The Federal Reserve Note is a Ponzi Scheme
A dozen years ago I attended a presentation about monetary reform. A group of people who favored precious metals gave an interesting lecture in which they described the lauded Federal Reserve Note as a "Ponzi Scheme."
I immediately balked at the description. Like most people, I associated the term "Ponzi Scheme" with deceit. The people who create Ponzi schemes are intent on committing fraud.
The problem with the naive definition is that I can't read other people's mind. It is impossible for me to know if a person intended to commit fraud.
A definition which hinges on the intent of others is useless. For a definition to be useful, it needs to be based on the structure of a system and not simply on the intent of the people who created the system.
The person giving the lecture said that telling feature of a Ponzi scheme was that the equity behind an investment has no intrinsic value and that the payoff for early investors comes from current investors. Current investors are hoping that future investors fail to scrutinize the equity.
The hundred dollar bill picture above is just a piece of paper. There is no intrinsic value to the paper. In the long run, the silver quarters used as a paper weight in the photo will be worth more than the hundred dollar bill.
This is essentially the way that fiat currencies work: There is no intrinsic value in the hundred dollar bill pictured above. The value stored in that piece of paper is simply my hope that the grocery store will value it when I go to buy food.
The Federal Reserve Note has worked with only minor inflation for over a century. So, I guess it is possible to create a somewhat stable Ponzi Scheme.
The lecturer went on to say that a reason Federal Reserve notes hold value is that people have to pay their taxes in the notes. This forces people to accumulate dollars. The Federal Reserve is using the coercive power of government to create a relatively stable Ponzi Scheme.
I have heard other pundits claim that Social Security is a Ponzi Scheme. Social Security doesn't invest money. The payouts received by the existing generations of retirees is coming from current workers. Again, we are using the coercive power of government to create a seemingly stable Ponzi Scheme. (Please ignore the National Debt).
I like the presenter's definition. I prefer definitions based on discernible structures to those based on our judgments of other people's intentions.
For example, I contend that it is possible for a person with good intentions to create a Ponzi scheme. It appears that many Ponzi schemes began with people who did not understand accounting. They over reported earnings or tried to hide a loss. They tried to fudge the books and were soon drawn into a routine of fudging books.
Many Ponzi schemes start out as attempts to create pension plans or insurance policies. The investors under estimate future payouts and then begin the fudging the books.
Such people are not driven by an intent to deceive.
I once hired on at a company developing VOIP products. I later learned that the company sought to sell the product through an MLM structure. I do not believe that the marketers were motivated by the intent to deceive. They ended up creating a pyramid in which the people at the top of the pyramid made out like bandits and every one suckered into the pyramid lost their investment. The pyramid collapsed.
It was not the intention of the company to create a failed pyramid. It was the structure of the MLM that caused the company to go bad. I guess I should note. I live in Utah. The people at the top of the pyramid were LDS Bishops. They appeared to be honest and forthright. Certainly, such good conservative people would never intentionally lie to a large number of investors. They intended to create a pyramid that would bring wealth to the masses.
People can have great intentions, but still create bad structures.
The second great thing about the structural definition is that once people understand the structural definitions, they will start finding Pyramid and Ponzi-structures are built into many investments. In such cases one attaches a ponzi-like structure or pyramid-scheme to a legitimate investment. The investors get snookered in by the legitimate investment but are taken by the ponzi-structure attached to the legitimate structure.
For example, we can look at venture capital. In some cases the first wave of venture capitalists have an exclusive focus on the IPO. The venture capitalists will spend their capital propping up the books of the firm. They make their money on over valued stock during the IPO. The people who bought the IPO find out later that they are holding an empty bag.
Anyway, I found the lecture that called the Federal Reserve Note a Ponzi Scheme to be extremely value. It highlights an intrinsic weakness of fiat currencies. It highlights the need to diversify and look at the structure of investments before investing. Since hundred dollar bills are not backed by anything, I would not want much money invested in paper currency.
Literally a Ponzi scheme, but not the bills, the Fed.
There is no such thing as "intrinsic value", bills don't have it, nor the gold, nor the silver, nothing has such a thing. The value is subjective.
Gold is better than bills, of course, because it's scarce and banks/governments cannot print it, but it has no intrinsic value.
The only thing that backs up the bills, the gold, the silver, etc., is the human will.
Have you seen how a place can become economically prosperous simply by injecting paper? Or on the contrary how can be left desert by the shortage of such? Does paper create wealth?
