It is noteworthy that in all the glaring headlines and TV news media’s Pecksniffian commentary about Bernard Madoff’s $50 billion scam and now R. Allen Stanford’s multi-billion dollar gold brick, not one word has been heard about the federal government’s own ongoing confidence scheme. The recent “bailouts” of banks, mortgage companies and automakers, together with the $787 billion “stimulus” legislation and the $75 billion home mortgage “rescue” plan signed by President Barack Obama last week, share the same attributes and methodology as Madoff’s and Stanford’s, and differ from them only in scale. Compared to Congress, the U.S. Treasury, the Federal Reserve, and the myriad perpetuated entitlements such as Medicare, Social Security, the Federal Employees Retirement System, confidence men Madoff and Stanford are mere small-time grifters.
Some economic consultants of the major networks have even dared concede that the $787 billion commitment to “saving” the economy by spending the country into “prosperity” (but no mention of the solvency on which any prosperity is actually based) will balloon to over $3 trillion in a few years, allowing for whatever occasional expenses are dreamed up and sanctioned by Obama and a Democratic Congress.
What, other than an ignorance dulcified by an altruistic and collectivist bias, can account for an epistemology that can grasp a Madoff style scam, but not a government scam? It can see trees, but not the forest. What causes analysts, consultants, and columnists to fail to make the connections? Why do so many believe that the government is intrinsically capable of “managing” the economy, when the record of government intervention demonstrates the opposite? When Obama and Congressmen harp on the urgency to reestablish “confidence” in the economy, should one assume that they are true “confidence men” and have actively engaged in bilking Americans?
Frankly, yes. As in all political action taken in the name of altruism and collectivism, there are givers and takers — and the ones who are forced to foot the bill in the name of the “public good.”
At the moment, for example, the news media are reporting unhappiness with Obama’s $75 billion home mortgage “rescue” plan, one expressed by homeowners who feel they are not only invisible to the government but penalized by it as taxpayers, as well, in favor of those who took advantage of the subprime legislation and could not or cannot make their payments. The solvent homeowners and the news media can be heard flailing about in confusion, seeking explanations, reaching some right conclusions. No one is telling them that the chief driving force behind the new “rescue” plan is: altruism. It is the nature of altruism that it will always penalize or ignore the responsible, the virtuous, the thrifty, and the morally and financially solvent, and reward the irresponsible, the amoral, the reckless, and the morally lame and halt.
Although there are differences between pyramid and Ponzi schemes, the key elements are the same. The Ponzi or pharaoh at the top receives the lion’s share of money that works its way up to him, while the incautious and foolish at the very bottom receive little but mostly nothing for their “investments.” The Ponzi or pharaoh is a creature whose chief task is to instill confidence in a “sure-fire,” “safe” means of investing and making money. Pyramid and Ponzi schemes work differently and have variations, but at the bottom of them are countless “recruits” or investors who have entrusted their money to the scheme, hoping for extravagant or better-than-average returns.
“Recruits” at the bottom of a pyramid scheme pay money to belong to it, which they are told is a form of fee or investment, but who have nothing to sell but the same kind of incentive to even lower strata of “recruits.” Investors at the bottom of a Ponzi scheme fall victim to the mere illusion of stability and legitimacy: a flamboyantly maverick, but respectable-looking CEO, lush corporate offices, in-house account managers, regular but fictive account statements, glossy marketing materials, conferences in exotic locales, and so on.
“A pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, often without any product or service being delivered….Pyramid schemes exploit greed and gullibility. A successful pyramid scheme combines a fake yet seemingly credible business with a simple-to-understand yet sophisticated-sounding money-making formula.”
Both types of schemes must, by their nature, reach a “saturation” point; in the pyramid scheme, when there are more “recruits” than there are buyers of products or services to sell (if any); in the Ponzi scheme, when investors call for their money or attempt to close their accounts but learn that their money was never invested at all but siphoned off to the Ponzi’s personal accounts which pay genuine interest or dividends. Pyramid schemes crash when reality catches up with them because the frauds are too successful; Ponzi schemes crash when their victims exercise their volition by either wanting to cash in on their investments or when they suspect that their investment performance is too good to be true.
Unlike the government scheme, however, pyramid pharaohs and Ponzis are not motivated by altruism, but by a desire for the unearned.
The primary motive behind the government’s scheme, which is a vast, seemingly opaque combination of the Ponzi and pyramid models, is not greed, avarice, or even the “quick buck” (the latter except through inflation of the currency, when a government takes advantage of prices before it causes them to rise), but rather power. As the pyramid pharaohs and Ponzis fake reality in order to steal from their duped victims, politicians strive to keep reality at bay, that is, to postpone or delay the consequences of their past and current policies. They fake reality by blaming any financial crisis on anyone but themselves, usually on “unfettered“ capitalism (and there has never been a time in American history when it wasn’t fettered). Their role as “confidence men” is to persuade everyone else of it and to call for an expansion of the scheme, to assume more powers in an attempt to correct a crisis of their own making, literally with their fingers crossed. (“I need wider powers!” demanded Wesley Mouch in Ayn Rand’s prophetic novel, Atlas Shrugged.)
