Who Madoff with the Dollar?

So what is a Ponzi Scheme?



In the early 1920's Charles Ponzi successfully convinced a large group of people that he was an investment genius. His supposed investment vehicle of choice was postal reply coupons, with which he claimed returns of 400%. Postal reply coupons where postage stamps purchased in another country and redeemed in the target country whose currency was stronger than the country in which they were purchased. In short he was supposedly playing a currency exchange program. Essentially an early type of Forex trading.

What he was really doing was paying returns to earlier investors with the deposits from new investors. There were no real returns from the initial investors deposits. Those and portions of subsequent deposits were skimmed off by Ponzi to fund a lavish lifestyle and continue the illusion of success. As the mania grew and grew, people were throwing money at Ponzi to cash in on his promised riches. At one point taking in $250,000 a day.

Eventually, of course, the pyramid scheme crashed and investors were financially destroyed.

Ponzi schemes are simple to pull off if you have no moral compass. They are also extremely easy to detect if you have the desire and easier yet to avoid if you apply the common sense.

How many times have we heard the mantra, "if it sounds too good to be true ..."? You know the rest.

Bernie Madoff pulled it off for years before the end came. In fact his scam would probably be rolling right along still if the markets hadn't tanked. These scams are always out there in one form or another. In fact our government is running two of the biggest Ponzi schemes in the history of the world. In broad daylight none the less!

Social Security and Medicare. The scary part is that we know there is no money in the Social Security "Trust Fund" Yet we let politicians get away with that term and the term, Social Security "Lock Box".

The money just ain't there.

If nothing is done to change these pyramid structures they will fail. Unfortunately the political will to accomplish those changes, doesn't exist.

And yet there is one more Ponzi scheme developing out there that will dwarf these two government mandated schemes. The US Economy.

I know that sounds hysterical and unpatriotic, but bear with me for a moment longer.

This is the greatest country the world has ever seen. We have been a force for good throughout the world. Whenever a disaster hits anywhere in the world we are the first to offer assistance, even to our enemies.

Our workers are the most productive, innovative and determined people on the planet.

Medically we are second to none. Our compassion for and reverence of life is a wonderful thing to behold. Even our pets and livestock enjoy a quality of life seldom seen anywhere else.

When we defeat an enemy we give back the territory as long as they demonstrate that they will play nicely with the other kids in the sandbox. Germany, Japan, Italy, half of Korea and Grenada. We are attempting to do the same with Afghanistan and Iraq.

Of course there are exceptions to all of these. However the vast majority of the time these statements hold true.

The one thing that makes this possible is wealth and the promise to attain it. That is the American dream. The American Capitalist is the reason we can be philanthropic as a nation.

The reason we make advances in medicine, quality of life, even environmental awareness.

It is the reason we conquer our enemies but don't expand an Empire.

All of these things make good business sense.

Take away that dream and you take away our greatness as a nation.

The financial world knows this is true as well, that is why the dollar is the reserve currency for the world. For now.

If we continue to try and print our way out of this financial crisis and into even more and more international debt, there will come a time that the international financial community will see the Ponzi scheme that is building in our economy and want out. Even if we reverse course right now, the national debt, if applied to every household throughout the country, would be around 500 thousand per household.

There will be only two ways we can pay off that debt. One is to grow our way out of it and, at the same time, have the politicians stop spending our money. That is apparently, not going to happen. The other way is through hyperinflation.

If you borrowed 100 dollars 20 years ago and had to pay it off today, no big deal right? back then you could have dinner and a movie for 2 for around 25 bucks. Today it's about $75-100 . That's mild inflation. With hyperinflation, foreign creditors would be lucky to receive 10 cents on the dollar, return on investment.

Will hyperinflation happen?

I believe it is already a done deal.

Bernanke has stated that he will print his way out of a deflation, to whatever extent that is required. He is in the process of doing just that.

So where does all this leave us average Joe's and Josephine's? Out in the cold, unless, , ,

We buy real, tangible assets.

In addition to our core holdings of real gold and silver, held in our own possession, we should be acquiring food and energy related stocks, various mining companies as well as shares of companies that provide products, which will be required no matter what happens with the economy. These will hold their value as the dollar drops. The more indispensable the commodity, the more it will hold it's value.

The unbelievable part of all this is that these things are on sale right now.

Even small amounts of tangible stock can become very valuable in a hyper inflationary market.

I'm building that house brick by brick, as we speak.

Even if I'm wrong about all this, these sectors should, at the minimum, hold their value or return to it, first as the economy turns for the better.



Good luck and Godspeed



JT

Legal disclaimer: This post is for informational purposes only and is solely the opinion of the writer. Nothing in this post should be considered investment advice. Before investing in anything, the reader is encouraged to do his or her own research and consult with a certified financial advisor, which John Tompkins makes no claim to be. John Tompkins and Toro Creek Investments accept no liability for financial losses or damages incurred by the reader because of this post.