponzi got five years in jail for his fraudulent actions, and apparently went on to "greater" things when released - with a fraudulent land investment deal in Florida!
Thus the Ponzi scheme/scam was invented and perfected. And it's really simple. Just come up with a plausible investment or business scheme and promise unheard-of returns - and watch while hopeful investors stream in. Make sure to pay out your investors on time (at the beginning) so they are "happy chappies" who tell all their friends and family about their success - and thus ensure a continuing stream of new investors, and new money.
In this way, normal, apparently rational people can be fleeced of their life savings. And I guess you can put it down to one fact - the innate greed of most of us. When big dollars show up on our radar screen, it appears our judgement goes out the window.
Well, Ponzi scams are alive and well in the world today. In fact, it's almost impossible to keep up with all the new variations and twists on the old theme.
The basic operational principle is always the same: put up a "legitimate" sounding project, business idea or investment - offer extraordinary high returns; pay your early investors on time, and use these people to promote your scheme, usually by way of referral commissions.
The advent of the internet has provided a virtual honey-pot of opportunity to latter-day Charles Ponzis. The ability to tap into the power of viral marketing strategies, by paying out referral commissions; the ability to create professional looking websites so people are lulled into a false sense of security; the ability to take in and pay out funds quickly, using some form of internet payment system; and the ability to constantly tap into a growing market of internet newbies.
Modern day Ponzi scams come in all shapes and sizes. Some are disguised as legitimate investment opportunities, like forex or day trading - where high returns are promised. Some are disguised as business opportunities, like the surf-to-earn phenomena - where you can supposedly earn megabucks by spending five minutes a day surfing internet sites. Some are disguised as legitimate, but exotic business ventures. And some are disguised as "bank debenture" programmes.
It doesn't matter how it looks on the outside, the under-the-hood mechanics remain unchanged - to rake in the cash and pay out the early birds at the expense of the later-arriving dodo birds.
And the end result is always the same. Tears all round.
However, no matter how much exposure such scams receive, it appears there is no shortage of new "suckers" to support the latest offering.
In fact, even if you are fully aware of the dangers; even if you've been scammed before and swore never to do it again; you are probably participating in one huge Ponzi scam right now - without even knowing it.
I'm talking about the state-sponsored Ponzi known as a social security or pension scheme.
Obviously, different countries may run these differently, and some may have already abandoned them. But for most developed nations the state-sponsored welfare/pension Ponzi scam is alive and well.
Just look at the "business" model. You promise your citizens a living wage upon retirement - known as a pension or "super". Citizens are told that when they start work, a small proportion of their earnings will be deducted each week, to contribute to their future pension or social security needs. This sounds feasible enough - until you look closer at the funding mechanism.
What the state does is take in the funds, via the tax system, and use those funds to pay CURRENT pension and social security obligations. In other words, they are taking in money from today's income earners, in order to pay money to yesterday's income earners. This money the state takes in is NOT invested on your behalf, but spent immediately to meet existing financial obligations of those already retired!
It's a classic Ponzi scam. And like all such schemes, it can only grow so much before collapsing. You see, in order for the pension or social security system to keep going, it would require ever- greater numbers of 'new' people coming into the system. More babies and more population growth in other words. But that is not happening. No, the population growth in the developed nations is either static or in decline (as in Germany, for example). And this is set to produce the moment of crisis for such state- sponsored Ponzis.
The new "investors" are drying up - and that will leave the old investors high and dry when it's their time to draw their income. And the only thing that has kept this state-sponsored Ponzi scam going as long as it has, is the long "life" of it.
When Charles Ponzi started his scheme, investors were promised a payout in 90 days - so if funds were not forthcoming at that time then alarm bells went off. However, with the state's version, the lifespan is considerably longer - more like 40-45 years. In fact, one of the tricks now being employed is to wind forward the official retiring age, so funds can be withheld (and the day of reckoning held off) for even longer.
This problem has been noted in some countries, where they are moving to market orientated solutions - like national super investment plans, where funds are put into real investments. This is what "privatisation" of pensions and super is all about. It's about actually investing the money. This is being done in a number of ways. Sometimes by the state, acting as investment manager - and placing funds on behalf of its citizens. And sometimes the responsibility for such investment decisions is being handed over to those individuals who desire to manage their own affairs.
But all this new-found freedom to invest your own money for your own retirement is a relatively new response to a pressingly urgent problem - the fact that government funded pension and social security schemes are simply unsustainable in the long run.
To be sustainable would require an ever-growing population - to build the ever-growing pyramid - in order to rake in the ever- increasing amount of funds needed.
The simple barefaced fact is this: if you've been handing over your hard-earned money to your government, in the hope that they will pay you a pension or look after your health at some time in the future - then you are in for a rude shock. Your money is long gone. It was spent the moment the government took it off you to pay for other people's pensions and health care. And by the time you need the same benefits, the cupboard will be bare.
When "investors" in a private Ponzi scam realise they've become victims, they are always angry and aggrieved - and usually bay for blood. I wonder how it will be when the masses wake up to the fact that their own government has scammed them big time - bigger than Mr Charles Ponzi could ever have dreamed of.
I guess we'll find out one day - soon.
Yours in freedom