Archive for December 30, 2009

Modern Ponzi Schemes: An Introduction

December 30, 2009 Leave a comment

The last couple of years has marked a resurgence in public understanding of ponzi schemes. Whether it is individuals (Madoff) or institutions (federal reserve, ‘wealth’ management, underfunded pension plans, housing bubbles and various other bubbles) there is no doubt that people are becoming more cognizant of the effects of a particular series of actions/ choices originating in the late 1970s-early 1980s. However ponzi schemes have been a feature of human history, culture and civilization since the beginning. Indeed it is not possible to understand the success of ponzi schemes unless one understand the mental calculus that enables them.

If you want a brief ‘official’ understanding of the concept and history of ponzi schemes, the following links are useful: Ponzi Schemes (wikipedia), List of Ponzi Schemes (wikipedia) and the similar Pyramid Schemes (wikipedia).

While the preceding links give you a good basic introduction to the concept, they tend to concentrate on money related ponzi schemes that failed. Discussions about successful financial ponzi schemes and non-financial ponzi schemes are either absent or mentioned in passing. This attitude gives the casual reader an impression that ponzi schemes are never too successful when the converse is true.

At their core, all ponzi schemes are based on the following basic concept:

A socially ‘respectable’ group convinces a much larger group of persons to accept their control (or give them goods/ services) on the promise of future benefit derived from esoteric concepts which these group pretends to understand and control.

The real kicker is that these socially ‘respectable’ groups are neither knowledgeable nor in control of what they claim, and depend on sophistry and various frauds to perpetuate their illusions of power over reality.

It is now obvious that many ‘respectable’ institutions and accepted practices are in fact just ponzi schemes, albeit successful ones. Whether we are considering the investment decisions of your ‘wealth’ management expert, doctors treating diseases with ineffective, harmful (and expensive) modalities and protocols, religions promising an afterlife if you follow their teachings and priests, universities that charge you over 50k-200k for a degree that promises nothing, ‘experts’ who can predict trends/ futures, intellectuals who pretend to understand their field very well, but resent explaining it to ‘outsiders’.

All of the above examples, and ponzi schemes in general, suck away money and resources from people (and ideas) that actually have a non-zero chance of improving the status quo. They cause heavy malinvestment, sabotage efforts to correct it and help perpetuate the status quo which is just another facet of zero sum thinking and behavior.

The mental calculus that motivates the followers of such ‘faiths’ is equally interesting and also based in a zero sum view of the world.

People follow such groups because they think that such actions will allow them to gain advantage over others, a view distinctly based in a zero sum mentality. They do not care about the validity of their ‘priests’ beliefs, nor question their actions (or honesty). Indeed, the same people who seek an unfair advantage over others, also believe that leaders of these cults have the best interest of their followers at heart. The irony of this mentality is hard to miss.

Followers rarely question, contest or disobey cult leaders because:

1. Accepting that they have been conned is painful.
2. They want to avoid ostracization, loss of social status etc.
3. Hope of rising up through the ranks (of their cult) is a motivator.
4. If feels better to pretend conning somebody else, even if that is not the case.

A fifth reason is the topic of another discussion.

Most people find it necessary to believe in an extrinsic ‘ordered’ universe with independent meaning in order to justify their existence.

There will be many posts on this topic (or related to it) in upcoming weeks and months.

Update: My next post in this series is now up- Modern Ponzi Schemes: Underfunded Pensions

Thoughts on Zero Sum Behavior- III

December 30, 2009 9 comments

In a previous post on this topic I had promised to trash a few more industries that pretend to be productive and capable of creating wealth. The difference between wealth and money will however be tackled in a future post.

Law and order industry: A holy cow of our age, and one many commentators avoid criticizing for fear of being considered less american or non-mainstream. This attitude itself should serve as a warning about its true nature. Any branch of the government that evokes such a response cannot be considered a public service or good. People freely criticize departments of the government that deal with more essential services such as water, electricity, sewage, EMTs, fire or even the judiciary. Heck, people will criticize their elected head of state or soldiers who fight for their nation with more enthusiasm.

So why the absence of open criticism about the “law and order” system. Is it not supposed to protect us from the “evildoers” amongst us? Are the laws they enforce not written and approved by elected representatives? Then why are they treated with the deference accorded to “domestic security agencies” in totalitarian regimes? Need I say more on that subject? Whose interests are they serving anyway? Maybe just perpetuating those of the ones with power?

