No doubt you have heard about the recent conviction of Bernard Madoff, the Wall Street guru who swindled an estimated $50 billion from investors around the world – many who were certainly smart enough to make their own fortunes but decided to turn the management of some or all of their fortunes over to Madoff. Madoff in turn used a sophisticated Ponzi scheme to give investors the illusion of increased wealth.
The Ponzi scheme derives its inspiration from an Italian immigrant, Carlos (or Charles) Ponzi who came to America in 1903. Before the stock market crash of 1929, Ponzi bilked thousands of investors for millions of dollars through his Securities Exchange Company. Setting up a dummy investment with fictitious returns, he paid “returns” to old investors with money received from new investors. He carried out his scheme through 35 branch offices. It only took eight months for the scheme to fall apart and he was arrested for embezzlement. He was eventually deported to Italy in 1934. He died in Brazil in 1949, destitute.
So what does Carlos Ponzi have to do with President Obama and his financial plans for America? Americans are being asked to accept and believe the idea that the Federal government can “invest” trillions of borrowed dollars from “new” investors (foreign countries and U.S. taxpayers) to pay bogus “returns” (or repayment) to old debt holders (read: foreigners and U.S. taxpayers). Along the way there is no real investment in America to generate lasting returns, only a slight-of-hand shell game that gives the illusion of the improvement of one’s well being. It is a financial “house of cards” waiting for some event to flick out the bottom card and precipitate a great collapse.
Foreign investors in Obama’s Ponzi scheme are starting to get a whiff of its failure. On March 10, according to Laura Mandaro of MarketWatch, “The spreads on credit-default swaps for U.S. government debt jumped to 97 basis points Tuesday, nearly seven times higher than a year ago and 60% higher than the end of last year. . . .”
What this means is simply this: There is growing sentiment abroad, particularly among those that have “invested” in the U.S. borrowing scheme, that the Federal government has a rapidly rising likelihood of defaulting on its debt obligations and will not be able to make good on the returns to the “old” investors. Sounds and looks like a mammoth-size Ponzi scheme to me. Like the old farmer said: “If it walks like a duck and quacks like a duck, then it must be a duck.”