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| Edward J. O'Boyle |
Ponzi schemers approach persons and organizations who already know them and trust them. The schemers must find new investors on a continuing basis because the monies invested are not used in the same way that legitimate investment managers use their funds under management to purchase assets for their potential to appreciate in value and for the income they generate which in turn is distributed to their investors. Schemers use their investors' monies to make distributions to their old investors from the monies gotten from new investors and, more importantly, to enrich themselves.
The scheme works as long as it is able to attract new investors and retain old investors. New investors are attracted by the very same promise of higher returns. Old investors are retained by an accounting system that prepares individual investment reports that deliberately lie about the status of their investment portfolio.
The scheme collapses when it no longer is able to attract new investors or an insider blows the whistle. Bankruptcy follows where the investors receive the proceeds from the sale of whatever assets remain in the scheme. At the peak of its duplicity the Bernie Madoff ponzi scheme had more than 35,000 investors. Today, through a process that continues more than 10 years after bankruptcy was declared, those investors have been repaid $13.3 billion of the $17.5 billion they invested. They will never be compensated for the returns they would have earned had they invested with honest wealth management firms.
Congress approves and the president signs a budget which projects revenues and expenditures and estimates the size of any surplus or deficit. The U.S. Treasury is forced to sell bonds whenever during the budget cycle there are insufficient funds to make current payments due. Those bonds are sold through an auction process. At the end of the budget cycle any borrowings result in additional public indebtedness. At the moment, Japan and China each hold more than $1 trillion in Treasury bonds.
Here's how the public debt ponzi scheme works. In the budgeting process, Democrats and Republicans know beforehand that the Treasury will sell bonds to raise the monies to make payments that are not covered by revenues. The CARES Act was passed with full knowledge that it would add trillions to the public debt. When those bonds mature, often 30 years after they were issued, the Treasury will issue new bonds to redeem the old ones. No one at that time has to pay the taxes necessary to redeem those bonds.
From time to time Congress is forced to raise the debt ceiling which is supposed to impose fiscal restraint on it members. It doesn't because Congress simply authorizes a new, higher debt ceiling. The spending and borrowing continue apace. Like the schemer's promise of higher returns which are never kept, Congress makes a promise it has no intention of keeping. The debt ceiling is a charade. The proof is in the historical record. The last time the federal government ran a budget surplus was in FY1957. Since then we have had more than 60 consecutive years of deficit spending. In the 1940s, 1950s, and early 1960s, under the influence of Keynesian economics, students were taught not to worry about the public debt because "we owe it to ourselves."
A crisis arises when the Treasury no longer is able to sell new bonds because it no longer can find parties willing to purchase them. The crisis is ponzi-like because the Treasury finds itself in a situation much like any schemer who no longer is able to attract new investors to make payments to old investors. Today, right now, who would buy and hold for the long term municipal bonds issued by Chicago, New York, Portland, Minneapolis, St. Louis, or Seattle?
The impression that Congress wants to get across to the American public is that expenditures like the $1200 dollar check-in-the-mail, the $600 weekly bonus to persons out of work, and the paycheck protection program are "free". It's true for the 44 percent of all America households that do not pay federal income tax. It's not true for the rest who pay their taxes. In FY 2019, well before the trillions borrowed in response to Covid-19, interest payments on the public debt amounted to $575 billion. The greater the share of nonpaying households, the greater the incentive to continue running annual deficits, because taxpaying households face even greater challenges in electing public representatives committed to deal effectively with the schemers in Congress.
With no public debt, the estimated $1 trillion cost to repair the state and federal public infrastructure could be paid for in two years from the savings of not having to service the debt.
Playing loose with the $1.5 trillion student loan debt held by the federal government only reinforces the ponzi scheme. Today, many elected officials on both sides of the aisle in Washington are eager to cancel that debt. That action would have two effects. First, it will reduce the interest and principal students owe the government holder of their debt. At 3 percent, interest payments alone would cost the Treasury $45 billion in revenue, assuring that a deficit-ridden government will have to issue even more bonds to cover the budget deficit. And that doesn't include the additional revenue loss attributable to completely forgiving the unpaid balance owed. Second, students will have learned a valuable lesson: the federal government promises to provide whatever you alone cannot provide for yourself.
To paraphrase former UK Prime Minister Margaret Thatcher, the problem with unrestrained government spending is that eventually you run out of other people's money.
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Edward J. O'Boyle is a Senior Research Associate with Mayo Research Institute. Shared by the Ouachita Citizen.
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