The Ponzi Scheme As Way of Life

Sharon December 19th, 2008

I’m sorry, I’m having a bit of trouble getting all outraged about Bernie Madoff and his ponzi scheme.  Yes, I’m shocked.  Shocked and appalled.  You mean, someone was offering a scheme in which you pay present day participants with the funds of those who come in later, and then it fell apart.  Gosh, that seems so unprecedented.

Yeah, I feel bad for those who were taken in, particularly for charities that lost their funds.  But no worse than for those who lost their 401Ks or their pension funds on the stock market, for cities and states that can’t sell municipal bonds, and I feel far worse for the poor, who never had a glimmer of getting to participate in the get-rich-quick ponzi scheme that was a stockmarket that everyone said could have perpetual growth forever. 

Madoff may be a criminal, but he’s a criminal in large part because he’s engaging in a particular form of ponzi scheme that we look down upon, one small enough to be called illegal.  In general, we’re pretty comfortable with ponzi models -we live, quite happily, in a ponzi economy, one in which the concept of perpetual economic growth is sold, divvied up again and resold.  We live in a Ponzi ecology where we borrow constantly against the future to pay for our present affluence.

Is this truly a Ponzi scheme?  I think the answer is yes – a Ponzi scheme never really generates new wealth, it simply relies on a constant stream of new money.  And since the eco-Ponzi economy relies most of all on reducing the capacity of future generations to live well – because natural resources and associated wealth are already drawn down, I think that it does meet the criteria at both the economic and ecological levels.

 Most of us have been putting our money into 401Ks and Mutual funds,  and now that money is disappearing – and it is disappearing again, because we live in a Ponzi economy, one in which new funds can, for a while, conceal the bankruptcy of a society that draws down its natural resources and leverages both its ecology and economy past bearing.  Thus we get the mantra, as Bob Waldrop wisely observes, investing is saving that we all belong in the stock market:

“Lie the First: Money in the stock market is “savings”.

Reality: Money in the stock market is “speculation”. You buy a stock on the speculation that it will go up and you will sell it later at a profit and in the meantime, maybe get a regular dividend. It can also be considered casino gambling. It is not savings as we generally define the term, since it can be here today and gone five minutes later.

Lies the Second and Third: Everyone should be in the stock market. You can’t afford to NOT be in the stock market.

Reality: The stock market is only for people with money to gamble. People with debts and small savings should not be in the stock market. The former should pay the debts, including their mortgages first. The latter should wait until they have substantial savings before they decide to risk a small amount of their assets in the stock market.

The stock market game is rigged against the average small investor. With the way accounting rules and etc are these days, there are lots of ways that corporations can hide important information. Just ask some of the Lehman’s stockholders about that.

Lie the Fourth: Buy and hold is the smart strategy. Over time, the stock market always goes up.

Reality: That’s not the way the rich make their money in the stock market. They buy stocks when they are cheap and sell them when they are expensive. The “always goes up” comment is usually coupled with a comparison of two dates and the stock market index values on those dates. Compared to the history of economics, there is no way that we can say with total truth that the market over time will always go up. Where are the investments in the stock exchanges of the Roman Empire these days? And a rise in a stock market index may have nothing to do with the performance of individual stocks or mutual funds. Ask the stockholders of Enron about that. Or the stockholders of corporations that made horse-drawn carriages.”

I don’t blame people who were constantly told that they’d need X million dollars to keep living into their old age, and if they didn’t have it, would find themselves freezing and starving for believing this, but it is how the Ponzi economy works.  It relies on the idea that you are doing something good by feeding your dollars into corporate coffers, and that your money is still really yours.  Those are both false truths.  And they are built on ponzi model they pay out to the earliest investors (why, for example, wealth is increasingly concentrated in the hands of older folks) while offering nothing to those unlucky enough to get in late.

I had one of those “duh” moments yesterday as I was doing a radio show – I made a point I’ve made many times before – that growth capitalism in general and the real estate bubble in particular depended heavily on the idea that we can’t live together, that everyone has to own their own separate household.  So the rise in average material living space from 250 square feet per person in 1950 to 850 square feet for each warm body in 2000 was in part a product of the constant message that living together with one’s family or friends was a measure of failure. 

