By - August 11, 2011

The US Credit Rating: Another Term for Ponzi Scheme

America’s credit rating being downgraded by Standard & Poor’s should come as a shock to all Americans who have The US Credit Rating: Another Word for Ponzi Scheme had their heads buried up their assess for the last eighty years.  Stating the obvious, S&P merely noted, if the present rate of spending continues, the deficit cannot be sustained over the long-term.

While the concept has been around longer, the term “Ponzi Scheme” became part of the lexicon around 1920, for Charles Ponzi, who used a well-published variation of a technique in which investors are paid from their own money or money paid by subsequent investors, and not by any actual investments.  A Ponzi Scheme requires an ever-increasing flow of money from investors to keep the scheme going.

In March 2009, Bernard Madoff plead guilty to eleven felonies while admitting he turned his wealth management company into a massive Ponzi Scheme that defrauded thousands of investors of approximately $18 billion.

Some said Bernie Madoff orchestrated the greatest Ponzi Scheme in American history, but compared to our own government, Bernie Madoff was small potatoes.

Social Security, signed by FDR on August 14, 1935, is a pay as you go system similar in most practical respects to a Ponzi Scheme, where current workers pay the retirement benefits of current retirees.   In 1942, there were about 42 workers per retiree.  The surpluses of Social Security revenue was “invested” in US Treasury Bonds.

Since 1942, our life expectancy has increased, with people spending more years in retirement.  Further, the baby boomers are aging into retirement, causing a demographics shift of only two workers per retiree by 2025.  How long would any system be sustainable.

The IOUs are coming due.  The Congressional Budget Office reported Social Security will have a $45 billion deficit in 2011, to be financed from the general tax revenue.  Of course, there is also a deficit of general tax revenue compared to spending.

Long term, the prospects are grim, with a projected deficit for Security, Medicare, and Medicaid at over $50 trillion dollars over a seventy-five-year horizon.

One wonders if Congressmen supporting the original Social Security Act weren’t, consciously or unconsciously, influenced by newspaper accounts of Ponzi’s scheme as a framework for their model based on the newspaper publicity.

If you or I ran an investment scheme like the Social Security Administration, we, too, would find ourselves facing the same felony fraud charges faced by Bernie Madoff.   In contrast, our Congressmen are paid $174,000 and up, plus federal benefits.

Senator Rand Paul has suggested a modest reform of eliminating one penny of federal spending for every federal dollar spent for the next seven to eight years to end the deficit and begin to pay down the debt.  This was met with cries of condemnation by the Democrats in the Senate, who asked Americans to think of the children and the elderly when considering cuts.

Cutting spending is too difficult a job for our Representatives and Senators, who have turned to a six-member bipartisan committee to make the difficult job, reserving only a strict up or down vote.

Yet simply slowing or stopping the rate of grow of government spending, and the priorities and efficiencies it would create, is the easiest means for protecting our credit, avoiding market chaos, and putting the United States on the long-term path to prosperity.  Draconian cuts aren’t needed.  Just cutting a penny of every federal dollar.

It is a shame most in Congress lack the testicular fortitude to deliver it.  The US Credit Rating is not the only thing at risk.

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Comments (1)


  1. bobby says:

    downgrading is all smoke and mirrors to a country that has the ability to print and control its currency. the down grade is due to the fact that the normally inhouse bickering became public allowing the uninformed to have an opinion.

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