Ponzi Schemes, the investment craze and the End of Days

MR. CHARLES PONZI OF NEW YORK
In December 1919 a certain Mr. Charles Ponzi of New York initiated an "investment" scheme in which he put up $150 dollars and got ten friends to do the same. He promised his friends a 50% return on their "investment" in 90 days. He then got a second set of friends, many times larger than the first, to put up similar amounts and promised them the same "return on investment" that he had promised the original group of "investors." With the money he collected from the second set of "investors," he paid the first set back their $150 dollars plus the promised 50% "return" ($75 dollars). Naturally, the original investors were thrilled and enthusiastically began promoting the scheme. The process was quickly repeated with the second set of "investors" - and rapidly mushroomed from there.

The intrigue was simplicity itself: give Ponzi money and in 90 days (and usually much sooner than that) he would give you your money back plus 50%, plus 10% to the recruiter. There was only one problem with the scheme: while the originators and early participants were handsomely paid off from the cash flow of those they recruited, the last ones who were brought into the scheme found that there was no one left to be recruited, and the cash flow stopped - leaving them "holding the bag." Before the scheme broke down, however (in May of 1920 - six months after it began), Ponzi had made more than a million dollars. Whether Ponzi knew it or not, what he had done was formulate or give expression - so to speak - to much of the thinking which lies behind today's New World Economic Order.

GREED
The driving motivation behind the scheme, from top to bottom, was greed. Everyone - from Ponzi on down to the last "investor" recruited - knew that in the end someone would be left "holding the bag;" that people would get hurt; and that some would be hurt very badly. They didn't care! - just so long as it wasn't them. Most who involved themselves in the scheme felt that they could get "in and out" of the pyramid before it collapsed - and "to hell" with those who were "dumb" enough to get caught.

Needless to say, it took very coldhearted people to push the scheme, and very greedy and selfish-minded ones to participate. The scheme Ponzi devised is today called a "Ponzi Pyramid." It's called this because if one were to chart out the scheme on a piece of paper it would resemble a pyramid with the originator(s) perched atop the pyramid and the losers sitting at the bottom. Money flows from the bottom of the pyramid to the top.

Originally, most pyramid schemes involved the use of "chain letters." The originator would send out a letter to ten friends asking for a certain amount of money, say $10 dollars (for a total of $100 dollars). They were then told to make ten copies of the letter and send one each to ten of their friends. A second circle of "investors" was thus produced, creating a second step in the pyramid that consisted of 100 people. These 100 were told to "buy into" the scheme by producing $10 dollars each and "sending it up the pyramid" (total amount $1,000 dollars) and then to recruit ten more "investors," making a third circle of "investors" consisting of 1000 people. The process was then repeated, with the new circle of "investors" contributing $10 dollars each ($10,000 total) to be "sent up" the pyramid making the new total "invested" in the pyramid $11,100 dollars ($10,000 dollars contributed by the third circle of investors plus the $1,000 dollars contributed by the second set of "investors" plus the $100 dollars contributed by the first set of "investors"). As the money is passed up the pyramid, each step (circle of "investors") takes out a portion of the "investment" according to a prearranged schedule as a "return" on his or her "investment." By the time the fifth step of the pyramid is reached (100,000 people, each contributing their $10 dollars ($1 million dollars) the total amount of money has become astronomical considering the small amount of money with which the scheme was initiated.

In 1923 the Supreme Court determined that this was fraud (Cunningham v Brown 44 SCt 424) - and since then such pyramid schemes have been known colloquially as "Ponzi schemes." According to the Supreme Court, what made the scheme illegal was that there was no "product" involved in the scheme. Nothing was "bought and sold."

INTRODUCING "PRODUCT" TO THE SCHEME
What to do? - introduce a product around which the scheme could be reorganized. The product could be anything; that wasn't important - what was important was the scheme remained the same.