No. Paper is an illusion, like gold, a representation that we use to externalize and materialize our will.
We could literally use shit, and if we gave it value nothing would change. The value is in our head, not in the object.
The value of gold is objective, not subjective. It is superior to green cotton paper because of its intrinsic value. The energy and manpower required to mine and refine it, in addition to its scarcity are what give it intrinsic value. Its beauty, durability, density, resistance to rust, scientific and industrial applications, you can add those as well.
Green cotton paper has none of those properties, neither does toilet paper, neither does shit.
"Injecting paper" is theft by counterfeiting, it has never created prosperity.
If you say that is what gives it value, then the value would not be intrinsic but relative, because it would depend on certain specific circumstances to have value; as the fact that its scarce or the difficulty in its extraction.
Already in the past there have been cases where gold, not only is not scarce, but its abundance created similar effects as the FIAT. The first to notice inflation were in fact the Spaniards of the 15th century, when the gold of the Americas flooded the Iberian peninsula. They realized that in the places where gold was most abundant, the prices of all products increased, this of course, because gold was devalued in the same way as any other currency.
We also have no reason to think that technology will not make it easier to extract gold in the future.
The injection of paper has similar effects to the injection of gold, and in both cases economic prosperity is created, however, nothing that usually lasts because the only thing that gives value to both, is not its intrinsic properties, but the human will.
And by the way when I said "paper injection" I don't refer to the issuance of new paper, but to investment of foreign capital. Injection of paper from one place to another.
Hey that is actually a valid point about Iberia, but I believe it was mostly silver with regards to the flood into Europe and the resulting price increases. Bolivia, Peru and such were oozing silver, kids would kick it down the alleys.
It really is the exception that proves the rule, though. There are no new continents to discover like there were 500 years ago. The galleons of silver poured into Europe before even Adam Smith’s grandparents were born. We can politely say the bullion was mismanaged long before the concept of supply/demand was codified.
Mine production has essentially increased in line with population growth for decades now if not centuries. You’ve got to move a lot of earth and there is no going around that. I’m guessing a couple grams per ton at the best mines.
Fiat is a different story altogether. They all go extinct. That is the rule without exception. I was looking at some paper currencies from the Mongolian Empire the other day!
Fiat counterfeiters have done more damage to humanity than anything else.
I don't doubt that.
In my opinion, gold is much better than fiat and that any other, however, is not because it has an intrinsic value but because of a series of circumstances that make it so.
Damn, I thought we were making progress.
intrinsic - Belonging naturally; essential.
extrinsic - Not part of the essential nature of someone or something; coming or operating from outside.
value - The regard that something is held to deserve; the importance, worth, or usefulness of something.
progress - Forward or onward movement towards a destination
Oxford dictionary.
Ha, that's what I thought.
If gold possessed intrinsic value there would be no possible way to devalue it.
What happened in Spain is not only an exception. It happened in all western Europe, the abundance of gold made that the products in the international market went up doing that the countries that did not benefit from the colonization went bankrupt, this is one of the reasons why the Ottoman Empire declined.
There is also the example of Mansa Musa, who on his pilgrimage to Mecca causes the devaluation of gold from Mali to the Middle East, wiping out all the markets of the Mediterranean.
And of course, the fact that the American Indians had so much gold that did not give them much value, they also did not know its usefulness, so it shows us that the utility is related to the knowledge that humans have of it and to the human needs.
It's not a myth that the Spaniards bartered with the Indians to give them mirrors and trinkets from the old continent in exchange for gold. This might seem like a scam today, but it was not, for an American the mirror had more value than gold.
I have never heard of Mansa Musa. Quick check shows he died 585 years before the end of the Ottoman empire and went to mecca, not anatolia.
Back to south America, we have already covered the fact that there was abundance of silver rather than a scarcity, which was the case everywhere else. Scarcity is one of the intrinsic features of precious metals, hence the term precious, hence their value.
To say silver has no intrinsic value would be saying nothing has intrinsic value. The main veins have been exploited, tons of earth have to be moved per ounce. Were there isolated times in history in isolated places where veins were bursting on surface? Yes, those are exceptions.
It has industrial uses as well. There is a reason the US constitution defines the dollar in terms of silver, that is because it has intrinsic value.
All this stuff is so simple, yet it boggles the mind. Well, it boggles my mind.
Thanks for helping to expose the insanity!