Bernie Is a Piker

by Jim Carter

February 12, 2009

So you read the headlines that say Bernie Madoff bilked his friends for $50 billion and you think his Ponzi scheme was phenomenally huge?  Nah.  He was a piker trying to emulate his mentors.  

If you really want to see a Ponzi scheme on a large scale, look at the Federal Reserve.  They have a deal worked out with Congress where they loan money that they do not have.  All Congress has to do to have first claim on this new printing press money is give the Fed a security (bill, bond, or note) in the amount Congress wants and the Fed will make a credit on the accounting books of the government for that amount. Presto!  New money off of the printing press. It’s like a credit card that never needs to be paid.  

But this does not profit the Fed.  For the Fed to make a profit, they must charge interest on the security.  No problem for Congress.  If Congress can buy votes, obtain campaign contributions from businesses, and assure their reelection with the principal generated, they will be glad to let the taxpayers pay the Fed, or whoever holds the security, the meager interest charges.   

But a small mathematical problem arises. Every “dollar” in circulation is created by this process.  The value of the principal is created on the accounting books of the Fed but the interest is never created. The interest does not exist.  The agreement cannot be culminated.  An agreement that cannot be completed is an act of fraud. An act of fraud is void upon its inception.  

The only way the interest can be paid is to create more principal. But a mathematician will tell you this creates a bigger problem.  Even if there is only a slight consistent increase in the size of principal created (linear increase), the size of the value of the interest that must be paid becomes increasingly larger (exponential growth). Not only must the securities being redeemed be reissued, but the increased interest value must be included.  

A year ago, the increase in the federal budget was 7.2 percent while the increase in the interest payment was 15 percent.  It is only a matter of time before the interest charges become so humongous that it will require great increases in annual selling of principal (deficit spending) to conceal the increase in interest charges.  Do you now see another reason why the administration/Fed/Treasury Department is so adamant for an Economic Stimulus package?  

An economic scheme that pays interest from the funds of new investors is a Ponzi scheme. The national debt was sold to Arabs for oil for many years.  It was sold to Japan for other years.  It has more recently been sold to China that now holds close to a trillion dollars of U.S. debt. When China starts selling the debt to finance the collapse of its economy (and it is happening), the printing press is Congress’ only alternative.  

Nervous investors currently fleeing hedge funds and mortgage packages are now buying government securities, which has driven the interest rate down.  When they realize the purchasing power of the dollar is being lost by inflationary deficit spending, they will flee government securities. When the public becomes aware of rampant inflation, there will be no buyer of the new debt and the interest rate must eventually skyrocket.  Hello, Zimbabwe .

The stimulus spending will not solve the crisis; it will merely postpone the ultimate catastrophe of any Ponzi scheme. Bernie’s escapade will pale in comparison. The stimulus is the same government methodology that has created the current crisis. The cause of the economic problem is not even discussed by anyone in D.C. except Ron Paul.