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M. Atilla Öner


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Capitalism: Worldwide PONZI Scheme


rev. 8 May 2014; rev. 14 September, 2013; rev. 29 May, rev. 15 April, rev. 6 April, rev. 20 March, 16 March 2009[1] 

My daily readings of the WSJ has helped me to reach the following conclusion: The dominant economic system of the world, i.e. Capitalism, is a Worldwide Ponzi Scheme. Members of  the western academic world have been legitimizing this scheme with their "so-called scientific" research work. In microeconomics textbooks[2], one can even find sections in which the American academicians prove that a worse income distribution (income inequality as measured by Gini coefficent) is better for the poor in the long run, although in the long run we are all dead!

WSJ-E authors and editors are very skillful in presenting all the economic and financial facts and figures dispersed among different articles and editorials in WSJ-E issues extending several days and weeks (for which I am thankful to them). In order to get the whole story, one needs to put together several different articles and editorials published in different issues of WSJ-E. Once you bring them together, the true story line emerges.

WSJ-E authors and editors are very skillful in putting the blame for any rising problem not onto the shoulders of the dominant economic and financial system, i.e. Capitalism, but  on the individual misbehaviors, be it investors, professionals, rating agencies, regulators, politicians and ordinary citizens. D. Henninger (WSJ-E, 8 Jan 2009) calls the behaviors “cataclysmic behaviours”. Although we read many examples of companies being mugged by their executives, members of the Worldwide Ponzi Scheme defend them with the following argument “Honoring contractual commitments is at the heart of what we do in the insurance business” (WSJ-E, 16 March 2009, p 31).

The Worldwide Ponzi Scheme has supporters in every country of the world. If there aren’t any, the system creates them by pushing the virtues of globalization and foreign (or global, which is the preferred term) capital, a necessary ingredient for indefinite (?!) and limitless (?!)[3] growth. WSJ-E is one of the covert and overt supporters of the Worldwide Ponzi Scheme. The system avoids discussing the disequilibrating effects of, e.g., capital inflows of US $ 135 billion into Russian Federation in 2007 and capital outflows of US $ 85 billion from Russian Federation in 2008, because the system feeds itself on disequilibrium. Each and every disequilibrium creates its own legal Ponzi Scheme. Examples of this "pump in - suck out" scheme can be found in graphs drawn using World Bank data.

Short-selling of equities is another form of legal Ponzi Scheme. Andy Kessler (WSJ-E, 27-29 March 2009) explains: "In an typical bear raid, traders short a target stock - i.e., borrow shares and then sell them, hoping to cover or replace them at a cheaper price. Once short, traders then spread bad news, amplify it, even make it up if they have to, to get a stock to drop so they can cover their short." The existing mark-to-market accounting rules also help the raiders, not the companies or banks!

World Gross Product  was US$ 54.3 trillion in 2007; The increase in World Gross Product between 2002 and 2007 should have ringed alarm bells at the World Bank, IMF and governmental regulatory agencies. During the same period the size of the credit derivatives industry reached US$ 58 trillion with no regulation; credit-default swap market size reached US$ 27 trillion (WSJ-E, 19 March 2009) Andy Kessler (WSJ-E, 27-29 March 2009) estimates the market size for credit derivatives as US$ 62 trillion. Despite all these problems, Mr Trichet of ECB didn't distance himself from his longer-standing view that financial technology has been beneficial for economic growth world-wide although he admits that the interactions of perverse incentives, excessive complexity and global imbalances, threw the credit boom into reverse. (WSJ-E, 28 April, 2009)

Financial institutions and investors worldwide are reported to ultimately realize US$ 2 trillion in losses on US loans, but recognized only half of those losses so far (WSJ-E, 19 January 2009). I venture to forecast that the actual figure will lie somewhere between US$ 3.1 trillion and US$ 5.4 trillion.

Apparently, during the financial markets turmoil, stocks all over the world lost US$ 30 trillion in value, whereas home equity dropped US$ 11 trillion. But, we need to know the number of transactions at each price level and compare them with the original purchase price to determine the actual losses. Most of the losses could be "paper-loss".

It is difficult to understand how governments and IMF and World Bank do not see that the amount of free-floating financial capital in 2009 is much larger than its amount in 1950 or 1970 or 1990! Size matters. Company size should be capped to get rid of "too big too fail" cases. Maybe country size should be capped, too!!!

