Social Security, Ponzi Schemes, and Leprechaun Economics
by Gary North: Why
Ron Paul Never Fit in on Capitol Hill
I want to discuss
an article. I may be exaggerating, but I regard this article as
the most sophisticated exercise in terminal naiveté that
I have ever read. It is an intelligent article with respect to the
problems that it lays out. It is dealing with the Ponzi scheme economics
of the modern world. Certainly, I am in favor of articles that discuss
modern government economic policies as Ponzi schemes. I have been
doing this for over 45 years, and I see no reason to stop now, especially
since we are 45 years closer to the end of the Ponzi schemes.
Yet at the
same time, I am always dismayed to see an article written about
the inevitable Ponzi scheme collapse of the modern economic world
that begins with some version of this assurance: if we act now,
we can solve this. It is not too late. The article begins as follows:
there is still time to act. But leaders from all social sectors--government,
business, organized labor, environmental and other stakeholder groups--need
to act decisively and quickly in order to secure future economic
prosperity, social cohesion, and political stability. It is in the
nature of Ponzi schemes to collapse suddenly, without warning. No
one knows what event may send the developed world and the global
economy as a whole back into crisis.
I have heard
some variation of this assurance for over 45 years. In fact, if
a book on Social Security, Medicare, and the unfunded liabilities
of the U.S. government is published by a major publisher, or if
an article appears in a journal aimed at establishment intellectuals,
it will have the obligatory disclaimer. It will not be published
unless there is this assurance somewhere in the article. There are
no articles published by respectable scholars or respectable columnists
on the Ponzi scheme economics of the modern world that do not include
such an assurance. Anyone who insists on the fact that there is
going to be a collapse, that these schemes will end in default,
and that there is no possible statistically way of avoiding this,
will not get his article published in a respectable magazine, newspaper,
This is why
I always look for the disclaimer. If there is the disclaimer, I
know that I am about to read utter poppycock. It may be highly footnoted
poppycock. It may have lots of charts. If it is written by somebody
trying to get tenure, it will be filled with arcane mathematical
formulas. But it does not matter what the content is, or what the
structure is, the article is total poppycock.
YOU MEAN "WE," PALEFACE?
The key poppycock
indicator is the word "we." Readers are assured that if we take
immediate steps, courageously, systematically, and if we continue
to implement the writer's recommended program of reform, there is
still hope to avoid the chaos and devastation that is the inevitable
result of every Ponzi scheme in history.
Why is this
poppycock? First, because of the nature of every Ponzi scheme. The
scheme that Charles Ponzi invented was doomed from the beginning.
There was no way statistically that that scheme would not collapse,
leaving devastation in its wake. Whether we are talking Charles
Ponzi or Bernie Madoff, from the day the deception began, there
was no possible way that the scheme would not run aground on the
shoals of statistical reality.
could not have been stopped at any time. The participants in the
scheme, from the day they got into it, would not consider the possibility
that they had been completely conned by someone who sold them a
story that was based on a statistical impossibility. This is a true
Ponzi scheme. A Ponzi scheme must end with losses for all but the
participants who got in early and got out early. The only people
to win in a Ponzi scheme are the people who recognize it as fake,
who get in early, get out early, take the money and run. They spot
it as a fraud from day one; therefore, they have an exit strategy.
thing about Ponzi schemes is not that there is an endless supply
of suckers, including sophisticated investors, who believe in it.
The astounding thing about Ponzi schemes is that their originators
seldom disappear with the money, never to be seen again. Charles
Ponzi is the classic example. If he had taken the money, which was
in the tens of millions in an era in which the dollar was worth
20 times as much as it is today, and if he returned to Italy, from
which he had arrived, he would have made out like the bandit that
he was. But he stayed in the game until the bitter end. So did Bernard
Madoff. The originators know that the thing cannot possibly end
well, and yet they are unwilling to take the money and run. They
believe their own impossible promises. This, I do not understand.
of the Ponzi scheme is not simply its statistical unsustainability.
