It’s all a ponzi scheme

Byline: | Category: Economy | Posted at: Wednesday, 28 January 2009

American consumers are awash in debt, drowning in it. This is the fundamental issue with the stimulus proposal. We’re trying to borrow our way out of debt. Unfortunately, we need a recession. That is, consumption must decline because for some time we have been consuming more than we produce or have reasonable prospects of producing. Monetary policy has been used to inflate a series of bubbles to avoid the consequences of excess debt, and the more we try to hold it off, the worse it’s going to be. Bourbon works as a hangover cure, but only for a while.

This isn’t from Heritage or Cato or National Review.  This bit of common sense is from the Atlantic Monthly.  There is large bipartisan agreement on the fact that all the machinations in Washington are doomed.  Stimulus, bailout, whatever you want to call it, it will fail to stimulate anything but debt, or bailout anyone but well-connected cronies.  No one else will benefit and a lot of innocent people (taxpayers) will ultimately lose even more if we don’t confront reality. 

The reality is that we’re bankrupt–all of us:  households whose debts grossly exceed assets, banks whose balance sheets include vast real estate holdings that on paper still have inflated values, car companies whose only “profitable revenue” for years has come from forcing their own distributors to “buy” their products financed by loans from themselves, and governments whose obligations cannot be met.  From shuffling credit cards to flipping houses to GMAC to Social Security, it’s all a Ponzi scheme.

We are not going to heal until we expose the wound to air.  Mark to market for mortgage backed securities is not the enemy, it’s the solution to finally giving banks a bottom.  GM and Chrysler both need to fail.  Now.  Actually, that’s wrong; Chrysler needed to fail thirty years ago when it was bailed out the first time.  Houses need to be foreclosed on those who aren’t meeting payments.  Entire regions of the country are overpriced.  My own neighborhood was priced at more than a half million dollars an acre for a vacant lot not too long ago.  In Tennessee!  How stupid is that?  The real value is a fraction of that.  As for SS and Medicare, they are insolvent.  They must reduce benefits that kick in later in life.  That’s reality; it’s time we deal with it.

Read the whole thing.


Even more depressing is learning who will pay what to afford the “stimulus” bill.  It averages to only $6,700 per household.  But wait, not all households pay taxes.  Broken down by income levels the result is pretty depressing.  The good news, however, is that we will probably never have to pay the nearly trillion dollar bill back.  Not directly.  Instead it will be taken from all of us–even the non taxpayers–in the form of inflation. 



An alternative view:  Inflation is a good thing.  I joked a few weeks ago to some friends that those who bought houses they couldn’t afford might end up having made a wise investment.  If they can survive past the next few months and years, the coming inflation might bring down the real cost of their mortgages to where they actually become affordable.  Meanwhile, those of us who saved instead of spent, may find the value of our savings depleted.


Since I mentioned the National Review, Heritage, and Cato earlier, here’s a good resource full of links.  The money quote likens the stimulus bill to “trying to cure dysentery with Ex-Lax.”

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24 Responses to “It’s all a ponzi scheme”

  1. Instapundit » Blog Archive » BOB KRUMM: It’s all a Ponzi scheme. But we’re not all “awash in debt,” at least not debt of our ow… Says:

    […] KRUMM: It’s all a Ponzi scheme. But we’re not all “awash in debt,” at least not debt of our own making. At our […]

  2. Paul Says:

    The problem is that those high costs were the standard entrance costs to this Ponzi racket. Everywhere.

    Where could you go to escape it?

    We have one Federal Reserve. Everything is controlled out of Washington.

    Are people supposed to live like Randy Weaver? Up in a plywood shack in the woods?

    Local, State and Federal governments have, by gun point, been looting half of what people make, at least. Every year of their life. And throwing on debts. First we put all the women to be taxed. They when there were no more women to be taxed half of everything that they made, we printed up Treasury bonds and bamboozled poor Chinese people to lend the government money with the promise that our children would be sold into tax bondage, or we would pay the poor working stiff Chinese back in junk dollars.

