Free Madoff!

In a just world where all men are created with equal rights, Bernie Madoff would be a hero.  More than any other private sector figure, Bernie Madoff perfectly embodies the new American ideal. 

What Madoff Did

Bernie Madoff admitted to investigators that he created an enormous Ponzi–or pyramid–scheme.  He promised investors very high returns.  He made good by paying of Round 1 investors with Round 2’s money. 

As long as a new generation of investors, larger than the previous, lines up to invest, everything’s good. 

Only two things can possibly go wrong:

1.  A round of investors is smaller (in capital) than the antecedent round, or

2.  Someone figures it out.

In the case of Madoff, both seem to have happened.  With the declining economy, a new round was smaller than the previous round.  This first-ever loss drew questions from Madoff’s investors, including his two sons.  After Madoff admitted to his sons that the whole thing was Ponzi scheme, the kids called the Feds. 

Why Madofff Is a Hero?

Madoff at last tried to emulate the U. S. Federal government, and he may have given Hank Paulson and others the idea for the current bailoutmania gripping the nation’s capital.

The Government Is a Ponzi Scheme

Beginning with Social Security in the 1930s, the U. S. Government has operated the largest Ponzi scheme in history.  The theory behind Social Security was that each succeeding generation of workers in America would be a) larger and b) wealthier than the one before it.  With this ever-growing pie of "investors," Social Security would never run out of money.

Then something awful happened:  the baby boom.  While the boomers became a windfall for Social Security when they started working, economists quickly realized that the end of the scheme was inevitable.  Unless the boomers produced 3.0 children per coupling, the jig was up.  Sometime around 2015, there would be 2 workers for every 1 retiree drawing benefits.  Add to that the fact that Social Security benefits increased over the years (as investors demanded ever-increasing returns from the Ponzi scheme), and you have the recipe for economic disaster. 

The Bailout Is a Ponzi Scheme

Having failed to learn its lesson with Social Security, the government has embarked on the riskiest Ponzi scheme to date:  bailouts.

The bailout scheme works like this:  as long as idiots in China and Japan keep buying US Treasuries, we can keep pouring money into bad business (like banks and auto makers) run by the people we cheated off of in B-school.

As of today, the government has signed about $8 Trillion in promissory notes on behalf of private companies.  The Feds plan to pay these bills by borrowing ever-increasing sums from China and Japan. 

It Won’t Work

The sad thing for all of us is that this scheme simply will not work.  China and Japan will not continue to buy US Treasuries with a guaranteed loss when cash pays a better return.  (Treasuries are a guaranteed loss at 0% interest as the time-value of money flips–the longer you hold the T-Bill, the less it’s worth no matter whether the money supply is inflating or deflating.)

With their own economies weakening, Asia will turn its attention home.  Without money coming into the Treasury in the form of loans, the government in Washington will have two choices:  default (on financial or political promissory notes) or print money. 

Either way, the US is in a for a decade of economic misery.  If the government prints money to pay its bills, inflation could run as high as 20 percent.  If it defaults, more trillions of dollars in wealth will vanish and the US will become a second-rate financial center.  No one, including taxpayers, will be willing to trust Uncle Sam with their dollars.

Prepare for inflation.  Unless Obama makes Madoff the next Secretary of the Treasury.

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