The real money didn't involve the product, it involved the scheme; that is to say, the creation of an "investment pyramid." The product was at best a contrivance - a subterfuge. At worst, it was a fiction. Recruits (i.e., "investors") were not sold on the hope of making money off legitimate sales of the product; rather they were sold on the hope of making money by speculating on the pyramid. Speculation was the name of the game; the product was only a device around which the speculation was organized.

MULTILEVEL MARKETING
The most well-known (but by far not the most widespread) form of such speculation in today's world is multilevel marketing (MLM). Recruits to MLM schemes are enlisted in the hope of huge profits to be made on their "downline commissions," not on the sales of the product per se. They anticipate recruiting others to build "legs," thus creating a pyramid, with a pyramid's law of averages. But like the original Ponzi Pyramid, success for everyone is impossible. There aren't enough human beings in the world to recruit. Once new recruits stop coming into the multilevel pyramid, the scheme inevitably collapses. Ami Chen Mills writes concerning her experience with an MLM:

"My experience with multilevel marketing began with Mark, the classified sales rep in a small newspaper office where I once worked. After an unremarkable stint at an ad desk, Mark announced that he had struck gold - and was leaving us to make a fortune in his own business. He would work for the Boss Man no more, and we who stayed behind would regret our miserable lives when, in a few years, Mark tore himself away from the country club to visit, and paid for lunch with a tiny fraction of his $50,000-a-month salary.

"'You'll be sorry', he said on strolls to and from the taqueria for our usual low-budget burritos. 'You'll see'. Mark was suffering from an acute case of the American Dream; it first surfaced, as he now tells it, at a recruiting meeting in Santa Cruz for Equinox distributors. For two months, the only language Mark could speak was the language of Equinox International, an ostensible environmental and health company which produces herbal supplements, water filters and other sucking and sifting gadgets to ward off air and water-borne toxins. Yet the miraculous Equinox products were not the main event for Mark. Rather, Equinox and its executive progeny had convinced Mark that if he did not sign up to become an Equinox distributor right away, he would be squashed flat by the thundering steam train they call the Opportunity of a Lifetime.

"When we coworkers learned that Mark had already maxed out two credit cards to fly to Equinox "training seminars" in Portland, Denver and Hawaii and when we further learned Mark was preparing to take out a $5,000 loan to buy into the company as a 'manager', we each decided to take our turn with Mark, to talk some sense into the boy.

"My own conversation with Mark took place in the office after hours, and went something along the lines of, 'So, are you sure you can make all that money'? 'Oh yeah, no problems'. Mark looked at me askance, considering something, then retrieved a magazine from his desk. 'Look at this', he said, flipping through pages filled with pictures of Equinox founder Bill Gouldd. (The extra "d" was added by Gouldd according to the advice of a 'spiritual adviser'. Mark told me it stood for 'dollars'.) There was Bill Gouldd next to his sports car collection. There was Bill Gouldd at his expansive mansion on a hill. There was Bill Gouldd with a buxom blonde at his side. According to the magazine, there was no doubt that Bill Gouldd was making money.

"My next approach was to question the fundamental premise of multilevel marketing, the sketchy business of selling not a product, but a dream. The conversation was making Mark uncomfortable. I saw a flash of panic in his eyes before they glazed over. Then he said this: 'They told us there'd be ripe apples who are ready - who see it. They told us there'd be green apples that weren't ripe yet. And they told us there'd be rotten apples ... You're a rotten apple', he said. There was an uncomfortable silence. I smiled thinly and suggested we both go home.

"'What about the product? Does anyone pay attention to what the distributors are selling'? I wondered."

No, Ami! - no one pays attention to the product; it's the scheme that counts! the pyramid!

You say, of course, that you're too sophisticated to be caught up in a Ponzi or multilevel pyramid scheme. That's for the common folk. You invest in real estate and the stock market. That's different. No! - not really! - at least, not anymore! And those who bought real estate as an "investment" in the late 1980s and then tried to sell it a few years later for a profit [after the real estate market had maxed out] have found out that it's not.

