It happens to every pyramid scheme eventually. I salute the American people for having made it this long without getting caught. Charles Ponzi himself (from whom the term "Ponzi Scheme" takes its name) could not have done better.
In fact, it seems to me a natural progression. A Ponzi scheme is one that pays returns to investors from the funds provided by future investment. Such schemes generally have little or no other source of legitimate income. So we promise Paul he can make 5 bucks if he invests 10. He says sure and hands us a ten, with which we buy a pack of baseball cards, a Fresca, and a copy of Cat Fancy magazine. The gum is ok, but we toss the B. J. Robideau rookie card. Paul now wants his money. What to do? Easy. Convince Peter to invest 50 by promising him 75. Having robbed Peter to pay Paul, we spend the rest on that croquet set we've had our eye on. When Pete wants 75, we find a handy Pauline. If we're lucky, we build a track record of satisfied investors that keep the gravy train running like a train full of gravy.
The pyramid scheme is slightly more honest. It sets up a scheme in which new members of an enterprise make money largely by recruiting subordinates. There's often a pretext of selling detergent or timeshares or some such, but basically, it's about getting people to kick up some percentage to the level above them. Eventually of course, there is a level at the bottom that has nothing more to kick upward and the whole thing collapses.
That's where the American government comes in. They eliminated this little problem by legally requiring everyone to pay up. Social Security is the most obvious example; everything it pays out is from the proceeds derived by collecting higher and higher taxes from American workers. If I did anything similar as a private citizen, I'd be convicted of a crime. That's why the aging population is such a concern--the pyramid is bulging at the top and will soon be upside down.
It may not matter though. We're seeing the same phenomenon across the board. Even when the law forces you to contribute to such obviously ridiculous schemes, they can only last as long as there is actual money to contribute. When the government has all the money, eventually the plan will fail--or will have succeeded beyond their wildest mustache-twirling expectations.
We are nearing that point. We are paying off previous investors (bond holders, those who paid social security taxes, etc) with the taxes we collect, often from the same people to which we make the payments. We can increase the tax rates for now; we can maybe put them off a little longer. But ultimately we're going to wind up right where they all do: with an angry phone call wondering why a payment is late. Then a flurry of them. Then the cops. And finally, the liquidation of all our croquet sets, at auction, with the Chinese taking home some great bargains.
Then what? Start over of course. And who does the starting over?
<sigh> You. Me. The exact same people who were paying for it all to begin with.
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