PONZI SCHEMES, THE INVESTMENT
CRAZE, AND THE END OF DAYS
by S.R. Shearer
MR. CHARLES PONZI OF NEW YORK
In December 1919 a certain Mr. Charles Ponzi of New York
initiated an "investment" scheme in which he
put up $150 dollars and got ten friends to do the same.
He promised his friends a 50% return on their "investment"
in 90 days. He then got a second set of friends, many
times larger than the first, to put up similar amounts
and promised them the same "return on investment"
that he had promised the original group of "investors."
With the money he collected from the second set of "investors,"
he paid the first set back their $150 dollars plus the
promised 50% "return" ($75 dollars). Naturally,
the original investors were thrilled and enthusiastically
began promoting the scheme. The process was quickly repeated
with the second set of "investors" - and rapidly
mushroomed from there.
The intrigue was simplicity itself: give Ponzi money
and in 90 days (and usually much sooner than that) he
would give you your money back plus 50%, plus 10% to the
recruiter. There was only one problem with the scheme:
while the originators and early participants were handsomely
paid off from the cash flow of those they recruited, the
last ones who were brought into the scheme found that
there was no one left to be recruited, and the cash flow
stopped - leaving them "holding the bag." Before
the scheme broke down, however (in May of 1920 - six months
after it began), Ponzi had made more than a million dollars.
Whether Ponzi knew it or not, what he had done was formulate
or give expression - so to speak - to much of the thinking
which lies behind today's New World Economic Order.
The driving motivation behind the scheme, from top to
bottom, was greed. Everyone - from Ponzi on down to the
last "investor" recruited - knew that in the
end someone would be left "holding the bag;"
that people would get hurt; and that some would be hurt
very badly. They didn't care! - just so long as it wasn't
them. Most who involved themselves in the scheme felt
that they could get "in and out" of the pyramid
before it collapsed - and "to hell" with those
who were "dumb" enough to get caught.
Needless to say, it took very coldhearted people to push
the scheme, and very greedy and selfish-minded ones to
participate. The scheme Ponzi devised is today called
a "Ponzi Pyramid." It's called this because
if one were to chart out the scheme on a piece of paper
it would resemble a pyramid with the originator(s) perched
atop the pyramid and the losers sitting at the bottom.
Money flows from the bottom of the pyramid to the top.
Originally, most pyramid schemes involved the use of
"chain letters." The originator would send out
a letter to ten friends asking for a certain amount of
money, say $10 dollars (for a total of $100 dollars).
They were then told to make ten copies of the letter and
send one each to ten of their friends. A second circle
of "investors" was thus produced, creating a
second step in the pyramid that consisted of 100 people.
These 100 were told to "buy into" the scheme
by producing $10 dollars each and "sending it up
the pyramid" (total amount $1,000 dollars) and then
to recruit ten more "investors," making a third
circle of "investors" consisting of 1000 people.
The process was then repeated, with the new circle of
"investors" contributing $10 dollars each ($10,000
total) to be "sent up" the pyramid making the
new total "invested" in the pyramid $11,100
dollars ($10,000 dollars contributed by the third circle
of investors plus the $1,000 dollars contributed by the
second set of "investors" plus the $100 dollars
contributed by the first set of "investors").
As the money is passed up the pyramid, each step (circle
of "investors") takes out a portion of the "investment"
according to a prearranged schedule as a "return"
on his or her "investment." By the time the
fifth step of the pyramid is reached (100,000 people,
each contributing their $10 dollars ($1 million dollars)
the total amount of money has become astronomical considering
the small amount of money with which the scheme was initiated.
In 1923 the Supreme Court determined that this was fraud
(Cunningham v Brown 44 SCt 424) - and since then such
pyramid schemes have been known colloquially as "Ponzi
schemes." According to the Supreme Court, what made
the scheme illegal was that there was no "product"
involved in the scheme. Nothing was "bought and sold."
TO THE SCHEME
What to do? - introduce a product
around which the scheme could be reorganized. The product
could be anything; that wasn't important - what was important
was the scheme remained the same.
