Deficits, Dollar, Federal Reserve, Game Theory, Individual v. Collective, Live and Learn, Taxes, Treasury, Trust

Fiat Money is a Ponzi Scheme, No Better Illustrated Than in Europe

One of the biggest losers in Bernie Madoff’s infamous Ponzi scheme was New York Mets majority owner Fred Wilpon. Wilpon was actually friends with Madoff, and over the years, he and his partners invested $550 million into their Madoff account. Wilpon’s group had taken out an estimated $160 million from their account over the years, ultimately being saddled with a $440 million loss. If that wasn’t enough, the bankruptcy trustee decided that Wilpon and his partners were not victims in the crime, but rather “enablers” and “accomplices” given their close relationship with Madoff. So the bankruptcy trustee has filed a lawsuit against Wilpon’s group seeking a repayment of not only the $160 million of “profits” taken from the account, but their principal as well. This has all led to Fred Wilpon scrambling around to right his financial ship. He is ultra rich, but not Rockefeller rich. Wilpon cannot just cut a check to make this go away. To his chagrin, he sold one third of the Mets to hedge fund manager David Einhorn. Included in the deal is an option for Einhorn to own 60% in three years. It’s too bad the Fed wasn’t there to provide Wilpon some liquidity.

It has been a long season for Mr. Met

What does this have to do with Europe? Well, the EU’s fiat money system is scrambling to right the ship as well. Like Madoff’s heist, it too is a Ponzi scheme. Ponzi schemes usually see their demise once the network grows to a certain unmanageable size due to incompetence and pride of the manager(s).

The euro was established in 1992 to create a collection of countries that would rival the economic power of the US, all united under a common currency that would allow for seamless trade. The collaboration was all under the guiding principle of no bailouts to avoid any moral hazard problems. The idea is to incentivize countries to make sound fiscal decisions, and force those that over-leverage themselves to bear the costs of their poor decisions. This principle was abandoned when the Eurozone debt crisis hit with a full head of steam. First Greece, then Ireland and Portugal, spiraled toward insolvency. The other countries stepped in to supply them with the liquidity necessary to service their unsustainable levels of debt.

As in a pyramid scheme, it will be the last holder of the “asset” that takes the full loss. In the case of Europe’s fiat money, it will be the taxpayer that foots the bill, rather than the original bondholders that made ill-advised investment decisions.

There are many parallels between Europe’s sovereign debt crisis and the United States’ fiscal woes. They both have fiat money operating on the same bailout paradigm. While bondholders make out okay, it is the taxpayers that lose. Inflation through devaluation of the currency is just another way to quietly default on your obligations. We know that states and municipalities are not beyond asking for a backstop. California asked the federal government for $6.9 billion in bailout funds at the peak of the financial crisis. Also, the feds once bailed out New York City in 1975 with $2.5 billion in federal loan guarantees.

It’s never good to be the last one holding the “asset” in a pyramid scheme. Unfortunately, taxpayers get no choice in the matter.

Photo Credits: Turkey & Macedonia, New York Mess

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2 thoughts on “Fiat Money is a Ponzi Scheme, No Better Illustrated Than in Europe

  1. Pingback: The Seigniorage Of Credit And Currencies Is Failing … The Seigniorage Of Diktat Will Emerge Very Soon As Regional Economic Government Arises To Replace Sovereign Nation States « EconomicReview Journal

  2. Pingback: Is fiat money a ponzi scheme?

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