Governments are pyramid schemes

Journal roman_mir's Journal: Governments are pyramid schemes 3

Journal by roman_mir on Friday May 07, 2010 @08:30PM

I want to put this into the journal not to lose it, my own comment, took too long to write, it's about the governments being pyramid schemes and going bust.

original comments on the story about the market sell off.

Going to sleep in a moment, it is past 1am, I always stay too late and my head hurts, but no worries, lets look at this step by step.

You'll have to define what you claim to be a pyramid scheme, then. From what I've heard for definitions, SS doesn't fit (nor the government as a whole).

A pyramid scheme is a way to organize an enterprise, which relies on attracting more and more participation into itself, where participation means giving something, giving money for example to the enterprise, which then allows the earlier entrants to take out more of what they gave and relies on the later entrants to finance the earlier ones. If there was an infinite number of entrants, this enterprise could in theory continue indefinitely, paying out more than what was supplied to the people in the ever thickening chain. The progression is algorithmic, it could be geometric or cubic, but is is certainly more than linear. It is not possible to have a real pyramid if the number of entrants on the bottom is equal to the number of those who exit at the top, otherwise it would be a pipe and it would not be possible to give out much more than was given in to any of the participants. What is not important here is how exactly the people are convinced to enter the enterprise and to provide the money while they are at the bottom.

Social Security is a pyramid and any Government that regulates money supply is a pyramid.

SS is a pyramid because when it was originally set up, most people who had to pay into it only had to pay for a very short amount of time but they were guaranteed a very nice outcome. This is easy to observe, the first person to get a monthly check from that system, Ida May Fuller paid around 24 dollars into it. She paid the payroll taxes for 3 years to pay that 24 dollars. She got about 23 THOUSAND dollars out of it before she died. Corrected for inflation over the years, the payments made to the recipients have decreased but the payments that were required to be made into the SS were always raised, never decreased while the age of retirement has consistently moved higher up (there are tricks there, if you were born between such and such date, your retirement age starts at 62, for other dates it's 65, 67 and then at 70).

Most important thing to understand is that the earliest of the entrants got the biggest gain, with each subsequent generation paying more into the system and getting less and less out of it and in money that is much more inflated.

The entire Government runs like a pyramid when it prints bonds and t-bills and then prints more to finance paying out the interest payments needed to cover the cost of the earlier sold bonds and t-bills. Same principles apply as to the clients of Bernie Madoff, he could easily take the place of Bernanke, Greenspan or Geithner, no reason for the guy to rot in jail, he was, after all, doing what the Governments are doing. But of-course, just like with printing money itself, like with a powerful military and taxes, governments do not want citizens to have the right to do any of the thing it does everyday.

The bonds and t-bills work the same way as the mortgage financing. There are people with capital (be it countries, banks, independent brokers and even private retail customers) who want a stable, guaranteed return, even though it is only supposed to cover cost of inflation really. What actually happens is that the Government does not increase taxes enough to cover its rising costs. Governments don't shrink, remember, they only grow, so the costs rise.

Governments do not want to be honest, so they do not raise the taxes to the levels that are really needed to cover the costs of their spending, so they print money (inflation) and print and sell papers instead (credit bubble). As long as the economy is strong, this can continue, because the people in this pyramid really believe that this can go on as long as the country stands, and who will believe that US can fall as an Economic empire?

But they are as wrong as the people who believed that the houses can go up in prices indefinitely. Think about the fact, that the housing bubble was blown up by the ideas pushed by the mortgage brokers, who got paid per sold mortgage, who had incentives to falsify people's credit information, to falsify appraisal reports to make it look like the mortgages were secured, that there was enough equity and assets, that the houses could be just taken and resold at always higher values even if the mortgage payments were not made any longer. Of-course the government lending standards lead to this, that's what Free Money does and Free Market prevents. Free Money lent to banks at no cost are easy to gamble with while in a Free Market a bank that would operate this recklessly would be destroyed because of all the bad debt. Also Free Money allows people to trade SIVs without caring about their real values ESPECIALLY when Government GUARANTEES the mortgages, that's where Fannie Mae and Freddie Mack come into play. US Government did not bother to regulate the monsters they have set up themselves, which eventually caused the brutal SIV trading, which never had a chance of being paid back.