"Big Bang" architects in UK are questioning today the ideal of unfettered capitalism on which it was built. Under former Prime Minister Margaret Thatcher, a small group of officials, including Treasury chief Nigel Lawson and Secretary of State for Trade and Industry Cecil Parkinson, scrapped decades-old rules at the stock exchange and other institutions. Looking back two decades later, Messrs. Lawson and Parkinson say at least one thing went wrong: Banks were allowed to grow too big for anyone, including their own managers, to oversee. At the end of 2008, U.K. bank assets amounted to US$ 11.31 trillion, ca. four times the size of the UK economy (2008 GDP US$ 2.79 trillion)!! One sees that governments have little choice but to bail them out when they get into trouble (WSJ-E, 31 March 2009). The case of Ireland is a perfect example, where the Irish government has guaranteed bank liabilities of US$ 632 billion, more than twice GDP. (WSJ-E, 16-18 January 2009)

Governments are part of the Worldwide Ponzi Scheme as the following stories tell us. The pharmaceutical company Eli Lilly & Co agreed to pay US$ 1.42 bn to US Justice Department to settle a probe into alleged improper marketing of the antipscyhotic drug Zyprexa. (WSJ-E, 16 March 2009) UK Financial Services Authority fined a unit of US Insurance Broker AonCorp US$ 7.9 mn for weak controls on payments made overseas that could be used for bribes in Bahrain, Bangladesh, Bulgaria, Indonesia, Mynamar, Vietnam. (WSJ-E, 9 January 2009).  Why are US Administration and UK Government making money when  US companies misbehave?

Reading WSJ-E, I learned that

1.        countries hold US$ 11 trillion (US$ 12,2 tn March 2014) as central bank reserves, mostly in US government papers;

        Individuals in Turkey hold twice the Central Bank reserves as US$ deposit. A naive estimate would claim that individuals in all countries are holding US$ 22 trillion, or US$ 24 tn by March 2014..

2.        US government debt has reached US$ 11 trillion and expected to reach US$ 13 trillion within 2 years.

3.        US government spends US$ 3 trillion in an economy of US$ 14.3 trillion (2008 GDP);

4.        there were 19 million empty houses repossessed by banks in USA at the end of 2008;       Total commercial real-estate loans outstanding in USA at the end of 2008 is ca. US$ 1.70 trillion.

5.     the financial products unit of AIG in USA holds US$ 1.6 trillion derivatives portfolio (WSJ-E, 19 March 2009);

6.        the Japanese companies sit on US$ 1.5 trillion cash;

7.     Government debt-to-GDP in Japan is 157 % according to Japanese government, but 180 % according to OECD (WSJ-E, 1 April 2009).

8.        55 million vehicles were sold worldwide in 2007, 16 million in USA; this figure dropped to ca. 13 million in USA in 2008 and expected to hover around 9 million in 2009.

9.       Bank of America holds US$ 1 trillion deposits, which have probably evaporated!

10     the private equity firms in USA  have more than US$ 1 trillion available for deal making (Guess whose money this could be!);

11.     US pharmaceutical and technology companies hold USD 250 bn in cash and have US$ 220 billion debt.

The USA is at the apex of the Worldwide Ponzi Scheme. Now, efforts are underway to add layers to the bottom of the Worldwide Ponzi pyramide by luring Russia, China, India and African countries into the scheme, if and only if, the Worldwide Ponzi Scheme does not collapse before this is realized. As of September 2013, household debt in China is US$ 2.5 tn, corporate debt US$ 5.0 tn, government debt US$ 5 tn with US$ 3.4 tn government reserves which reached US$ 4.0 tn by March 2014.

Reshuffling world economy could put another country at the apex of the Worldwide Ponzi Scheme, which would probably be prevented from materializing by a war, say around 2050!



[1] I will update this writing occasionally. Please send your comments to maoner@yeditepe.edu.tr

[2] Fred. M. Gottheil, Principles of Microeconomics, 2nd Edition, South-Western College Publishing, Ohio, USA (1999), p. 408.

[3] In chess, (!?) implies a very innovative move, and (?!) implies a strange move!