This point I’ve written about a number of times – but somehow I’d never quite fully grasped the corollary point, which I found myself articulating on the fly - that the Ponzi economy depends on an endless supply of laborers, laborers who wouldn’t quit because they can’t.  And that means that the cost of living – of basic needs like housing, food and transportation have to be kept high – because otherwise people might notice that serving corporate masters isn’t the best or only way to live their lives.  Those 850 square feet, and the costs associated with them, and the problems of housing the ordinary stuff we “require” for daily life in 250 square feet means that the cost of housing for ordinary people is dramatically  high – so high that we must devote most our time to the corporate economy, so high we then have no time to do work in the informal economy, so high that we can never, ever think about whether there are any better choices out there.

We’re going to try and rescue the economy with another Ponzi scheme – with borrowing against our children’s future wealth to protect financial institutions and invest in some good things and some bad ones.  This, of course, is the oldest ponzi scheme of all, and you can make the argument that some human societies have been playing this game for a very long time.  We’ve been doing it with natural resources and are continuing to do so, and we’re also expanding the share of our children’s wealth we’re willing to borrow against.  After all, what have future generations ever done for us?  They might as well serve some purpose – to pay off our debt.

And of course we’ve got the best possible reason for this – we’re in a crisis.  There’s always a good reason for taking just a little more of what belongs to the future – to bring people out of poverty, to resolve this or that crisis.  Of course, the crisis was caused by borrowing against our children’s inheritence of natural resources, but more of the same is now necessary.  A good Ponzi scheme always needs new investors – and if none are going to volunteer, well, let’s volunteer them.  We’ll use the to prop up the stock market and today’s version of the Roman chariot business.

Our ecology and our economy all fundamentally are built on a Ponzi scheme in which we can never make enough to keep up – we are always losing ground, always having to steal from further down the line of our posterity.  At the same time, we justify their forcible participation in this speculation by saying that we are protecting them – we have to protect them from a Depression, so it is worth risking their future.  But, of course, if you actually care about your children and grandchildren, you don’t ask them to make sacrifices you aren’t prepared to make.  Fundamentally, we’re covering our own asses, and asking our kids to do it for us.

And that’s, well, evil, to put it bluntly.  It is precisely the opposite of what parents are supposed to do for their children, and what present generations are supposed to do for the future.  As David Orr observes in his superb essay “Loving Children: A Design Problem” living in a world in which we do not act as though we love our children (despite our endless assertions that we do) does them deep, moral harm.  It lessens us, but more importantly, it doesn’t just physically impoverish our children, it morally impoverishes them too.

“The Skymall catalogue, conveniently available to bored airplane passengers, recently offered an item that spoke volumes about our approach to raising children. For a price of several hundred dollars, parents could order a device that could be attached to a television set that would control access to the television. Each child would be given a kind of credit card, programmed to limit the hours he or she could watch TV. The child so disciplined, would presumably benefit by imbibing fewer hours of mind numbing junk. They might also benefit from the perverse challenge to discover the many exciting and ingenious ways to subvert the technology and the intention behind it, including a flank attack on parental rules and public decency via the internet.

My parents had a rather different approach to the problem. It was the judicious and authoritative use of the word “no.” It cost nothing. My brother, sister, and I knew what it meant and the consequences for ignoring it. Still, I sometimes acted otherwise. It was a way to test the boundaries of freedom and parental love and the relation between the two. 

The Skymall device and the word “no” both represent concern for the welfare of the child, but they are fundamentally different design approaches to the problem of raising children and they have very different effects on the child. The device approach to discipline is driven by three factors that are new to parenting in the postmodern world. It is a product of a commercial culture in which we’ve come to believe that high-tech gadgetry can fix human problems, including that of teaching discipline and self-control to children. Moreover, the device is intended mostly for parents who are absent from the home for much of the day because they must (or think they must) work to make an expanding number of ends meet. And, all of our verbal assurances of love notwithstanding, it is a product of a society that does not love its children competently enough to teach them self-discipline. The device approach to parenting is merely emblematic of a larger problem that has to do with the situation of childhood within an increasingly dysfunctional society absorbed with things, economic growth, and self. 

