Sprott: Is it all a Ponzi?

December 28, 2009

In his latest missive to investors (pdf link here), Eric Sprott asks if our Ponzi economy is at risk of collapse. In fiscal 2009, foreigners scooped up $698 billion of Treasuries while the Fed upped its holdings by $286 billion. But the public debt increased $1.9 trillion. So who bought all the rest? According to Treasury, “other investors” bought $510 billion, up from just $90 billion in 2008. With the Fed’s printing press turned off, the question for next year is whether “other investors” can buy more Treasuries than they did this year…

As we have seen so illustriously over the past year, all Ponzi schemes eventually fail under their own weight. The US debt scheme is no different. 2009 has been witness to spectacular government intervention in almost all levels of the economy. This support requires outside capital to facilitate, and relies heavily on the US government’s ability to raise money in the debt market. The fact that the Federal Reserve and US Treasury cannot identify the second largest buyer of treasury securities this year proves that the traditional buyers are not keeping pace with the US government’s deficit spending. It makes us wonder if it’s all just a Ponzi scheme.

Sprott has over $4 billion under management, the majority of which is in physical bullion, both gold and silver.

This blog has also argued that the American economy is a pyramid scheme:

At the end of the day, flushing more debt through the system is the only lever policy-makers know how to pull. Lower interest rates, quantitative easing, deficit spending, it’s all the same. It’s all borrowing against future income. Each time we bump up against recession, we borrow a bit more to keep the economy going. With garden variety recessions, this can work. Everyone wants the good times to continue, so no one demands debts be paid back. Creditors accept more IOUs and economic “growth” continues apace. If it sounds like Bernie Madoff’s Ponzi scheme, that’s because it is.

Each time Bernie’s scam got a few too many investor withdrawals, he’d simply plug the hole by raising more investor cash. The guys at Fairfield Greenwich were making so much in fees, they were happy to funnel more his way. But at a certain point, Ponzis get too big. There simply aren’t enough new investors to pay off older ones. In the aggregate, the same is true for Western economies. Their debt loads are now so huge, they are simply unpayable.

Naturally, policy-makers sound just like Ponzi-schemers: Just give us a little more cash to get us through this rough patch and everything will be copacetic. Ben Bernkanke at the National Press Club alluded to the famous quote by St. Augustine: “Oh Lord, give me chastity, but do not give it yet.” President Obama convened his “fiscal responsibility” summit days after passing the stimulus bill and days before proposing huge increases in health care spending.

Like pyramid schemes, fractional reserve banking systems simply don’t work in reverse. “It’s A Wonderful Life” demonstrates why.There must always be new money coming into the system to refinance debts. If investors/depositors suddenly demand their money back, the system crashes.

Deflation to a central banker is like withdrawals from a Ponzi scheme. Too much at once and the scheme collapses. The Fed’s (impossible) job is to make sure it never does.

Bernanke says he’ll stop printing money to absorb debts, and he may for a time. But the American Ponzi has grown so large, the private credit system is, IMHO, no longer capable of generating sufficient debt finance to keep it going. So to avoid a debt deflationary depression the Fed will have to rev up its printing press again.

Japan has been wrestling with its own Ponzi collapse for 20 years, keeping it at bay with trillions of dollars worth of deficit spending and money printing.

Hasn’t worked for them and it won’t work for us.


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I’ve read Sprott’s article and his analysis of who’s buying Treasuries is a good one. Kind of hard to quibble with it. OTOH, I also have to think one needs to at least keep in mind Sprott’s perspective as a bullion investor.

That said, it would be helpful if you could write more on this beginning from your end point. What will the beginning of the unraveling look like? What will be the early signs of a policy response–fiscal & monetary? How might it play out (other than like Japan)?

Posted by Lilguy | Report as abusive

It seems hard for me to believe that the Federal government is paying an interest rate of 4.75% for 30 years, while I can borrow on a mortgage at 5% for 30 years–and I have a prepayment option!!! Little old me (and the missus, of course) is now as good a credit risk as a government which can tax me to get its money (even though it doesn’t need to–it can simply issue more PIK bonds).

Something’s not right here. . .

Posted by But What do I Know? | Report as abusive

Yes… yes it is all a Ponzi.

Just like the homeowner (purposefull misnomer – mortgage owner) who tries to maintain a standard of living by equity withdrawal, and not an increase in income, the gubermint wants consequence free spending – don’t raise taxes or cut spending, because…someone might not get re-elected. Just as the home value can’t go endlessly up, borrowing is not income, and debt is not wealth.

Posted by fresno dan | Report as abusive

From the economist, “America is a Ponzi scheme that works”

‘Immigration keeps America young, strong and growing. “The populations of Europe, Russia and Japan are declining, and those of China and India are levelling off. The United States alone among great powers will be increasing its share of world population over time,” predicts Michael Lind of the New America Foundation, a think-tank. By 2050, there could be 500m Americans; by 2100, a billion. That means America could remain the pre-eminent nation for longer than many people expect. “Relying on the import of money, workers, and brains,” writes Mr Lind, America is “a Ponzi scheme that works.”‘

http://www.economist.com/world/unitedsta tes/displayStory.cfm?story_id=15108634&s ource=hptextfeature

Demographically speaking, our underlying trend is growth, if only due to demographics, and this can cover a great many sins. Contrast this with Japan, where the overbuilding up to 1990 can’t be absorbed, EVER, because the population is shrinking. Here in the DC area, house inventory overhang is 40% less than it was at the peak, and prices are climbing again.

We’ve had inflation over the years, and lots of it too. We’ve gotten through… Government budgets will get crunched and fiscal sanity will return. Guess what: There are 1.9 million people employed by the federal government (ex post office and military), same as 1963.

Compared with all history the standard of living of Americans is far higher than ever before. And the vast majority of goods and services in the economy are by Americans, for
Americans. Trade is only a minority of the economy. Speaking of trade, our deficit for the first 3 quarters was just $300B, less than half of what it was a year ago. That is also less than 3% of GDP.

Posted by Dan H | Report as abusive

@Dan H – while immigration and assimilation of immigrants in the US is one of it’s strengths and charms, I suspect unskilled Latino immigrants form the bulk of the immigrant flow. With our public education system, particularly in cities, leaving this population severely unprepared for the 21st century workplace, I fear that on balance the immigrant influence will not leave the US more, but less skilled, less creative, less inventive.

Posted by Jon | Report as abusive

[…] Sprott: Is it all a Ponzi? | Rolfe Winkler […]

Posted by Links: 2009-12-28 – Credit Writedowns | Report as abusive

Discussion of the Federal Reserve as a Ponzi scheme over poker and beer:

Sprott gets a mention.


Posted by George | Report as abusive