The real money didn't involve
the product, it involved the scheme; that is to say, the
creation of an "investment pyramid." The product
was at best a contrivance - a subterfuge. At worst, it
was a fiction. Recruits (i.e., "investors")
were not sold on the hope of making money off legitimate
sales of the product; rather they were sold on the hope
of making money by speculating on the pyramid. Speculation
was the name of the game; the product was only a device
around which the speculation was organized.
MULTILEVEL MARKETING (MLM)
The most well-known form of
such speculation in today's world is multilevel marketing
(MLM). Recruits to MLM schemes are enlisted in the hope
of huge profits to be made on their "downline commissions,"
not on the sales of the product per se. They anticipate
recruiting others to build "legs," thus creating
a pyramid, with a pyramid's law of averages. But like
the original Ponzi Pyramid, success for everyone is impossible.
There aren't enough human beings in the world to recruit.
Once new recruits stop coming into the multilevel pyramid,
the scheme inevitably collapses. Ami Chen Mills writes
concerning her experience with an MLM:
"My experience with multilevel
marketing began with Mark, the classified sales rep
in a small newspaper office where I once worked. After
an unremarkable stint at an ad desk, Mark announced
that he had struck gold - and was leaving us to make
a fortune in his own business. He would work for the
Boss Man no more, and we who stayed behind would regret
our miserable lives when, in a few years, Mark tore
himself away from the country club to visit, and paid
for lunch with a tiny fraction of his $50,000-a-month
"'You'll be sorry', he
said on strolls to and from the taqueria for our usual
low-budget burritos. 'You'll see'. Mark was suffering
from an acute case of the American Dream; it first surfaced,
as he now tells it, at a recruiting meeting in Santa
Cruz for Equinox distributors. For two months, the only
language Mark could speak was the language of Equinox
International, an ostensible environmental and health
company which produces herbal supplements, water filters
and other sucking and sifting gadgets to ward off air
and water-borne toxins. Yet the miraculous Equinox products
were not the main event for Mark. Rather, Equinox and
its executive progeny had convinced Mark that if he
did not sign up to become an Equinox distributor right
away, he would be squashed flat by the thundering steam
train they call the Opportunity of a Lifetime.
"When we coworkers learned
that Mark had already maxed out two credit cards to
fly to Equinox "training seminars" in Portland,
Denver and Hawaii and when we further learned Mark was
preparing to take out a $5,000 loan to buy into the
company as a 'manager', we each decided to take our
turn with Mark, to talk some sense into the boy.
"My own conversation
with Mark took place in the office after hours, and
went something along the lines of, 'So, are you sure
you can make all that money'? 'Oh yeah, no problems'.
Mark looked at me askance, considering something, then
retrieved a magazine from his desk. 'Look at this',
he said, flipping through pages filled with pictures
of Equinox founder Bill Gouldd. (The extra "d"
was added by Gouldd according to the advice of a 'spiritual
adviser'. Mark told me it stood for 'dollars'.) There
was Bill Gouldd next to his sports car collection. There
was Bill Gouldd at his expansive mansion on a hill.
There was Bill Gouldd with a buxom blonde at his side.
According to the magazine, there was no doubt that Bill
Gouldd was making money.
"My next approach was
to question the fundamental premise of multilevel marketing,
the sketchy business of selling not a product, but a
dream. The conversation was making Mark uncomfortable.
I saw a flash of panic in his eyes before they glazed
over. Then he said this: 'They told us there'd be ripe
apples who are ready - who see it. They told us there'd
be green apples that weren't ripe yet. And they told
us there'd be rotten apples ... You're a rotten apple',
he said. There was an uncomfortable silence. I smiled
thinly and suggested we both go home.
"'What about the product?
Does anyone pay attention to what the distributors are
selling'? I wondered."
No, Ami! - no one pays attention
to the product; it's the scheme that counts! the pyramid!
You say, of course, that you're
too sophisticated to be caught up in a Ponzi or multilevel
pyramid scheme. That's for the common folk. You invest
in real estate and the stock market. That's different.
No! - not really! - at least, not anymore! And those who
bought real estate as an "investment" in the
late 1980s and then tried to sell it a few years later
for a profit [after the real estate market had maxed out]
have found out that it's not.