Many whites traditionally supported the “law and order” system because in the past it hurt non-whites far more than whites. Essentially a form of ‘beggar thy neighbor’ and lynching became unfashionable. However the expansion in this system since the 1980s has made it bigger with each year. Ultimately it outgrew its old hosts (non-white people) and had to expand to non-traditional hosts (whites) to keep growing.

Given the number and percentage of people incarcerated or paroled, are americans intrinsically more violent and criminal? Or is it just another cynical ploy to make soccer moms and traditionalists feel ‘safe’. How many people are in the penal system because they cannot get out of it (for a variety of reasons) and what are their offences (mostly non-violent). What is the social expediency of using so much personal and money to prosecute crimes that cost a fraction of that sum? Why do many blue collar towns with outsourced manufacturing welcome prison construction? Our society celebrates you if defraud the taxpayer of billions and trillions and prosecutes you if you steal a few hundred dollars, or make money in victimless ‘crimes’. When is the last time a dope, crack or meth dealer destroyed your life savings, charged you 10k for a broken finger or fired you from a job that allowed you to support your family for 20 years?

Is your fear of a desperate non-white or poorer white worth it? Why not decriminalize victimless ‘crimes’? Why not stop imposing your own morality on others? Is the feeling of control and domination worth it? Who is going to pay their ever-increasing salary, benefits and pensions? Your kids and grandkids? with what job? Why not just give even the poorest slacker a lower middle class lifestyle? It is not going to cap your lifestyle.. just make him much less likely to steal from you.

EPA and other enforcement agencies: These agencies make and enforce laws and regulation without being elected. They write their own funding, and what do they do?

Has anything more than basic enforcement of laws and regulations made your life safer or happier? Nobody begrudges meat inspection, preventing factories from dumping toxic waste in lakes or policing drug companies. But do these agencies perform their basic roles effectively nowadays? I would point out that such useful enforcement is actually the minority of their current roles.

They spend most of their effort and budgets on projects that are based on whim, charisma and poor science than reality. Their modus operandi is creating scares based on exaggerations to justify a bigger budget, more jobs, better benefits and bigger pensions. They, if anything, hinder good and rational science.

I do not have to give you a long list of scares that never materialized or were blown out of all proportions- just remember any 6-month period since the late 1970s (or even earlier). Who benefits from them? certainly not YOU. They take away resources from real innovations, stifle others and generally make your life more cumbersome and poorer without any compensatory benefits. I am not against regulatory agencies, merely their lack of accountability and unchecked power.

Contractors to the government: A group that revels in Ayn Rand worship and lip service to free enterprise while sucking at the teat of taxpayers and protecting their turf. While I do not seem them as particularly evil parasites, they have reached my list for two reasons: Hypocrisy and facilitating malinvestment.

The hypocrisy of such free enterprise supporters is almost unmatched, considering their actions. Only banksters can match them in the department of cognitive dissonance. It is easier to forgive honest shysters than hypocritical shysters. These people spend ever waking minute of their life trying to come up with the next rent-seeking type scam.

Which brings me to next reason I have singled them out: causing malinvestment. While intentional malinvestment and scams cannot be eliminated, the current levels are not compatible with a functional society for any extended length of time. Projects in China and India are done with more diligence and fewer cost overruns than we are accustomed to. The depression-era infrastructure built in the USA or pretty much everything built upto the 1970s could not to be built today because of our patronage of such shysters. While they have always existed, we had ways to keep them relatively honest (in the past). Not anymore!

So I will repeat the assertion from my previous post on this subject:

The biggest parasites are rent-seeking privileged whites, but the average white person cannot/ does not want to accept that reality. Looking at the world in that manner would pose even more inconvenient questions about themselves, ranging from the welfare-like nature of most government generated jobs that employ them such as the defense sector, health care, home building/ selling, contractor to various levels of governments, the law and order system, jobs created by tax breaks to corporations, peculiar accounting rules etc. Furthermore many government programs that have benefitted whites such as SS, Medicare, GI Bills, post WW2 house buying programs are a form of affirmative action/welfare. People do not like looking in an undistorted mirror, for they fear what they might see.