Monday, May 23, 2016

Belief In The False Illusion Of Stability - Ponzi Scheme 101

Helicopter Drops Of Money Have Been Proposed!
A series of what would have at one time been considered outlandish  ideas, such as a war on cash, forgiving debt through a debt jubilee, giving everyone a guaranteed income, and even injecting money into the economic system by dropping it from a helicopter have all found their way into conversations about ways to jump-start the economy. These might even seem as conflicting ways to move into an uncertain future but one thing is clear and that is all these ideas have seemed to steamroll over more conservative and time-proven methods of dealing with debt such as austerity. In economics, austerity refers to cutting spending usually by lowering and reducing the amounts of benefits and public services.  

Delving into all the above answers and solutions to our current economic problems I conclude they tend to offer and create the illusion of stability rather than sustainability. We have reached a bizarre place in our global economic situation where a few libertarians and some innovative thinkers on the left have even started talking about granting a "guaranteed income" to everyone as a possible solution to our economic and social woes.  Advocates claim a guaranteed basic income would eliminate the need for multiple government agencies, as well as the expensive bureaucracies needed to manage them.  They reason that all the added money in circulation would be spent providing a permanent boost and stimulus to the economy. As a bonus wages would compete with the guaranteed basic income and result in pushing salaries higher meaning artificial minimum wage laws could also be abolished.

Last year, more proposals and opinions began to trickle in supporting a guaranteed income. Many people today argue that society and the economy have grown so productive that if society harnessed its power by halting self-destructive actions, such as war, the world could enjoy a level of prosperity never before experienced in the history of mankind. Throughout history, several famous and forward thinking figures have supported the idea that a guaranteed basic income to sustain people would be an important step in this direction. The liberal case is that it would eliminate poverty, the conservative case is that it would allow government to eliminate a huge number of programs put in place to support the massive underclass of people who live on the margins and have virtually nothing to subsist on.

A few governments are actually experimenting with such policies at the same time more political parties and think tanks have begun endorsing it, surprisingly opposition has been mild. In Finland, a new conservative-led government announced plans recently to hand out a universal basic income of nearly $900 per month starting in 2017. The basic income payments would replace all other benefits, cutting administration and means-testing costs, and will be paid to everyone regardless of whether they have other sources of income. Opinion polls show 70% of Finns favor the idea, which will cost more than $50 billion a year. At one time the idea that the world owed you a living and that you deserved an income whether you worked or not would have seemed strange and foreign.

Over the decades we have seen government stepping up and to feed and house the poor within their populations, even though some groups have come to see these people collectively pose a constant threat. A guaranteed basic income may be costly, but many see it as less costly than a hard leftist revolution bred in a growing number of super-slums, at the same time community leaders hope it will generate positive social and economic benefits. We all know about strange bedfellows and how some alliances defy general logic even extending to where they justify uniting those who diametrically oppose and despise each other under the "enemy of my enemy" theory, it is hard to deny some of these alliances are rather mind-boggling. The truth is so many people have become dependent on our current system that it has become almost a sin to shed light on the fact that debt loads are quickly overwhelming the system.

The Famous London Word Of Warning
Visitors to London who travel across town constantly are reminded and warned to "mind the gap" which is a well known famous phrase that is repeated at the London Underground warning people using the subway to be wary of the potentially dangerous void between the train and the platform. I sometimes feel anyone looking at the stock market, the economy or any part of our financial system should be issued a similar warning worded as "mind the hype" because so much of what we read and hear is totally devoid of fact or spun to give the impression markets are far more stable and fairly valued than they really are. The newest ideas being rolled out to put us back on the straight and narrow are in a way their own warning.

An example of just how delusional we have become as to the fragility of our financial system is that many people have taken comfort in the efforts to control the banking sector through legislation following the 2008 crisis. The Dodd-Frank Act of over 2,300 pages and still growing, is the longest and most complicated bill ever passed by the U.S. legislature. The 2010 Dodd-Frank law which was originally intended to rein in dangerous behavior in the banking sector was partially written by the very banks it is to control. In its preamble, Dodd-Frank states that it will “protect the American taxpayer by ending bailouts.” But it does this under Title II by imposing the losses of insolvent financial companies on their common and preferred stockholders, debt holders, and other unsecured creditors. This includes depositors which are the largest class of unsecured creditor of any bank.  Once your money is deposited in the bank, it legally becomes the property of the bank.

This means in a financial crisis the banks might decide not to repay depositors but instead, do a "bail-in" where depositors in giant too-big-to-fail failing banks could have their money confiscated and turned into equity shares. This could also be related and the main motivation behind what appears to be a push by those in power to turn us into a cashless society by increasingly imposing limits on cash transactions. By quietly eliminating the possibility of cash withdrawals, the central bank can make sure the deposits are there to be grabbed when disaster strikes. People are not keeping their money in the bank today for the minuscule interest they are paid, but rather for the convenience of writing checks, issuing bank cards, and storing their money in a “safe” place. They would no doubt be willing to pay a modest negative interest for that convenience; but if the fee gets too high, the incentive to pull their money out and spend it (thus driving the economy forward) is also a win-win for those seeking proof all is fine.

