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November 3, 2011
THE WORLD'S SECOND LARGEST PONZI SCHEME
Arshad M Khan
There is a "Peanuts" cartoon that often appears before each football
season. It has Lucy holding a football saying to Charlie Brown, "I really, really
mean it. I won't take it away this time." She holds the ball in place. Charlie
Brown runs in to take the kick ... she takes away the ball. So it is with the
on-again-off-again European plan to resolve the Greek debt problem -- also
the Italian, the Spanish, the ... .
This time after much wrangling, a trillion Euro plan was agreed upon. Guess
what happened? The Greek Prime Minister facing a no-confidence vote in
Parliament, which could bring down his government, decided to call for a
referendum on the belt-tightening measures required in the plan. The polls
show a solid majority of Greeks against them, but perhaps he hoped to sway
some Parliamentarians in the no-confidence vote. Either way (referendum or
the no-confidence motion) the prospects for the deal look grim, and markets
across the world have responded with steep declines.
The plan itself has problems. It calls for investors to lend again to Greece
and Italy, etc. It guarantees the loans ... but partially -- certainly not
confidence inspiring when the lending banks are taking a 50% 'haircut' on
present loans. A deadbeat comes to you and says, "Lend me $20. Trust me.
Don't worry, if I can't pay you, my friend here guarantees you'll get some of it
So how did all this start. The European Central Bank (ECB) facilitated an
environment where the poorer European countries could borrow from the
ECB's friends ... the French and German banks. It set off a house-building
boom (in Ireland, in Greece, in Spain). The banks made a lot of money. Easy
money rocketed demand and prices soared. They borrowed more. Like all
speculative bubbles, the market eventually collapsed. The governments had
also borrowed -- but their deficit spending was not focused on investment
towards building a competitive economy. And it could not generate the
income to pay back the debt. Very soon they were borrowing to pay interest
on the debt. That's a Ponzi scheme and we know how it ends. Ireland went
first. Now it's Greece. Tomorrow Italy? Spain? Portugal?
However, this is only the world's second biggest Ponzi scheme, so which is
the first? We are living through it. When the U.S. runs massive deficits,
facilitated by the Fed, to support spending on Chinese and other foreign
goods -- note our trade deficit is at record levels -- it simply creates jobs
overseas. What we need is investment spending to develop jobs here, not
tax cuts to buy foreign goods and support jobs abroad, but our government
has failed us.
Greece is insolvent. We are lucky the dollar is a reserve currency. But if
nations start to flee the dollar for a more stable alternative, then man the life
boats and pray for a miracle.