What's the difference between a Ponzi scheme and the National debt?
By pierone
@pierone (1894)
Italy
February 9, 2010 1:35am CST
As lot of you probably know, Bernard Madoff was sentenced to the maximum 150 years behind bars for his massive Ponzi scheme fraud.
For the ones that don't know what a Ponzi scheme is, a Ponzi scheme basically is a fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors. (more or less like quite all the HYIP online, till they don't run away with all the money collected;) ).
(btw, is called Ponzi scheme in "honor" of Carlo Ponzi,an Italian living in United States during 1920s, known as the father of those pyramid schemes. As usual, "Italians do it better";) )
Now, I would like to analize how a National Debt is managed: A Nation have a public debt (every nations have). Usually the Nation is not beable to refund their debt (almost all the nations spend much more than they earn) and, obviously, as on any debt, they need to pay interests on the debt.
How they pay the interests? Iussuing National Bonds, promising some interests to the whom will lend money to the Nation for a certain time period. At the end of the period the Nation is supposed pay back the Bond and the interests.
What happens when the time period finish? We said that usually Nations spend much more than they earn, so for sure they will have not the money to pay back the loan, nor the interests. So what they do?
Easy! They run a Ponzi scheme!
They emitts new Bonds, finding for subsequent inverstors and re-investors, collecting in this way the money they need to pay back the previous investors principal and interests. Is obvious that this scheme let the debt grow and grow, and grow again.
So what happens in the end? Well, the answer is not easy... or maybe it is.... anyone heard few years ago about Argentina (south american nation) Bonds?
So the question is, if the Ponzi scheme is illegal all over the world (and it is), why ALL the Nations are allowed to run a Ponzi scheme managing their National debts, often against their own citizens?
What's your opinion about it?
1 person likes this
2 responses
@liazedo (13)
• Germany
14 Feb 10
Hello pierone.
I never thinked, before, to the National Debt as a Ponzi scheme. But your discussion don't seems to be so wrong. The way the govern use to pay the Bond is exactly what we usually call Ponzi Scheme.
And you're right, if the Ponzi Scheme is illegal, then should be illegal for the governments too!
But you know, usually who make the laws have the privilege to be in the power to don't attend the laws they made ;). Probably this is the reason why all the government can do that.
Thanks for your interesting discussion.
@liazedo (13)
• Germany
14 Feb 10
Hello pierone.
I never thinked, before, to the National Debt as a Ponzi scheme. But your discussion don't seems to be so wrong. The way the govern use to pay the Bond is exactly what we usually call Ponzi Scheme.
And you're right, if the Ponzi Scheme is illegal, then should be illegal for the governments too!
But you know, usually who make the laws have the privilege to be in the power to don't attend the laws they made ;). Probably this is the reason why all the government can do that.
Thanks for your interesting discussion.