THE REAL ESTATE MARKET
Now to be sure, the real estate boom (and inevitable
bust) of the 1970s and '80s was not an organized Ponzi
scheme. No one fiendishly devised it and pushed it on
an "unsuspecting" public. There was no single
"mastermind" behind the scheme; no lone Svengali
planned and promoted it; no Bill Gouldd. But it was a
Ponzi Pyramid nonetheless, at least in the sense that
people bought and sold homes not to live in them, but
to speculate on them.
Like all those who "invest" in Ponzi schemes,
greed was what motivated them. "Easy money"
was what enlivened and excited them. People came to expect
that housing values would rise endlessly. No one really
knew how or why - they just seemed to sense that they
would, and that there was money to be made in all this.
People could buy a house one year, hold it for a few years
without putting any real cash into it to fix it up, and
then sell it for a twenty or thirty percent profit. The
house wasn't what was important in the scheme. It was
the speculation that was important! Like Equinox's herbal
supplements, water filters and "other sucking and
sifting gadgets," houses were merely the "product"
around which the speculation was organized. Speculation
was the name of the game; building or rehabilitating homes
had nothing really to do with what was going on.
As the speculation boom took off, houses which sold for
$35,000 dollars at the beginning of the 1970s were selling
for $150,000 dollars at the end of the 1980s - a run up
of over 400 percent in less than fifteen years. The run-up
in these values had nothing to do with the "real"
value of the home - i.e., what it cost to originally build
it (minus the costs of inflation and improvements). It
resulted in speculation. Houses were incidental to the
speculation. It was the "paper" (i.e., the mortgage)
that was being "bought and sold." People were
buying paper, they weren't buying houses. People bought
real estate sight unseen. So long as people could be found
to buy the same house (i.e., the "paper" on
the house) every two or three years at a twenty to thirty
percent markup, the pyramid held and the speculation continued.
Eventually, however, there were no more buyers. The price
of the paper had reached a point where it no longer had
any real connection to the value of the house. Buyers
quit coming into the market.
Those that had bought at the height of the speculation
craze, found they couldn't unload their purchases. The
mortgage (i.e., the "paper" on the house) was
technically worth more than the house itself. People found
that when they sold their homes, they couldn't get enough
money to pay off the banks (i.e., liquidate the "paper").
The pyramid broke down, foreclosures ensued, and bankruptcies
followed shortly thereafter. Thousands of people lost
everything they had. And who was at fault? - everybody!
Both the big investors and the small investors. Greed
- not a desire to find a place to live - had brought them
into the market; and their own corruption and depravity
had "sold them down the river."
And were there any innocent victims? You bet there were!
- but they weren't the investors who got left "holding
the bag" when the pyramid collapsed; they deserved
what they got! They speculated on the market and lost!
The real victims were instead the families who legitimately
needed a home to live in; "blue collar" families
who needed a roof over their heads, not a device to speculate
with. These people were left out in the cold through no
fault of their own - and for the most part, they're still
there, left having to rent houses in run down neighborhoods
from landlords that could "give a damn."
THE STOCK MARKET
And what about the stock market? More specifically, what
about today's stock market? It's the same. Today's bull
market is nothing more than a colossal Ponzi scheme -
the same kind of scheme that undergirded and drove the
real estate market of the 1970s and '80s. And the same
kind of greed and avarice that animated and energized
Ponzi in 1919 and real estate "investors" in
the 1970s and '80s is the same avarice and greed that
is energizing today's bull market. The sad fact of the
matter is, today's stock market is an "investment
pyramid" that will continue to survive only so long
as new money is pumped into it. When new money ceases
to flow into the pyramid, it will collapse just as surely
as the real estate pyramid collapsed in the late 1980s
and Ponzi's failed in 1920.
WHAT STOCK IS REALLY ALL ABOUT
Stock represents ownership (usually partial ownership)
in a business corporation. It gives the owner of the stock
the right to participate in the profits (supposedly the
legitimate profits) of the company. When the stock market
is functioning properly, people buy stock (ownership)
in a company in order to participate in its growth and
reap the bona fide profits that are derived from the sale
of the corporation's product. Money is invested into the
company in order to increase the corporation's ability
to produce more product. The value of the company (and,
ipso facto, its stock) rests in the value of the product
the company produces. When the value of the aggregate
product rises, the stock (or value of the company) rises
in accordance. When the aggregate value of the company's
product falls, the value of the stock (or company) falls.
