If our entire money system is itself a Ponzi scheme, then it follows that much of what will be based on that monetary superstructure will, almost by definition, share that characteristic.
The garden-variety illegal schemes, such as those run by Bernie Madoff and Peregrine Financial, are easier to cover up and keep running when money and credit are readily available and expanding rapidly. Their early demise just means that they were in the weakest positions and therefore unable to survive the first rounds of crediting/money stagnation.
Next in line is the practice of borrowing at a faster rate than economic growth. That process is already well underway for Greece, Spain, Italy, and Portugal – but just barely. An enormous gap exists between any practical level of funding and the desired levels of spending, and closing that gap will be a long and painful process.
Following this will be the state-sponsored schemes. Woefully underfunded pensions and entitlement programs will take longer to unravel, but it will happen too in one form or another, most likely by cutting benefits.
The simple truth is that when credit and money expansion stops, all of the various schemes that relied upon the illusion of growth supplied by that dynamic are exposed as unworkable propositions. One summary of the current crisis is this: Credit growth stalled and there simply wasn't enough “juice” left in the system to cover the various “legal” and illegal Ponzi schemes.
Socially speaking, as long as the pie is expanding, there is virtually zero public or political support to call out the schemes for what they are. If anything, the opposite is true. It is only once some limit to growth is reached – the most recent case being the bursting of a multi-decade credit bubble in 2008 – that the party ends, heads groggily lift, and the painful lack of standards and critical thinking are finally revealed.
The fraud has always been there, often in plain sight, but very few really cared as long as the status quo was being maintained. Obviously and mathematically unworkable municipal and state pension plans are a prime example of this dynamic. For as long as the fiction could be maintained, very few challenged the system, even though they were quite obviously going to be an eventual fiduciary train wreck.
The recent spate of municipal bankruptcies indicates that the "eventual' train wreck has begun and the first few cars of a very long train are off the rails.
Officially Supported Fraud
As bad as the private frauds are, and as corrosive as they are to public trust, they pale in comparison to those perpetuated at the very highest levels. The fact that some frauds are supported and encouraged by the regulatory bodies and official institutions should render them no less palatable to the rational mind. In fact, the opposite should be true.
Recently it has become clear that various regulatory bodies can be counted on to look the other way when certain frauds are aligned with the aims and goals of the state while punishing other frauds selectively and grudgingly. There are many recent examples to support this view.
The Libor scandal is a perfect example of regulators "looking the other way when it suits us.' Because a Libor rate that was manipulated to inappropriately low levels created the appearance of robust bank health, the Fed and other central banks and regulatory authorities were more than happy to look the other way. Not just briefly, but over many years.
That the manipulation of Libor also happened to pad the profits of big, well-connected banks (another prime goal of the central authorities) was just one more reason to tacitly support the manipulation. It's important to note that Libor was and is the main determinant for the rate of interest paid on tens of trillions of loans and hundreds of trillions in derivatives.
If the central authorities are willing to overlook fraud on that scale, how far are they willing to go in other areas? Asked another way, just how serious is the predicament we face, and what are we not being told?