THE REAL ESTATE MARKET
Now to be sure, the real estate boom (and inevitable bust) of the 1970s and '80s was not an organized Ponzi scheme. No one fiendishly devised it and pushed it on an "unsuspecting" public. There was no single "mastermind" behind the scheme; no lone Svengali planned and promoted it; no Bill Gouldd. But it was a Ponzi Pyramid nonetheless, at least in the sense that people bought and sold homes not to live in them, but to speculate on them.

Like all those who "invest" in Ponzi schemes, greed was what motivated them. "Easy money" was what enlivened and excited them. People came to expect that housing values would rise endlessly. No one really knew how or why - they just seemed to sense that they would, and that there was money to be made in all this. People could buy a house one year, hold it for a few years without putting any real cash into it to fix it up, and then sell it for a twenty or thirty percent profit. The house wasn't what was important in the scheme. It was the speculation that was important! Like Equinox's herbal supplements, water filters and "other sucking and sifting gadgets," houses were merely the "product" around which the speculation was organized. Speculation was the name of the game; building or rehabilitating homes had nothing really to do with what was going on.

As the speculation boom took off, houses which sold for $35,000 dollars at the beginning of the 1970s were selling for $150,000 dollars at the end of the 1980s - a run up of over 400 percent in less than fifteen years. The run-up in these values had nothing to do with the "real" value of the home - i.e., what it cost to originally build it (minus the costs of inflation and improvements). It resulted in speculation. Houses were incidental to the speculation. It was the "paper" (i.e., the mortgage) that was being "bought and sold." People were buying paper, they weren't buying houses. People bought real estate sight unseen. So long as people could be found to buy the same house (i.e., the "paper" on the house) every two or three years at a twenty to thirty percent markup, the pyramid held and the speculation continued. Eventually, however, there were no more buyers. The price of the paper had reached a point where it no longer had any real connection to the value of the house. Buyers quit coming into the market.

Those that had bought at the height of the speculation craze, found they couldn't unload their purchases. The mortgage (i.e., the "paper" on the house) was technically worth more than the house itself. People found that when they sold their homes, they couldn't get enough money to pay off the banks (i.e., liquidate the "paper"). The pyramid broke down, foreclosures ensued, and bankruptcies followed shortly thereafter. Thousands of people lost everything they had. And who was at fault? - everybody! Both the big investors and the small investors. Greed - not a desire to find a place to live - had brought them into the market; and their own corruption and depravity had "sold them down the river."

And were there any innocent victims? You bet there were! - but they weren't the investors who got left "holding the bag" when the pyramid collapsed; they deserved what they got! They speculated on the market and lost! The real victims were instead the families who legitimately needed a home to live in; "blue collar" families who needed a roof over their heads, not a device to speculate with. These people were left out in the cold through no fault of their own - and for the most part, they're still there, left having to rent houses in run down neighborhoods from landlords that could "give a damn."

THE STOCK MARKET
And what about the stock market? More specifically, what about today's stock market? It's the same. Today's bull market is nothing more than a colossal Ponzi scheme - the same kind of scheme that undergirded and drove the real estate market of the 1970s and '80s. And the same kind of greed and avarice that animated and energized Ponzi in 1919 and real estate "investors" in the 1970s and '80s is the same avarice and greed that is energizing today's bull market. The sad fact of the matter is, today's stock market is an "investment pyramid" that will continue to survive only so long as new money is pumped into it. When new money ceases to flow into the pyramid, it will collapse just as surely as the real estate pyramid collapsed in the late 1980s and Ponzi's failed in 1920.

WHAT STOCK IS REALLY ALL ABOUT
Stock represents ownership (usually partial ownership) in a business corporation. It gives the owner of the stock the right to participate in the profits (supposedly the legitimate profits) of the company. When the stock market is functioning properly, people buy stock (ownership) in a company in order to participate in its growth and reap the bona fide profits that are derived from the sale of the corporation's product. Money is invested into the company in order to increase the corporation's ability to produce more product. The value of the company (and, ipso facto, its stock) rests in the value of the product the company produces. When the value of the aggregate product rises, the stock (or value of the company) rises in accordance. When the aggregate value of the company's product falls, the value of the stock (or company) falls. The price of the company's stock is supposed to be in equilibrium with the dividend (or profit) that investors can expect as a return on their investment. This is called the price / earnings ratio, a ratio which measures the value of a stock against the profits one can expect to derive from the sale of the company's product.

