14 June 2010

The greatest Ponzi scheme

In the early 1920's one Charles Ponzi entered the fiscal Hall of Fame by running an 'investment' scheme that paid investors unusually high and consistent returns by the simple device of paying dividends from the capital invested by new punters, or from the 'reinvestment' of dividends.

The fraudulent scheme run by Bernie Madoff from 1991 to 2008 was only the latest example of this hardy perennial. However, at a mere $68 billion it is not - as frequently averred - the largest such scheme ever.There are few nations, and even fewer of the component states of the USA, which do not run larger Ponzi schemes. In the aggregate, and with Federal obligations added, the sums in question are mind-blowing.

A recent article by Kevin Williamson in National Review does the sums:
Taken alone, the amount of debt issued by the federal government - that $14 trillion figure that shows up on the national ledger - is a terrifying, awesome, hellacious number: Fourteen trillion seconds ago, Greenland was covered by lush and verdant forests, and the Neanderthals had not yet been outwitted and driven into extinction by Homo sapiens sapiens, because we did not yet exist. Big number, 14 trillion, and yet it doesn’t even begin to cover the real indebtedness of American governments at the federal, state, and local levels, because governments don’t count up their liabilities the same way businesses do.
Beyond the official federal debt, there is another $2.5 trillion or so in state and local debt, according to Federal Reserve figures. A lot of that debt comes from spending that is extraordinarily stupid and wasteful, even by government standards. Because state and local authorities can issue tax-free securities - municipal bonds - there’s a lot of appetite for their debt on the marketplace, and a whole platoon of local special-interest hustlers looking to get a piece.
Added to which is another $3 trillion in unfunded state and municipal pension liabilities, and then:
The debt numbers start to get really hairy when you add in liabilities under Social Security and Medicare - in other words, when you account for the present value of those future payments in the same way that businesses have to account for the obligations they incur. Start with the entitlements and those numbers get run-for-the-hills ugly in a hurry: a combined $106 trillion in liabilities for Social Security and Medicare, or more than five times the total federal, state, and local debt we’ve totaled up so far. In real terms, what that means is that we’d need $106 trillion in real, investable capital, earning 6 percent a year, on hand, today, to meet the obligations we have under those entitlement programs. For perspective, that’s a little more than twice the total private net worth of the United States.
And that, my friends, is before considering private debt. In sum, in little more than a generation the people of the United States and their several layers of government have not only eaten the 'seed corn' of future prosperity, they have crapped it out and eaten it again several times over. 

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