MR. PONZI OF NEW YORK
In December 1919 a certain Mr. Luigi 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 todays 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 didnt care! - just so long as it wasnt 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." Its 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."
INTRODUCING "PRODUCT" TO THE SCHEME
What to do? - introduce a product around which the scheme could be reorganized. The product could be anything; that wasnt important - what was important was the scheme remained the same.
The real money didnt 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.
The most well-known (but by far not the most widespread) form of such speculation in todays 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 pyramids law of averages. But like the original Ponzi Pyramid, success for everyone is impossible. There arent 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:
No, Ami! - no one pays attention to the product; its the scheme that counts! the pyramid!
You say, of course, that youre too sophisticated to be caught up in a Ponzi or multilevel pyramid scheme. Thats for the common folk. You invest in real estate and the stock market. Thats 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 its 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 wasnt what was important in the scheme. It was the speculation that was important! Like Equinoxs 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 werent 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 couldnt 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 couldnt 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 werent 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, theyre 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 todays stock market? Its the same. Todays 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 todays bull market. The sad fact of the matter is, todays 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 Ponzis 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 corporations product. Money is invested into the company in order to increase the corporations 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 companys product falls, the value of the stock (or company) falls. The price of the companys 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 companys 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 companys profits (i.e., derive an income from the companys quarterly dividends). When it doesnt 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 companys stock continues to rise after that point is reached, then it is being speculated upon.
The price / earnings ratio of most of todays stocks on the worlds 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 todays 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 todays 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 companys quarterly dividends). People buy stock today not to derive an income from the stocks dividends (which is the only real legitimate reason for buying stock); rather they buy stock to speculate with it.
STOCK SPECULATION AND THE
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