We claim to love our children, and I believe that most of us do. But we have, sheep like, acquiesced in the design of a society that dilutes the expression of genuine love. The result is a growing mistrust of our children that easily turns to fear and dislike. In a recent survey, for example, only one-third of adults believed that today’s young people “will eventually make this country a better place” (Applebome, 1997). Instead, we find them “rude” and “irresponsible.” And often they are. We find them overly materialistic and unconcerned about politics, values, and improving society. And many are too materialistic and detached from large issues (Bronner, 1998). Not infrequently they are verbally and physically violent, fully adapted to a society that is saturated with drugs and violence. A few kill and rape other children. Why are the very children that we profess to cherish becoming less than likable and sometimes less than human? 

Some will argue that nothing of the sort is happening and that every generation believes that its children are going to Hell. Eventually, however, things work out. Such views are, I think, fatuous because they ignore the sharp divide imposed between the hyper-consumerism of the post-modern world and the needs of children for extended nurturing, mentoring, and imagining. It’s the economy that we love, not our children. The symptoms are all around us. We spend 40% less time with our children than we did in 1965. We spend, on average, 6 hours per week shopping, but only 40 minutes playing with our children (Suzuki, 23). It can no longer be taken for granted that this civilization can pass on its highest values to enough of its children to survive. Without intending to do so, we have created a society that cannot love its children, indeed one in which the expression of real love is increasingly difficult.”

Our love for our economy leads us to seek any path out of the crisis we are now facing – whether it will work or not, whether it does harm or good.  We say we are doing it for our children – but much of what we have done mean that their own Depressions will be deeper and they will be poorer.  The Ponzi scheme is coming to an end – we have drawn in generations at a huge remove from us.  500 years from now, when no one remembers our names, our descendents will still be living with the consequences of climate change, will still be paying the debt from our overdrawn ecology.

It may well be the case that we will have to borrow against both resources and wealth to adapt our infrastructure – but we shouldn’t put a penny of borrowed money into anything that won’t serve the next generation, as well as us or better.  That means not a cent for Detroit to keep building gas guzzlers and personal cars.  Not a penny for highways that they won’t be driving on anyway.  We cannot afford to waste what’s left of their inheritance – we need to leave our children buildings worth occupying, that will last long enough to house them, and energy resources that will serve them, and some accessible oil in the ground for the things they may not be able to produce without it. 

I was born in 1972.  By the time I was six or seven, it was well known that we desperately needed to take action to address future needs for energy, economic and climate stability.  In 1979, Jimmy Carter’s Year 2000 report identified Global Warming as a major threat, and the need for growth in renewable energy as a primary national project.  Some nations, including Sweden, took their posterity as a priority and began seriously investing in alternative energies.  And in the US, we had morning in America, and the decision to offer some temporary prosperity at the price that my generation, coming of age, with children on our knee, would face the coalescing problems passed down to us.

I don’t blame the baby boomers as a unit – many I know did their damnedest to make it happen, but they were not the majority.  I admire and respect all of those who fought the good fight to keep priorities straight.  But that said,  our parents and grandparents failed us, they passed the problem down to my peers, and those younger than us.  And those same people (because most of the powerful are baby boomers still) are planning on passing the problem down to the children we hold at breast or watch play at our knees.  They will impoverish their grandchildren to keep the Ponzi scheme going.

The question is whether we, and the baby boomers and older folk who had it right from the beginning, actually love our children and grandchildren enough to stop the buck here?  I don’t minimize how difficult that is - and I don’t doubt that trying to live on a fair share, and get through the necessary economic crisis so we can start better next time will be difficult for children as well as adults.  And yet, passing the buck again ensures them a darker, warmer, more bitter world with fewer natural resources, and a crushing economic debt.  Sometimes when there are no easy answers, one has to move to “what is right.”

The burden of addressing our world-wide Ponzi scheme falls, I fear upon all of us who are adult enough to demand it stop, to refuse to participate to the extent we can, to work to end it, and most of all, to shield with our bodies the children and grandchildren we do love, and in whom we must reposit our hopes, our endurance and our courage.

Sharon

61 Responses to “The Ponzi Scheme As Way of Life”

  1. BrianM says:

    Quote:
    You mean, someone was offering a scheme in which you pay present day participants with the funds of those who come in later, and then it fell apart.