THE PRICE / EARNINGS RATIO
When the price / earnings ratio favors the investor, the investor can expect to recover the price he originally paid for the stock within a relatively short period of time and from that point on live off the company's profits (i.e., derive an income from the company's quarterly dividends). When it doesn't favor the investor, it takes a relatively larger amount of time for the investor to recover the money he originally paid for the stock. When the amount of time increases to an unreasonable length before an investor can expect to recover his original investment, the price / earnings ratio is said to be "out of equilibrium." If the price of the company's stock continues to rise after that point is reached, then it is being speculated upon.

The price / earnings ratio of most of today's stocks on the world's exchanges long ago reached the point where it could be said that what's driving the market is "speculation" rather than any legitimate form of real "investment." Indeed, the price of today's stocks on the New York Exchange is more out of equilibrium than it was just prior to the collapse of the market in 1929 which brought on the Great Depression. The price of most of today's stock bears no real relation to the profits that can be expected from holding the stock (i.e., from the income that can be expected from the company's quarterly dividends). People buy stock today not to derive an income from the stock's dividends (which is the only real legitimate reason for buying stock); rather they buy stock to speculate with it.

STOCK SPECULATION AND THE CREATION OF A STOCK PYRAMID"
Like the real estate market of the 1970s and '80s, people are buying stock not to participate as owners in the company, but to hold the stock for a few years and sell it down the road. Like the participants in the real estate market of the '70s and '80s who bought and sold "paper" (i.e., mortgages) without ever having seen the houses (or real estate) the mortgages were drawn upon, today's stock market "investors" are buying and selling "paper" (in this case, stocks) without having any real idea about the company they are "buying into." Their "buy" and "sell" orders are based more on various bizarre mathematical models (and in some cases astrological charts) than on any real knowledge of the business activity of the companies the stocks are supposed to represent. This is speculation - there's no other word for it. And it makes no difference whether the stock is bought through one's 401k account or through a mutual fund (the ultimate in speculation devices) and held "responsibly" to be sold in ten or twenty years in order to send one's children to college, or whether it's held for two or three months in order to finance a riotous drinking and sex binge in the Bahamas. If the stock is being held so that it can later be sold for a profit, this is speculation. It's the same as owning a house not to live in it, but to sell it later for a profit. There's no difference.

The truth of the matter is, people who buy stock in today's stock market are not that much different from Mark who bought herbal supplements, water filters and "other sucking and sifting gadgets," from his MLM, Equinox. Stock market investors and holders of 401k accounts - in all their pompous arrogance and pride - would, of course, object to being compared with Mark. Still, there's little difference. It's the speculation that counts, not the product - i.e., not the company, not the real estate, and not the herbal supplements, water filters and "other sucking and sifting gadgets." It's the speculation! It's the investment pyramid! It's the gamble of getting into and out of the market before it collapses - and damn those who do get caught and the innocent victims of the speculation, the countless numbers of employees who depend on employment from the companies whose stock is being speculated on (and manipulated) in the world's exchanges.

THE STAGGERING AMOUNT OF TODAY'S SPECULATION
And just how much speculation has there been in the stock market? Estimates vary, but one can begin to get an idea when one examines the run-up of the market since the Nixon Administration. At the close of the Nixon/Ford presidencies the stock market (specifically, the Dow Jones Average) hovered around the 700 mark. Today it flutters around the 8,000 level - a run-up of over 1,100 percent (an eleven fold increase) in just over twenty-five years.