    We live in the big socialist financial camp. The elite, all knowing( not ) Federal Reserve and all the Harvard/Yale elite politicians and their elite friends in Wall Street and the banks are taking care of them selves like French nobility.

    We are neo-serfs now. Not ‘owning’ our land, working in perpetual debt to the state, its minions, and its financiers. Our lives are crop, to be harvested and lived off of.

  3. Max Says:

    This is the Randian nightmare where looters vote thmselves a share of your property. This is where revolutions begin.

  4. Punkindrublic Says:

    When will the “little people” visit their wrath upon Washington with torch and pitchfork? I think the event might go down sooner than the buffoons in Congress might believe. As of this morning most Dems are the ones in peril; hopefully republicans will REALLY take this to heart.

  5. Brian Macker Says:

    “The reality is that we’re bankrupt–all of us …”

    What’s this “we” shit, Kemosabe.

    Ed: Do you pay taxes? If so, then “we” means you. And if you don’t pay taxes, you’ll pay through inflation. All of us will. Read the link at the update.

  6. Ten Says:

    $6,700 is pocket change. Every man, woman, and child in the US owes over $175,000 in unpaid federal debt, foreign debt, personal debt, corporate debt, and unpaid entitlements and programs.

    Come on. This isn’t politics. This is endgame.

    “There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.” -Ludwig von Mises

    The bookmark to put at the top of your list is The second is

  7. I miss Bill Clinton! - UPDATED | The Anchoress Says:

    […] Krum: It’s all a Ponzi scheme. […]

  8. Gordon Richens Says:

    Ed wrote: “Do you pay taxes?”
    I believe Macker’s point is that those of us have who worked hard, lived frugally and accumulated savings will be the losers while the so-called “bankrupt” will be the winners…talk about an inappropriate feedback mechanism.

    Ed: Agree.

  9. Richard H Says:

    The general rule is, If you’re going to do something financially stupid, just make sure it’s the same stupid thing the rest of the herd is doing and that you do it at the same time the rest of the herd is doing it.

  10. Erich Schwarz Says:

    Mr. Krumm,

    Was it really that hard to understand Mr. Macker’s point?

    “We” are not, by any means, all broke; some of us actually do have a modicum of fiscal competence, have lived within our means, and are consequently debt-free.

    And so, of course, those of us who’ve bothered to act vaguely like adults are going to watch while our taxes get raised to bail out incompetents, or watch while Washington and the Fed strain to keep absurdly overinflated housing prices at their current crack-tastic levels (pricing sober people completely out of the market), or just have our savings destroyed by Pelosian hyperinflation.

    When I was in high school, I took a history class about a country where the government destroyed the frugal middle class. That country was Weimar Germany. I never really expected to see myself living in such a country, but that’s looking more likely by the day.

    Ed: I don’t disagree. My point is that we are all broke because those of us with money will, through taxes and inflation, find ourselves just as broke as those who spent their way into oblivion. I think we’re saying the same thing.

  11. Ridolph Says:

    Hey Bob,

    FROM each according to his ability.
    TO each according to his need.

    What’s so hard to follow?

  12. Vivictius Says:

    Sure Ridolph, you folks with lots of need and no ability seem to like that idea…

  13. Ed Piman Says:

    Hey Ridolph,

    Isn’t that what the master holding the whip told the slaves?

  14. newton Says:

    “Pagan justos por pecadores.” – The just pay for the sinners.

    That’s the bottom line.

  15. John Says:

    Wait. . .

    Ridolph’s post is not an example of irony and sarcasm?

  16. Anthony Says:

    Should those of us who did save, knowing that taxes and inflation are coming down the road, avoid looking like total suckers by purchasing things like crazy? At least that way we would have tangible goods for our efforts…

  17. K Says:

    I think those of us with modest estates sense doom is certain unless unusual (and illegal) steps are taken to disconnect from the antics of the US government.

    The young can best prepare by gaining skills and contacts. Over a lifetime conditions will change many times.

    Working people aged 40 and on face a very rough time. Their jobs will vanish or pay little. The government will take more of their pay check and then more again every time they pay sales taxes, utility taxes, real estate taxes, and increased fees at every hand.