The magical incantation largely responsible for it is the phrase the full faith and credit of the U.S. government. “Faith,” of course, is not a means of cognition or a vehicle of rational certitude. From the first time I read that phrase, I distrusted it because of the term faith. As for the term credit, in fact, the government has no such thing, since rarely has it been able to meet all its fiscal obligations, legitimate or otherwise. Originally, in Article IV of the Constitution, the phrase applied to the interstate relationships regarding “public acts, records, and judicial proceedings.” Section 2 of that Article declared that all citizens would be protected in all states by the same federal but presumably objective laws.
But the phrase has, over time, come to apply to any debts the federal government contracts, as detailed in Article I, Sections 1 and 2:
“The Congress shall have the power to lay and collect taxes, duties, imposts, and excises, to pay the debts and provide for the common defense and general welfare of the United States….
“To borrow money on the credit of the United States….”
The only “credit” the government of the United States should have theoretically is a balanced budget, a genuine surplus, and no outstanding debt. But, it hasn’t met the first two conditions in decades, if one applies the literal meaning of the term credit. One investors’ site says that the phrase full faith and credit is used:
“…to describe the unconditional guarantee by one entity to back the interest and principal of another entity’s debt….It is generally accepted that the U.S. government will never default on its loan obligations. The full faith and credit of the U.S. government essentially confers risk-free status to securities such as U.S. Treasuries.”
The first entity is the taxpayer; the second, the federal government.
It is hard to communicate the magnitude of the government’s debt and the scale of what it has committed itself to in terms of what it owes and will owe in the way of welfare state legislation, and what it must control, smother and destroy to even attempt to fulfill the commitment. The U.S. government has, in fact, repeatedly defaulted on its loan obligations, that is, has been unable to pay out the principal and interest on all its debt instruments. Congress has solved the problem by faking reality and regularly raising the official debt limit. In doing so it has merely perpetuated the debt and indefinitely mortgaged the productive sector over the course of generations.
“The United States total public debt, commonly called the national debt…is the amount of money owed by the federal government…to holders of U.S. debt instruments. Debt held by the public is all federal debt held by states, corporations, individuals, and foreign governments, but does not include intergovernmental debt obligations or debt held in the Social Security Trust Fund….As of February 12, 2009, the total U.S. federal debt was $10.76 trillion.” (Italics mine.)
U.S. debt instruments are Treasury bills, bonds and notes, considered to be “risk-free.” And the key thing to grasp, but which has not been grasped by any president, Federal Reserve chairman, or Secretary of the Treasury, or by any politician or news anchor that I know of, is that it is the productive private sector that gives any value to the fiat money printed and minted by the government. Because the government can simply print more money when it believes it is necessary, by implication it grants itself more baseless credit. That is the secret, unnamed belief and mystique behind the current usage of the full faith and credit of the U.S. government.
And if the government grants itself credit, then it is giving itself what doesn’t really exist. I could just as well arbitrarily say, with only $1,000 in the bank and $3,000 in credit card debt, “I’m giving myself a $1 million line of credit; think I’ll go out and buy myself a Jaguar and a bungalow in Antigua.” Well, I wouldn’t get very far with the car dealer or the real estate agent; I haven‘t the power to fake reality. But if the government does the same thing by being billions in debt and then by granting itself a higher line of credit in trillions, that action is beyond question.
Money “invested” — or “borrowed” by the government — in various government securities is money that could have been invested in the creation of productive goods and services, but instead is used to help fund the constant, unending cycle of indebtedness of the federal government, which always counts on the private sector to “do something.” It asks that sector to work and produce unceasingly as an indentured servant of debt.
Another element in this “confidence game” is that foreign governments have bought the same Treasury securities as have American citizens. Servicing the debt represented by these securities not only increases U.S. indebtedness, but keeps foreign governments, most of them operating the same Ponzi/pyramid schemes on their own citizens, in power and creates for them the illusion of solvency, as well, and allows them to continue their own irresponsible fiscal and domestic policies. They have always been able to count on the strength of these Treasury bills to offset their own indebtedness. Now they are feeling nervous.
As of February 17, according to the Treasury Department and the Federal Reserve Board, Mainland China holds the largest amount in U.S. government securities, some $696 billion. Secretary of State Hillary Clinton recently assured the Chinese government that the U.S. intends to honor those securities. The grand total of U.S. securities held by foreign governments comes to over $3.12 trillion. What is worrying these governments now is the possibility that, just as individual owners of Treasury bills are subject to the risk that our government may default on its obligations and concede bankruptcy, they also run the same risk.
A further peril in this practice is that the ownership of such securities allows such governments to exert an influence on U.S. policies. For example, there is a growing symbiosis between the U.S., which is becoming fascist, and Mainland China, nominally communist but fundamentally fascist, whose government, especially its military, is also deeply invested in its “capitalist” economy. In terms of policy influence, the next biggest group of governments holding U.S. securities, totaling $197 billion, is most OPEC members, including Iran, Saudi Arabia, and Venezuela, outspoken enemies of the U.S.
So, where are all the $787 billion and $75 billion and federal intragovernmental billions to come from, not to mention the money needed to service the billions in Treasury instruments? From the productivity of America’s private sector, such as will survive the regulations, controls, inflation, and other government interventions and actions, and now the current onslaught on it by an overtly fascist administration. And when the private sector, at the bottom of the Ponzi/pyramid, is utterly prostrate and unable to produce, when the law of diminishing returns reaches zero, then what?
That is when things will grow ugly. Choose your own scenario, but keep your powder dry.