Another rather strange idea gaining support, especially among those burdened with debt, is that creditors grant a debt jubilee. Those promoting this feel that creditors often share responsibility for loaning them the money that now weighs heavily upon them and it would be in the interest of society, in general, to wipe the slate clean and start fresh. An example of such an action is how the Allies expunged German debts that they knew could never be repaid after World War II so as to put the matter to rest. Advocates argue a “debt jubilee” similar to one mentioned in the Old Testament makes sense today. The issue of a jubilee year is a moral and religious concept, not an economic one, and was not actually practiced, still, it has been an inspiration to the modern debt jubilee movement. While they have dropped the religious context we still hear the political, economic, and sometimes a moral argument for extinguishing all or at least some of the debts the world is currently drowning in, those behind this movement seem to have forgotten that we already have bankruptcy laws to deal with oppressive debt.  

Winning The Lottery Not A Realistic Solution
Truth be told none of the above are long-term solutions, they are smoke and mirror schemes to mock financial reality and postpone the day of reckoning. It is clear to this former disciple of socialism* that many of those celebrating after being granted a guaranteed income will soon return crying "it ain't enough". Questions abound as to how this income would be paid out, annually, monthly, weekly, or daily, but rest assured many of the poor would soon find they have pre-spent or taken on obligations that have overwhelmed or exceeded their promised income and find they must again seek help. The fact is many of the poor today are poor because they live in a bleak world where much of their current income flows to pay debts incurred in the past.  A debt jubilee or even money dropped from the sky would soon be squandered and the short term benefits be left in the past, and so will any gains garnered from forcing people to spend their savings or having the banks rob them of their wealth.

Part of the problem we face is the stock market has for decades been promoted and viewed as a wealth producer when it is more of a wealth transfer machine than anything else. The stock market recycles currency and wealth into paper promises. The truth is the stock market does not always go up and several other factors come into play when trying to decide whether an investor is really making a real return on their investment. The inflation rate and how the money will be taxed when stocks are again turned into currency is very important. Belief in the illusion that all is stable with not move the economy forward on a sound foundation. While it appears many people want to forget what we learned in Ponzi Scheme 101. I contend much of what we see is the "greater fool" theory playing out in all its glory. Has leverage really diminished? I think not. This means as pension funds fail and reveal their inability to fulfill the hefty promises they have made we can expect the uproar to grow deafening.

Much of the debate of how solid the financial system is centers on and swings back around to the issue of whether debt and interest rates really matter, these two issues are the bedrock foundation of economic science. Financial stability is akin to a Ponzi scheme in that it is a belief based in fraud, a Ponzi Scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors and not from profits it earns. The Ponzi scheme usually entices new investors by offering higher returns than other investments. The perpetuation of the high returns requires an ever-increasing flow of money from new investors to keep the scheme going. The system is destined to collapse because the earnings, if any, are less than the payments to investors. All the proposed solutions mentioned above are dark alleys where danger lurks.

The economy might in some ways be viewed as a giant pot of stew into which we often toss the strange ingredients that makeup and comprise the slew of recent conventional ideas. All this is done in the hope we will improve the taste. Sadly, it is clear we have reached the place where those in charge have said "recipe be damned and full speed ahead" we are throwing all caution to the wind. All these twists of our system from a war on cash, forgiving debt through a debt jubilee and giving everyone a guaranteed income share a similar theme. The same can be said of the idea of a one-time massive drop of monetary stimulus into the economic system referred to a helicopter drop or helicopter money. All are over the top solutions offered to resolve the problem of slow economic growth in a global economy mired in debt. These efforts should be considered not real solutions but desperate attempts to render the laws of economics moot and move us further into the false state of modern voodoo economics.

 * Footnote; My reference to being a "former disciple of socialism"  comes from my experience during the salad days of my youth when I dabbled in the dark science of wealth transfer for the greater good. Having "felt the burn" as Bernie Sanders supporters might say, I completely understand the socialist argument. This has allowed me to see how flawed a system based on the hope people will take responsibility and step up to do the right thing really is.


  1. I agree with the article. A point about your comment regarding bankruptcy though. The risk of loaning money has been transferred to the taxpayers via fannie/ freddie, or else removed entirely as in non dischargeable student loans. Privatize gains, socialize losses.

  2. We tried Helicopter money in Australia after the last GFC. Used as intended, it all ended up going offshore, and into high finance, still.

    Retailers geared up for the announcement, arranging finance for new home appliances. Money - > interest repayments, Chinese manufacturers. Stimulus boost was undiscernible, and frankly a waste.

    Any form of UBI needs to (but won't be implemented with) a demurrage mechanism, to keep it out of financial markets and repayments. There is the overwhelming issue of a living wage, causing skills crises, and very unpredictable (or manipulable, as MSM propaganda and unions could influence whole industries of contractors).

    The demurrage aspect is the most curious aspect, as you want UBI/stimulus money to be "laundered" through enterprise as wages, CoGS, before it makes it to back someone else's new debt. Perhaps an idea, is to have it (or all money, so as to prevent a two tiered system) have a proportion less potency, when used to back fractional reserves... As a disincentive to create credit bubbles, and keep the focus on the bricks/mortar economy, of rebuilding humanity to fit on the planet, treading lightly.