Bitcoin Attacks The Ultimate Ponzi Scheme
Who Is Running The Ultimate Ponzi Scheme, And How Do We Stop It?
The Ponzi scheme is a straightforward idea.
“A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money. Instead, they use it to pay those who invested earlier and may keep some for themselves.
“With little or no legitimate earnings, Ponzi schemes require a constant flow of new money to survive. When it becomes hard to recruit new investors, or when large numbers of existing investors cash out, these schemes tend to collapse.”
If we change traders with lenders, we are able to take a look at an identical sort of Ponzi. Let’s take a look at an instance: Let’s say Acme Corp takes out a $1 million mortgage for one 12 months towards their $10 million in belongings. They spend that $1 million, however they nonetheless have to pay again the financial institution $1 million plus 5% curiosity. So, Acme takes out one other mortgage for $2 million plus, pays again the primary mortgage, and retains one other $1 million to spend within the second 12 months. In the third 12 months, Acme owes that $2 million plus with curiosity, in order that they take out $three million, plus sufficient to cowl final 12 months’s mortgage cost, with $1 million to spend within the third 12 months.
As lengthy as a lender remains to be prepared to lend to Acme, this could technically go on so long as Acme’s rate of interest is decrease than the expansion price of their belongings. Acme may even use borrowed cash to purchase extra belongings, additional fueling this machine.
As you’ll be able to see from the chart, the draw back is that every time Acme takes out a brand new mortgage, their complete debt load grows and approaches the overall worth of their belongings. If Acme’s debt load ever exceeds the worth of Acme’s belongings, Acme’s collectors will demand their a reimbursement and Acme’s worth — their whole existence and all investments in them — will go to zero in a single day. This might occur due to rates of interest rising or asset values falling, even when the latter is over a short while throughout some calamity.
For Acme’s infinite cash machine to maintain working steadily, the rate of interest on loans should be decrease than the progress price of belongings. If this continues, previous money owed will be paid with new loans. All the whereas, nonetheless, Acme faces danger from a downturn. If asset values go beneath Acme’s debt burden, collectors will come calling — and Acme higher have a reasonably good rationalization to maintain collectors from pulling out and leaving Acme penniless.
The longer Acme is ready to run the infinite cash machine, the upper the nominal worth of Acme and its belongings goes, and the tougher they and their traders fall when a sudden drawdown triggers a margin name from collectors. For an actual world instance, see certainly one of China’s largest firms, Evergrande:
From the article within the Financial Times: “‘There is no way we can repay so many creditors with our limited resources,’ said an Evergrande executive, who asked not to be identified. ‘We will let judges decide who gets paid and how much.’”
Seems like a harmful recreation to play, however Acme is only one firm. Can we take a look at this sort of Ponzi habits throughout a whole economic system?
The Global Infinite Money Machine
The Acme instance illustrates how the infinite cash machine Ponzi works and offers us a method to spot it from the surface: debt-to-asset ratios.
If the world have been one firm, gross home product (GDP) could be just like the “assets” of that firm — the sum of all its capital and productive actions. Thanks to the International Monetary Fund (IMF), we are able to test on the state of our world debt-to-GDP ratio.
Source: IMF DataMapper.
Just like Acme, the debt-to-GDP ratio is excessive around the globe — generally even above 100%! This means your entire world economic system is uncovered to large systemic danger, and the state of affairs is just getting worse.
Why are we seeing systemic danger rising, and what can we do about it?
To reply these questions, we have to begin with rates of interest.
The Interest Rate Gods
An rate of interest will be considered the time worth of cash — the quantity a borrower pays to borrow cash for a set time frame. This is just like every other rental service, like a automotive rental; the overall loaned quantity is the automotive, and the rate of interest is a method to categorical the quantity you pay to lease the automotive. Just like every other good or service, the competitors of service suppliers over prospects and repeated transactions could result in a “market price” for a mortgage, identical to costs for comparable companies throughout totally different automotive rental firms are inclined to converge.
In our trendy economic system, nonetheless, we’ve got endowed rates of interest with a divine standing, permitting central bankers to set these charges as a substitute of members in a free market. Central banks just like the Federal Reserve change charges utilizing their monopoly on the creation and destruction of reserve cash, which they use to purchase and promote belongings inside the business banking system. These actions are convoluted, however their stated intent is to affect all different rates of interest within the economic system to maneuver up or down.