    Hmmm, sounds like a reasonable working definition of Social Security. Keep paying off today’s recipients with tomorrow’s earnings until there aren’t enough earners to cover the bills.

    Oh, that’s right, I think this is the first year that the first of the baby boomers are eligible for early social security payments. Whoops! Guess we might have left that problem go a tad too long.

    The markets are speculation, and speculation is gambling. Simple enough. However, Social security is a straight-up, in your face Ponzi scheme, with the added wrinkle that the “investors” (we the people) were entirely captive and forced to pay to play (no references or marketing costs required). The end of that game in now clearly in sight.

    Brian

  2. Yvette says:

    What an enlightening article. Thank you for the great insight. I too fear that we are essentially raping our children and our childrens children to pay for the “pressing issues of today, right now”. It’s like we no longer have foresight or the ability to think about next year, or 10 years, or 20 years from now. Last night on 60 minutes Arnold Schwartzenagger said that the car industry big whigs told him 10 years ago it would take approximately that long to make “greener cars”. He said, well, it’s been 10 years and we are no closer to that goal then we were.
    On a positive note however, I feel as if a depression would force us again to get to know our neighbors, spend more time with our families and require us to work togethers as communities to survive, i.e. community gardens, bartering goods for services. These things have gone by the wayside and now we are a very informed, but isolated society.
    By the way, I heard you on NPR about a month ago and I was just blown away. You are outstanding and I have been telling everyone about you and giving them your web address. Keep up the good work and God Bless you and your family. Whichever is the case I wish you a Happy Hannukha or a very Merry Christmas and a Happy New Year.

  3. Tom Dennen says:

    Ponzi is a way of life. This is how it may have started here:

    THE HIDDEN HAND MOVED ON

    And We Didn’t Even Notice.

    Tom Dennen

    “But the free market is not primarily a device to procure growth. It is a device to secure the most efficient use of resources.” — Henry C. Wallich, a Governor of the Federal Reserve System from 1974 to 1986.

    Researching inflation has been an eye-opener because with all this meltdown stuff going on, every even half-baked student of basic systems wants to work out the who, what, where, when, and why of money systems.

    I started with the question, “Is there a definition, say of ‘inflation’ given that the basics of supply and demand are common cause?”

    Either we’ve lost the plot or there isn’t one, just some platitudes that do not lend themselves to anything but involutions:

    Inflation:

    “The overall general upward price movement of goods and services in an economy, usually as measured by the Consumer Price Index and the Producer Price Index.”

    “A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.”

    ‘A sustained, but sometimes rapid increase in general price levels.”

    What causes it? Now, that’s the toughie.

    “There is no one single, universally accepted cause of inflation” … So the modern economist gives us three:

    1. Cost-push inflation, which is due to wage increases that cause businesses to raise prices to cover higher labor costs, which leads to demands for still higher wages to pay for the increase in prices, called the wage-price spiral. Duh.
    2. Demand-pull inflation which results from increasing consumer demand financed by easier availability of credit – a little greed is allowed in here – and,
    3. Monetary inflation caused by the expansion in the supply due to printing of more money by a government to cover its deficits.

    All of the above are pure hogwash especially the obvious wage-price spiral.

    Adding pewter to Roman gold coins (monetary inflation) didn’t fool the merchants then, and economists today generally agree that printing lots of paper money (adding pewter) causes high growth rates (inflation) in the money supply but merchants just charge more for the same goods if there’s more money in the system.

    Duh – but why do it?

    (Just incidentally, reading through Book 6 of Tacitus’ Annals, does anyone agree that he implied a certain regulatory indifference at that time by the Roman government toward the systems that were collapsing pretty much the same as today’s for similar reasons?)

    Because economic reality is so simple when viewed in relation to broader historical events – which it isn’t – it has to be fed to us in ‘economic theories’ that have to sound complicated but look circular in nature (balanced).
    But because so far no cause, no cure, I have to either invent or find one for myself and ask for some criticism on it:

    THE STORY SO FAR:

    Before Zero Population Growth (ZPG), manufacturers had to make more goods every year because there were more people every year.