Does anyone actually believe that the real value of American corporations has increased by this amount - especially when the GNP has only been increasing by a fraction of that figure? If one thinks so, he's very, very naive or just a plain fool. Even if one were to say that the nation's GNP (GDP) has increased by an average of 5% a year over the last twenty-five years [which is way beyond the reality of the situation when the entire twenty-five year period is taken into account, even when one factors in inflation (the real figure is more like 2.3 percent a year)], that would only account for a rise of about 350% in the value of these corporations.

What's to account for the other 750%? In other words, if the rise in GNP accounts for only thirty-one percent of the surge in the so-called value of these stocks, what's to account for the other sixty-nine per cent?

WHERE DID THE MONEY COME FROM?
Consider for a moment: a 1,100 percent rise in the stock market! Think about what that means. Eleven times the money that was in the stock market twenty-five years ago is in it today. If the rise in GNP (i.e., the normal growth of the economy) can account for only 31 percent of the funds which have flowed into the market since the Nixon Administration, where did the other 69 percent come from? We're taking about billions and billions and billions of dollars here. And be clear! - the money didn't materialize out of nowhere. The greatest amount of this growth came during a period of low inflation (during the Reagan, Bush and Clinton presidencies), so the government printing office didn't "create" the money. We're talking about REAL dollars. Obviously, the money has been diverted from elsewhere.

Essentially it's come from:

(1) Lowering the wages of average American workers and diverting the money thus saved into the market.

(2) Opening up sources of funds which used to be "off-limits" for investment into the stock market [i.e., pension and retirement funds, public funds, funds held in trust (both public and private), etc.] and pouring this money into the market.

and

(3) The creation of mutual funds and 401k accounts to expand the amount of people capable of participating in the market.

THE STOCK MARKET VORTEX
As money has poured into the stock market, the sheer volume of it has pushed stock prices up. As stock prices have soared, others have joined in the stampede to "get in" on the "easy money," creating an upwardly spiraling vortex which, as it grows in size and strength, sucks in ever greater amounts of money which in turn pushes stocks that much higher reaching eventually into the absurd.

What kind of absurdity? - take, for example, the stock of one company with annual revenues of only $14-million which was recently bid up to the point where $52-billion had been dumped into it - and not just by wild-eyed crazies, but by "reputable" mutual fund managers of some of the most well-known mutual funds in the country. And this was an American company doing business in the American market where reporting procedures are considered to be quite strict in comparison to stocks offered on foreign exchanges - for instance, in Latin America and the so-called Pacific Rim - where more and more American investment money is being dumped. God only knows the absurdities that have been reached in those overheated exchanges.

The stock market is today nothing more than a mammoth Ponzi pyramid, and like all such pyramids, greater and greater amounts of money have to be found to feed into it in order to prevent its collapse. And the money that is being fed into it are the diverted wages of American workers, the pension and retirement funds of our senior citizens, trust funds, and the "savings" of ordinary Americans who have been persuaded to divert their savings from their bank accounts to mutual funds and 401k accounts.

One would think, of course, that the "game" can't go on forever; that eventually the funds that are required to feed into the pyramid will dry up. And that is beginning to happen insofar as the nation's pension and trust funds are concerned. [The only thing that hasn't been thrown into the maw is the nation's social security funds - and now there's talk of doing that.]

But so long as the wages and salaries of America's workers can continue to be squeezed there will be money available to feed into the vortex; so long as work can be shifted from high-paying U.S. jobs to low-paying jobs in Mexico, Indonesia, the Philippines, China, etc., the amount of money thus saved can be fed into the exchanges, thus preventing the collapse of the pyramid. If all else fails, of course, U.S. taxpayer funds can be fed into the pyramid to prevent its collapse - as is being done even now in Korea, Indonesia and Thailand (almost $100-billion in the last four months alone).

But there is a price to be paid - the pauperizing of ordinary people not only in the United States, but throughout the world - and this brings us to our next article, "The New World Economic Order: A Closer Look at Today's Ponzi Pyramid" and to a mysterious and enigmatic lyric in Revelation 6:6:

"A measure of wheat for a penny, and three measures of barley for a penny; and see thou hurt not the oil and the wine."
(Rev. 6:6)

S.R. Shearer