The price of the company's stock is supposed to be in
equilibrium with the dividend (or profit) that investors
can expect as a return on their investment. This is called
the price / earnings ratio, a ratio which measures the
value of a stock against the profits one can expect to
derive from the sale of the company's product.
THE PRICE / EARNINGS RATIO
When the price / earnings ratio favors the investor,
the investor can expect to recover the price he originally
paid for the stock within a relatively short period of
time and from that point on live off the company's profits
(i.e., derive an income from the company's quarterly dividends).
When it doesn't favor the investor, it takes a relatively
larger amount of time for the investor to recover the
money he originally paid for the stock. When the amount
of time increases to an unreasonable length before an
investor can expect to recover his original investment,
the price / earnings ratio is said to be "out of
equilibrium." If the price of the company's stock
continues to rise after that point is reached, then it
is being speculated upon.
The price / earnings ratio of most of today's stocks
on the world's exchanges long ago reached the point where
it could be said that what's driving the market is "speculation"
rather than any legitimate form of real "investment."
Indeed, the price of today's stocks on the New York Exchange
is more out of equilibrium than it was just prior to the
collapse of the market in 1929 which brought on the Great
Depression. The price of most of today's stock bears no
real relation to the profits that can be expected from
holding the stock (i.e., from the income that can be expected
from the company's quarterly dividends). People buy stock
today not to derive an income from the stock's dividends
(which is the only real legitimate reason for buying stock);
rather they buy stock to speculate with it.
STOCK SPECULATION AND THE
CREATION OF A STOCK PYRAMID"
Like the real estate market of the 1970s and '80s, people
are buying stock not to participate as owners in the company,
but to hold the stock for a few years and sell it down
the road. Like the participants in the real estate market
of the '70s and '80s who bought and sold "paper"
(i.e., mortgages) without ever having seen the houses
(or real estate) the mortgages were drawn upon, today's
stock market "investors" are buying and selling
"paper" (in this case, stocks) without having
any real idea about the company they are "buying
into." Their "buy" and "sell"
orders are based more on various bizarre mathematical
models (and in some cases astrological charts) than on
any real knowledge of the business activity of the companies
the stocks are supposed to represent. This is speculation
- there's no other word for it. And it makes no difference
whether the stock is bought through one's 401k account
or through a mutual fund (the ultimate in speculation
devices) and held "responsibly" to be sold in
ten or twenty years in order to send one's children to
college, or whether it's held for two or three months
in order to finance a riotous drinking and sex binge in
the Bahamas. If the stock is being held so that it can
later be sold for a profit, this is speculation. It's
the same as owning a house not to live in it, but to sell
it later for a profit. There's no difference.
The truth of the matter is, people who buy stock in today's
stock market are not that much different from Mark who
bought herbal supplements, water filters and "other
sucking and sifting gadgets," from his MLM, Equinox.
Stock market investors and holders of 401k accounts -
in all their pompous arrogance and pride - would, of course,
object to being compared with Mark. Still, there's little
difference. It's the speculation that counts, not the
product - i.e., not the company, not the real estate,
and not the herbal supplements, water filters and "other
sucking and sifting gadgets." It's the speculation!
It's the investment pyramid! It's the gamble of getting
into and out of the market before it collapses - and damn
those who do get caught and the innocent victims of the
speculation, the countless numbers of employees who depend
on employment from the companies whose stock is being
speculated on (and manipulated) in the world's exchanges.
THE STAGGERING AMOUNT
OF TODAY'S SPECULATION
And just how much speculation has there been in the stock
market? Estimates vary, but one can begin to get an idea
when one examines the run-up of the market since the Nixon
Administration. At the close of the Nixon/Ford presidencies
the stock market (specifically, the Dow Jones Average)
hovered around the 700 mark. Today it flutters around
the 8,000 level - a run-up of over 1,100 percent (an eleven
fold increase) in just over twenty-five years.