Central banks thus management a key lever of the infinite cash machine Ponzi: rates of interest.
What are they doing with this lever? Lowering rates of interest steadily.
Source: VoxEU.
As we keep in mind from the Acme instance, decrease rates of interest makes infinite cash machine Ponzis simpler to run, which implies extra firms and your entire world economic system face systemic danger. However, an infinite cash machine additionally requires asset values to steadily rise quicker than rates of interest with solely contained downturns.
What’s occurring with belongings?
The Everything Rally
Asset values, on paper, are skyrocketing. Looks unbelievable, till you think about that this implies a number of room for infinite cash machine Ponzis and the systemic danger that comes with them.
Major inventory indices in greenback phrases (Source: Preston Pysh).
The story behind asset values reveals the foundation of this meteoric rise. As central bankers and governments work collectively to decrease rates of interest and make credit score extra accessible, they’re incentivizing savers to maneuver their financial savings out of low-risk belongings — like financial savings accounts — and into larger danger belongings — like shares of firms.
Over time, this makes the S&P 500 and comparable indices into the brand new financial savings accounts. Younger generations know this, and because of this, we see record-high participation within the inventory market by way of apps like Robinhood. Passive investing methods — like ETFs — see record popularity as nicely.
Savers who purchase an organization inventory right this moment are widening the divide between rates of interest and asset worth progress for that firm, making it simpler for them to begin and maintain an infinite cash machine. If we take a look at the entire American economic system, we are able to see how rates of interest and asset values are diverging, opening the chance for people and companies to infinitely borrow towards their belongings.
So rates of interest are held low, and because of this, asset values are pushed larger, fixing two of the three items of our infinite cash machine. However, volatility nonetheless represents a powerful test on the infinite cash machine, given {that a} ample drawdown can finish the entire ruse right away. How come the occasion isn’t over but?
Eliminating Downturns
A downturn in asset values endangers the debt-fueled occasion of infinite cash machines. This makes downturns a deterrent to even embarking on an infinite cash machine Ponzi. Unfortunately, that deterrent is now however a relic of historical past as a result of readiness of central banks and governments to intervene in downturns.
When downturns arrive, central banks and governments work collectively to make use of authorities debt and newly printed money to maintain asset values afloat. “Ensuring solvency” of a financial institution, as an illustration, means protecting its debt burden from exceeding its asset worth — protecting its infinite cash machine in operation.
When money owed exceed asset values for an organization, that firm’s worth rapidly goes to zero – until they get a bailout (Source: Wall Street Journal).
Banks are sometimes the primary beneficiaries of presidency bailouts however not the final. With every disaster, central banks and governments are injecting extra money even additional throughout the economic system.
So, low rates of interest drive excessive progress in asset costs, widening the fertile floor on which infinite cash machine Ponzis develop and develop. Downturns normally reduce these Ponzis down, but we see governments stepping in to bail them out with but extra credit score. This, in flip, feeds asset costs, and on and on the cycle goes.
Can we ask our elected officers to easily cease pushing down rates of interest, bailing out those that took on an excessive amount of debt, and as a substitute let downturns run their course?
Let’s Just Stop
If central banks and governments stopped making credit score simpler and simpler to get by way of decrease rates of interest and debt monetization, we might put an finish to this Ponzi scheme habits and get again to an economic system the place we promote helpful items and companies to one another.
Where’s the issue?
Central banks and governments can not cease taking up debt and printing cash, as a result of our currencies themselves are a key a part of a large infinite cash machine Ponzi.
The U.S. greenback and all different main currencies in circulation right this moment are fiat currencies, with central banks and governments in a position to work collectively to create extra items of the foreign money. In observe, new items of foreign money are created by way of loans by central banks to banks or the federal government, and by banks to folks and companies. The currencies we use each day are literally debt held by folks, companies and governments.
The supply of this infinite cash machine is central banking. A company or particular person wants to indicate a lender that they’re creditworthy, however the central financial institution is a particular sort of lender. This lender bears no value to lend their foreign money, to allow them to lend to anybody, anytime, at any price. Governments make the most of this particular lender as their literal infinite cash machine. And they even admit it’s an infinite cash machine!