The essence of the Ponzi scheme is that it is like an addictive
drug. Once someone enters into it, he finds it psychologically impossible
to face the reality of the unsustainable statistics of the program.
He refuses to get out in time. His participation in the scheme fundamentally
changes his outlook toward reality. He is no longer capable of being
persuaded that he has made a fool of himself by entering into such
a scheme. This includes the founder of the scheme. The essence
of the Ponzi scheme is not statistical; it is psychological.
It creates belief in that which is statistically impossible, and
the degree of belief is so strong that anyone who points out the
statistical impossibility of the scheme risks being cut off personally
by the victim. Ponzi scheme economics creates the classic attitude:
shoot the messenger.
What also is
astounding about Ponzi schemes is that the messengers never understand
the nature of the psychology which undergirds the Ponzi schemes.
The messengers come before the victims of the scheme, and they lay
out their evidence. Their evidence may be fairly simple, or it may
be highly sophisticated. But the person who lays out the evidence
is also suffering from terminal naiveté. He thinks that he
can bring people to their senses by means of evidence. He thinks
that he can persuade someone who is the victim of a Ponzi scheme
to change his ways right now, to get out of the scheme immediately,
to take out his money if he can, or at least stop putting any new
money into it. He thinks he can get a rational response from somebody
who is knee-deep, waist-deep, or armpit-deep in a Ponzi scheme which
has, on paper, made him rich.
the victim pay any attention to a messenger who comes to him with
a twofold message: first, he is going to lose all of his money;
second, that he was an idiot for believing in the scheme in the
first place. The messenger does not actually tell the victim that
he was a fool to get into the project, but that is the inescapable
implication of his criticism. This is fully understood the victim.
He has no interest in the stack of papers or graphs or formulas
that show that the scheme in which he has invested his money is
statistically impossible to fulfill, and worse, that such a scheme
would only appeal to somebody who is terminally naïve.
scheme is a daisy chain. It is a daisy chain of people who have
this sign on their backs: I am terminally naïve. This includes
the founder, the victims, and the messengers who come before the
victims to try to warn them that they have gotten into a statistically
impossible scheme that could only have been promoted by a confidence
wants the victim to believe that there is hope if he takes effective
action now. What hope? He can get his money back. But all the others
can't get their money back. There is still hope for him, but not
for most investors. Maybe he will still come to his senses. Therefore,
the messenger is as terminally naïve as the victim of the scheme.
That is because the essence of a Ponzi scheme is not statistical;
it is psychological. It is the belief that there are great benefits
without great risks, that there are above-average profits without
above-average risk. In short, there is a pot of gold at the end
of a rainbow.
of the Ponzi scheme believes that the man who sold him on the scheme
is a real live leprechaun who is going to lead him and all of the
others in the program to the pot of gold at the end of the rainbow.
When you deal
with somebody who believes in pots of gold at the end of rainbows,
and who trusts salesman who are obviously in the leprechaun-imitation
business, you are not dealing with somebody who is going to respond
favorably to carefully prepared refutations of the statistical plausibility
of the scheme.
For over four
decades, I have come before people and warned them of the statistical
impossibility of the Social Security System and the Medicare system.
Never have I implied that the system could be reformed. I have denied
the political possibility of any such reform. Never have I warned
the person to try to get out of the system. Why not? Because it
is compulsory, and inherent in the nature of modern citizenship.
live in a Ponzi scheme economy. This means that we live in a society
in which the vast majority of voters have adopted leprechaun
economics, and have re-elected leprechauns on a regular basis
since 1935 in the United States, and since 1889 in Germany.
I have always
come with this message: "You may be able to escape the worst effects
of the Ponzi scheme, but only if you take active steps now that
will enable you to escape a system that has been imposed on you
by law, for which you are not personally responsible."
When you come
to the victim of a Ponzi scheme with this message, namely, that
he was forced into it, and therefore he is not the victim of his
own terminal naiveté, you have at least an outside possibility
of persuading him. He may begin to take steps to evade the worst
aspects of the inevitable collapse that the Ponzi scheme will produce
in the lives of virtually all members of society. He does not think
you are calling him a dupe of politicians, even though that is what
he has been.