Does anyone actually believe that the real value of American
corporations has increased by this amount - especially
when the GNP has only been increasing by a fraction of
that figure? If one thinks so, he's very, very naive or
just a plain fool. Even if one were to say that the nation's
GNP (GDP) has increased by an average of 5% a year over
the last twenty-five years [which is way beyond the reality
of the situation when the entire twenty-five year period
is taken into account, even when one factors in inflation
(the real figure is more like 2.3 percent a year)], that
would only account for a rise of about 350% in the value
of these corporations.
What's to account for the other 750%? In other words,
if the rise in GNP accounts for only thirty-one percent
of the surge in the so-called value of these stocks, what's
to account for the other sixty-nine per cent?
WHERE DID THE MONEY COME FROM?
Consider for a moment: a 1,100 percent rise in the stock
market! Think about what that means. Eleven times the
money that was in the stock market twenty-five years ago
is in it today. If the rise in GNP (i.e., the normal growth
of the economy) can account for only 31 percent of the
funds which have flowed into the market since the Nixon
Administration, where did the other 69 percent come from?
We're taking about billions and billions and billions
of dollars here. And be clear! - the money didn't materialize
out of nowhere. The greatest amount of this growth came
during a period of low inflation (during the Reagan, Bush
and Clinton presidencies), so the government printing
office didn't "create" the money. We're talking
about REAL dollars. Obviously, the money has been diverted
Essentially it's come from:
- Lowering the wages of average American workers and
diverting the money thus saved into the market.
- Opening up sources of funds which used to be "off-limits"
for investment into the stock market [i.e., pension
and retirement funds, public funds, funds held in trust
(both public and private), etc.] and pouring this money
into the market.
- The creation of mutual funds and 401k accounts to
expand the amount of people capable of participating
in the market.
THE STOCK MARKET VORTEX
As money has poured into the stock market, the sheer
volume of it has pushed stock prices up. As stock prices
have soared, others have joined in the stampede to "get
in" on the "easy money," creating an upwardly
spiraling vortex which, as it grows in size and strength,
sucks in ever greater amounts of money which in turn pushes
stocks that much higher reaching eventually into the absurd.
What kind of absurdity? - take, for example, the stock
of one company with annual revenues of only $14-million
which was recently bid up to the point where $52-billion
had been dumped into it - and not just by wild-eyed crazies,
but by "reputable" mutual fund managers of some
of the most well-known mutual funds in the country. And
this was an American company doing business in the American
market where reporting procedures are considered to be
quite strict in comparison to stocks offered on foreign
exchanges - for instance, in Latin America and the so-called
Pacific Rim - where more and more American investment
money is being dumped. God only knows the absurdities
that have been reached in those overheated exchanges.
The stock market is today nothing more than a mammoth
Ponzi pyramid, and like all such pyramids, greater and
greater amounts of money have to be found to feed into
it in order to prevent its collapse. And the money that
is being fed into it are the diverted wages of American
workers, the pension and retirement funds of our senior
citizens, trust funds, and the "savings" of
ordinary Americans who have been persuaded to divert their
savings from their bank accounts to mutual funds and 401k
One would think, of course, that the "game"
can't go on forever; that eventually the funds that are
required to feed into the pyramid will dry up. And that
is beginning to happen insofar as the nation's pension
and trust funds are concerned. [The only thing that hasn't
been thrown into the maw is the nation's social security
funds - and now there's talk of doing that.]
But so long as the wages and salaries of America's workers
can continue to be squeezed there will be money available
to feed into the vortex; so long as work can be shifted
from high-paying U.S. jobs to low-paying jobs in Mexico,
Indonesia, the Philippines, China, etc., the amount of
money thus saved can be fed into the exchanges, thus preventing
the collapse of the pyramid. If all else fails, of course,
U.S. taxpayer funds can be fed into the pyramid to prevent
its collapse - as is being done even now in Korea, Indonesia
and Thailand (almost $100-billion in the last four months
But there is a price to be paid - the pauperizing of
ordinary people not only in the United States, but throughout
the world - and this brings us to our next article, "The
New World Economic Order: A Closer Look at Today's Ponzi
Pyramid" and to a mysterious and enigmatic lyric
in Revelation 6:6:
"A measure of wheat for a penny, and three measures
of barley for a penny; and see thou hurt not the oil
and the wine." (Rev. 6:6)