    And those retired with a net worth of perhaps $200K to $2M are going to be taxed into total poverty assuming inflation does not destroy them first. The retired usually cannot increase their income, inflation means they must sell their possessions.

    Since a great deal of wealth is held in untaxed the government will devise means to obtain it.

    e.g. the owner of stock is not taxed upon the stock itself, he is taxed upon dividends and capital gains.

    The government will not let this continue, some way will be found to tax the stock itself.

  18. Warren Bonesteel Says:

    If even Bob Krum ‘gets it,’ you know it’s all over but the shoutin’…

    (Yeah, there’s a logical fallacy in that, but if it’s true, it’s still valid.)

  19. Dana H. Says:

    “The reality is that we’re bankrupt–all of us…”

    The reason some commenters have a problem with this phrase is that in using “us” to include everyone who pays taxes, you lump the irresponsible who really are bankrupt with those who live within their means but are subject to looting by the government. It’s like saying I’m “bankrupt” because I can no longer afford the protection money that the local mob boss demands.

    In other words, I agree with your message, just not the way you expressed it. I don’t like being lumped with the losers who are fiscally bankrupt because they are morally bankrupt.

    Ed: Sorry you don’t like the way I expressed it, but the reality is that your elected officials are busily lumping you in with the losers. It ain’t fair and it ain’t right, but that’s reality. BTW, love the protection money analogy. Apropos.

  20. Kathy Says:

    We made all the right choices, took half of the mortgage we could have because we took the time to do math and weren’t greedy, but we took out some debt for master’s degrees that we thought would be good returns on investments. However, incomes didn’t keep up with inflation in health insurance, food, gas, and other costs of living. If we were not solvent, we’d be better off in many ways, and herein lies the problem that is demotivating: we could get the same level of housing, get food, and health care, and thanks to section eight and other government programs, get our kids in the same schools. So, instead of pushing so hard and working so hard to advance all these years, we could have been parting, and there would be no practical difference between our lives and the irresponsible. I honestly can’t recomend others go to college and make the choices we did. Distest the younger bums if you want, but they are just doing math and seeing reality. We pay huge in hidden ways for them.

    For example, say you own a duplex that would normally rent for $1000 a side and you must rent one side to a section eight person at $500. You must then charge the other side $1500 to recoup that loss. This is an oversimplification, but nonetheless the situation we know we are in and it is sickening.

    One question: where is better? I love my country, but fear my government, and although I look overseas, I see nowhere better right now. That may change as things get really bad here. Any ideas on where to move?

    Honestly, the government is making it 1000 times worse by bailouts and no one knows what is going to happen with all that money in the system so everyone is scared to invest ordo anything. Will we have a long period of deflation no matter what, or will some period of deflation be followed by hyperinflation that makes Africa look solvent?

    By the governments paniced reaction, they are scaring people even more. In other words, a lot of us are wondering, “What more do they know and are hiding if they are taking such extreme measures?”

  21. airandee Says:

    “The government will not let this continue, some way will be found to tax the stock itself.”

    The govt. is already considering taxing 401K’s since they are seeing the value disappear before taxes can be extracted.

  22. E D Maner Says:

    “The final stage is marked by the forced exchange
    of privately held securities for government issued
    Paraphrase from Heinlein’s “Future History” Chart,
    which has turned out to be scarily accurate…

  23. K Says:


    Obviously personal property taxes are already in use in some places. There is one on my car. The real estate tax makes sense as a way to fund the infrastructure and services to a specific community.

    But a straight levy merely because you own something valuable such as a diamond bracelet or a stamp collection hasn’t been a feature of American life.

    There will certainly be more soon. In one guise or another.

    The obstacle to heavy property taxes is that the extremely rich and well connected don’t care to pay them. So expect exceptions, wordings, and enforcement galore. Earmarks.

  24. Bizosphere - Home of Carnival of the Capitalists » Blog Archive » Carnival of the Capitalists for 2009-02-02 Says:

    […] thought it was all a Ponzi Scheme for years: […]