Only a tiny
fraction of the population will be willing to listen to such a warning.
That is despite the fact that they believe in the system, participate
in it enthusiastically, and do not believe that it is going to blow
up in their faces. They are naïve. Only a tiny fraction of the population
is ready to listen to the story of the Ponzi scheme, and only if
there is a least an outside possibility that they, personally, will
be able to escape the worst effects of the inevitable breakdown
of the scheme.
Tell a man
that he personally has hope, and he may listen. Tell him, in effect,
that the vast majority of his neighbors and peers are terminally
naïve, and victims of a political con job, and he may listen. He
has always suspected that they are not too bright anyway. He has
always suspected that he is brighter than they are. So, he may be
willing to listen.
This is why
it never ceases to amaze me that sophisticated economists with academic
degrees go to enormous trouble to present cogent analyses regarding
the Ponzi scheme nature of the present economy. They spend lots
of time amassing evidence of the Ponzi scheme nature of the modern
economy, and then they try to tell their readers that there really
is hope for the economy if "we" act now. There is clearly no possible
hope for the economy. That is because Ponzi schemes are based on
leprechaun economics. Nobody gets into one of these schemes who
is not from the beginning a believer in leprechauns. They want access
to the pot of gold at the end of that government-guaranteed rainbow.
Here is the
bottom line. Most voters in the United States since 1935 have believed
that the federal government is in fact staffed by well-meaning leprechauns
whose only real interest is in providing voters personally with
a pot of gold at the end of the rainbow, either at the age of 62,
with early retirement, or later, if the voter wants to maximize
access to that pot of gold. We have in the West an entire civilization,
which we call Western civilization, which is based on leprechaun
a Charles Ponzi or a Bernie Madoff comes along and takes advantage
of this faith in leprechaun economics on a personal basis. It is
not just that middle-class people and working class people believe
in government leprechauns. It is that very rich and sophisticated
people believe in SEC- approved leprechauns. This, by the way, includes
everybody in the SEC, which regulated Madoff. Why? Because the moment
they approved the leprechaun who was selling the Ponzi scheme, they
got sucked into it to. To admit at this late date that they had
been completely conned by a man like Madoff is to imagine that they
will turn away in horror at their own stupidity and naiveté,
admit that they were completely conned by this man, and say they
are really sorry that everybody who put any money into this man's
hand is going to lose everything they have given him. That would
be a $50 billion admission of error. Anyone who thinks that a government
agency is going to make this kind of admission before the program
is forced into the bankruptcy by the market is himself terminally
the top to the bottom, from East to West, once one of these schemes
begins, it always goes over the cliff. The statistical inevitability
of the scheme always asserts itself, because the psychological inevitability
of the scheme asserts itself. Almost no one has sufficient self-awareness
to overcome his own ego in the name of personal economic self-interest.
Almost nobody has a strong enough ego to admit that he had been
taken in by this con man. For those few people who do have a strong
ego, and who are willing to admit that they have been taken in,
their personal self-interest is not in informing the SEC about the
con job. Their personal self-interest is in getting whatever money
they can out of the system, before everybody else finds out. So,
there is almost no incentive whatsoever for anybody who is participating
in the system to take personal steps to end the system prior to
the inevitable explosion. Once started, a Ponzi scheme cannot
be stopped by well-meaning messengers.
AT THE MARGIN
We now come
to the heart of the matter, economically speaking, which is economic
The first principle
of modern economics is that people make decisions in terms of their
personal self-interest. The second principle of modern economics,
far less known, is that all decisions are made at the margin. When
you accept the truth of these two principles, you can be sure that
any prescription or solution that is offered by the enthusiastic
bringer of the message, whoever he may be, or how many degrees he
has after his name, does not know what he is talking about if he
uses the word "we."
the rest of the article
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 31-volume series, An
Economic Commentary on the Bible.
2013 Gary North
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