    So from the beginning of the Industrial Revolution every commercial enterprise linked to population growth – the lot – expanded, and ‘growth’ over many years, generations even, was an invisible source of expansion, eventually an integral part of the general western economic paradigm – common cause: you ‘grow’ a business, you don’t just sustain it.

    So it wasn’t ‘good business practices’, centralization, decentralization or the creation of profit centers – or thrift or fiscal generosity or Scroogeisms, just more people being born.

    Tom Peters said something like this on his 90’s lecture tours: In the sixties and seventies: you couldn’t run a Fortune 500 company into the ground if you tried.

    ‘Growth’ insidiously assumed itself into all western economies and had become as necessary as air.

    But the basic source of growth – population expansion – had dried up without it being noticed – what I think may have been Smith’s ‘Hidden Hand’ having writ, moved on.

    And what we lost sight of is the fact that when the population stopped growing at the rapid rate western economies were used to, demand for growth-generated profits didn’t.

    Now we had a problem.

    We couldn’t grow a business in the traditional way because the population wasn’t cooperating so it very soon became obvious that we were all competing for the same stable, non-growing market and still driven by the ‘necessity’ for increased profits!

    Time-And-Motion specialists in full fiscal drag disguised as economists appeared and told us to “Get lean and mean.”

    Well, it got more sales … and growth in profit through efficiency but not through more customers because First World populations stayed celibate in economic terms and Zero Population Growth (ZPG) became a buzzword.

    We became so lean and mean we could keep up with shareholders’ demands for MORE PROFIT! Even in a stagnant market.

    Crunch time: Computers arrived and took over middle management functions – compiling quarterly pie-chart reports worked for a while, but plugging into the factory floor in real time 24/7 was huge.

    And saved enough in wages to continue posting annual profit growth over the ten years up to the early nineties during which time populations expanded in microns.

    The first world became host to fifteen million ex-middle managers who it would seem, had turned to running small, medium and micro enterprises (SMMEs) which also appear to be a Whole New Set of Resource-based Sustainable Economies on their own!

    But still just guys scratching for a mortgage, education for the kids and this outrageous (to management) new-fangled thing called a pension which appeared for the first time about a generation ago and will certainly not survive into this current Boomer generation..

    THE ‘HIDDEN HAND’ HAS LEFT THE BUILDING

    “Growth’ was generic yet its source ‘invisible’ to industrial revolution- population growth-geared economy.

    Today it’s a completely different ball game, of course, except for pork bellies, sorghum, wheat and genetically modified corn.

    For more customers = population growth, the First World has turned to the developing, high population growth Third World for the embedded ‘necessity’ for profit growth.

    After the computer age put middle management out to work and before Third World intervention the Age of Leveraged Buyouts, Hostile Takeovers and Mergers came upon us as the only way to satisfy the ubiquitous (and now labeled ‘greedy’) shareholders’ demand for annual profit increases.

    “Sustainable” is still waiting in the wings with the SMMEs.

    Back home in the early ‘30s we saw foreclosures, expensive labor outsourcing, cheap labor brought in and price fixing so bad Woody Guthrie made note of a truly unbelievable economic ‘solution’ to the starvation caused by The Great Depression: destroy food.

    “The crops are all in and the peaches are rott’ning,
    The oranges piled in their creosote dumps …”

    Right now, with my take on short-term economic pocket history in mind, make a note of what the American banks are doing with the ‘bailout’ money given to them by taxpayers to lend back to taxpayers – if they’ll let you see the books.

    I say they are creating an even Greater Depression, even deliberately; but then so say all the other new students of economics, all reaching the same conclusion from different routes.

  4. Wanna in NJ says:

    Hi Tom,

    Interesting thoughts, thanks for sharing them. I would add that computers created a lot of white collar jobs that then shrank with globalization, NAFTA, outsourcing and offshoring.

    I don’t think the banks are intentionally trying to make things worse. Clinton said he had sex with Monica because he could. I think the bank execs have pocketed the bailout money simply because they can. I really don’t think they put that much thought in to what they’re doing, just enough to justify their actions but then they have to stop thinking about it.

    I, like many others, would have preferred that the goverment let the banks take the consequences of their decisions and actions. Its not fair that they get rewarded for their bad behaviors at the expense of everyone else.

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