Central banks and their cash printers allow the phantasm of each decrease rates of interest and GDP progress. When central banks push rates of interest down, they’re injecting new foreign money into the economic system. This foreign money circulates and pushes costs for every little thing up, all at totally different charges and instances. As a end result, GDP floats upward.
Can we not modify GDP for this inflation? Sadly, no. No economist or supercomputer is able to parsing the complexity of worth actions in markets to say what proportion of an increase in GDP got here from precise productiveness versus merely extra foreign money items floating round, pushing up costs. If somebody might, they’d be the richest individual on the earth in a single day by completely buying and selling the monetary markets.
However, a central financial institution and its fiat foreign money have the identical Achilles heel as a Ponzi scheme:
“With little or no legitimate earnings, Ponzi schemes require a constant flow of new money to survive. When it becomes hard to recruit new investors, or when large numbers of existing investors cash out, these schemes tend to collapse.”
If central banks and governments cease printing cash, or if demand for his or her debt or foreign money falls, your entire ruse will collapse.
How does a authorities guarantee demand for his or her debt or foreign money?
Dictating Demand to Keep the Ponzi Going
A company or particular person who lets their money owed surpass their belongings should peaceably file for chapter and unwind the entire folly. A authorities would go down simply the identical as soon as folks started to understand the inanity of the fiat foreign money system. However, we’ve got given governments our blessing to make use of power, and in lots of instances given up our personal functionality as residents to withstand that power.
To preserve their Ponzi foreign money going when folks grow to be conscious of it, governments should limit freedoms or use violence.
Legal tender legal guidelines and taxation are a technique by which governments limit freedoms and make use of violence to be able to prop up their foreign money system. By demanding taxes be paid in their very own foreign money, governments are in a position to prop up demand for residents to amass their foreign money after which take that foreign money out of circulation. Proponents of recent financial concept are very direct about this, believing that the aim of taxation is to control inflation by sucking liquidity out of the system. The backstop to make sure these methods work? That authorities’s police will gladly lock you up if you don’t comply.
Imagine you determined to not proceed lending to an organization since you didn’t assume they have been solvent, and an worker of that firm handcuffed you and threw you in a cell. Who could be within the unsuitable right here?
Governments can also make use of navy power on the worldwide stage to deal with threats to its Ponzi scheme. The U.S. authorities is especially adept at utilizing navy energy — or just a projection of it — to defend the U.S. greenback system from threats. When different nations problem demand for {dollars} on the worldwide market, say to be used in oil markets, the missiles begin flying. This is the reality behind the meme beneath.
As the federal government goes deeper into debt, it might want to take extra drastic measures to make sure the fiat foreign money Ponzi continues. That will imply extra inflation, larger taxation, stricter controls, and strategic use of the federal government’s backstop of violence. They will enhance taxes, seize assets, tighten surveillance and even “debiting FedAccounts” when inflation inevitably accelerates. All the whereas, the severity of the eventual collapse will develop.
If the federal government gained’t assist us get out of a system that’s hurting us all, what can we do by ourselves?
Ending The Ponzi Ourselves
Thankfully, we, collectively, as residents of the Earth, can repair this drawback — not by way of votes or UN resolutions however by way of particular person actions to stop collaborating within the machine governments have constructed round us.
We are already bombarded by messages that it’s the grasping wealthy and capitalism itself which is accountable for our societal ills, however now we all know they’re solely following a playbook and technique enabled and inspired by a government-led Ponzi scheme.
Source: CNN.
Ironically, these messages drive folks at hand extra energy to governments, who’re seen as the one reply to controlling the excesses of the non-public sector. The result’s exacerbation of the issue, not decision, as government-centric financial methods are the foundation of these issues.
Thankfully, defunding the fiat foreign money Ponzis and ridding our world of their catastrophic systemic dangers is already in progress. Day by day, people are opting out of a damaged monetary system and into a brand new one, out of presidency attain and stuck in provide: Bitcoin.
The existence and progress of the Bitcoin community represents a problem to a system which should exert extra controls and enhance systemic dangers to be able to survive. That system would have us work tougher for much less simply to maintain the Ponzi scheme ticking. Each one who chooses to carry bitcoin as a substitute of belongings which governments can seize or devalue is doing their half to dismantle that scheme.
Will you be certainly one of them?
This is a visitor put up by Captain Sidd. Opinions expressed are fully their very own and don’t essentially mirror these of BTC Inc or Bitcoin Magazine.
