Since Everyone's Talkin' Ponzi

First off, sorry if this constitutes rubbing people's noses in it, but figured it a worthwhile exercise. So, what exactly is a Ponzi scheme? I'm gonna give it a go. Roughly, it can be construed as any financial operation in which there is no steady-state, stable condition. It's grow, or die.

How's it all work? Well, if I promise 100% annual returns, and do nothing productive, but instead redistribute my inflow, it goes something like this. I take $1 from A, and in order to remain liquid when A wishes to redeem the $2 in a year, within that year I have to recruit a similar $1 from B, so's I have $2 to give A at end of year. Done with A, unless she reups. But neglecting that, now I owe B $2, but have no funds, which means I need two new $1 suckers investors, C and D, in order to remain solvent. Therefore, as a pure redistribution unit, whatever return I promise, I have to grow by that same rate. 100% annual returns? Gotta grow suckers subscriptions 100% annually.

How stupid! Who'd ever fall for a scheme like that, right? Well, what if I promised a mere 12% annual return, rain or shine? Or even a safe-as-houses 6%? Or even just 3%? Just don't ask me how, and I'll do it. By the way, if everyone and their mother's brother decided to go get their alleged money out of the alleged bank at the same time it might not look so rosy. It's called a run on the bank, and we actually can't afford it in this glorious day and age. Hence my painfully sincere Modest Proposal a short while back. Will bank for kibble.

Better yet: what if I promised you mere return of your money--or maybe a little less, yet--in a month or three? And in the meantime I went out and printed more money, so that at end of term you got your money back, and it had to go out there and compete with more of the same? Yeah, right: that would never fly.

Ok, ok; how about this scenario. Everyone's income goes up by an average of 5% a year, nobody saves any money, but everyone scrambles to lever up and "buy" widgets which cost several multiples of annual income, simply because their prices recently have been, and hence always will be, appreciating at clips of 10-30%, or more, a year? That's gotta be sustainable, and Charles Ponzi had nothing on that in scope. Totally unrelated to this, Calculated Risk made a crucial point today that just can't be belabored enough:

That is a key point - the chain is broken - there is no move-up buyer.

Basically, to paraphrase Keynes, in the long run, everything's a Ponzi (or pyramid) scheme.

Might as well put a plug in for my favorite psychosociofinancial book, Charles Kindleberger's Manias, Panics, and Crashes. It can kinda be summed up as a history-always-repeats-only-sheeple-don't-see-it-until-after-the-fact sorta tome, but it can also be tied up in one pithy line: "Nothing so undermines your financial judgment as the sight of your neighbor getting rich." But before you thinks of investing any other moneys, you mights as well reads it.

But c'mon; why would anyone want to monetize envy? So much more rewarding to comestiblize it.