The same thing is happening with the bonds and t-bills. Those are Government Guaranteed after all, who'd think that they could ever go bad, right? Except, as I said, the Government never gets in any of the taxes the amounts that it needs to cover its expenses, it pays for its expenses by printing and by borrowing through these papers. But they never have any other income.

Understand this: Government does not produce value to back up the money, the bonds, the t-bills it prints. Governments have no way to produce value at all, they have no money, they really are a burden on economy and are supposed to be paid through some form of taxes only. But they overstep that because the politicians want to be reelected, they want the Government jobs for life, so they sell the favors to the Corporations for regulations that remove competition, they do not raise taxes because that can cause their reelection, they instead simply vote to raise the spending/borrowing ceiling every time that issue comes up.

This is true of most if not all governments in the world. But while a country that has production and manufacturing and has a good trading balance and can really feed itself and cloth itself and put a roof over its own head and do all of that itself, that country can afford the burden of a government, a country that lost that capacity cannot.

Greece, Portugal, Spain, Italy, Estonia, Latvia, Lithuania, Ukraine, Iceland, Ireland, Finland, really most of the EU countries save for Germany behave this way. Even UK and France are in this trouble. But so is USA and the US has a different problem. US Dollar is the reserve currency, so it is more difficult for the world just to drop it. And that is the only reason

That is the ONLY reason that USA is not bankrupt at this very second, right now.

This is inertia. Inertia by China, Japan, Germany and other countries and banks and funds that hold US bonds and t-bills. This is going to come to an end quite soon now, I do not expect it to last past Obama's first term, I think maybe even this year it will start to unravel.

I see that you believe that USA being able to print the USD is the thing that will save the country from bankruptcy and everything will be OK, that is not how it will go down.

The problem with USA is exactly that it is printing the dollar and it will print the dollar to buy back the bonds and t-bills instead of honestly declaring a bankruptcy and allowing the creditors to get not the full nominal value of their useless paper in more useless paper, instead of dealing with the investors fairly and saying: we will pay back in real money, we will not cause a hyper inflation, but you are NOT getting 100 cents on the dollar, you are getting something like 10-15 cents, deal with it, you should not have behaved so stupidly by giving us all that money.

Instead the USA will print itself out of this. But there is a problem with this FOR the USA. China will shrug it off, so it will lose a Trillion, OK. So will Japan and Germany and the rest. But the problem with USA is that there is a huge trade imbalance. USA has very limited manufacturing and production at this point and the countries that will lose money on US will not want to sell anything to US for dollars ever again. USA will have the issue of not having production to feed/cloth itself, it will not have enough energy to have the standard of living that US is used to. Eventually it will restructure, but as they say 'in the long term we are all dead'. Eventually does not bode well with people, who are faced with devalued money, faced with their retirement money being wiped out. Who are faced with shortages and inability to buy food.

Yes, the devalued USD will cause a collapse in the internal trade as well, as the US farmers will not want to sell food, US oil refineries will not want to sell gas for USD just as the Chinese will not want to sell anything for that paper.

This problem is only but an opportunity for a Government to become even bigger though, isn't it? Total price controls.
Total exchange controls (you won't be allowed to own foreign currencies or gold)
Martial Law - due to increased fighting for resources, the crime will skyrocket, people will be forced to behave, how will they be forced? Well, I believe Nixon did not have a problem killing a few students sometime back, when they protested against conscription and fighting in Cambodia, this will happen again.
Total controls over the means of production, I am talking about collectivization of the farmers, in the best traditions of the former USSR.
Closing of the border, not to allow young people to escape, not to allow the remaining capital to escape.
Arresting people's bank accounts abroad and at home.

Basically I expect the US to become what USSR was only not through any ideology based on some political agenda, but simply through a very natural process of the politicians doing what they do daily and people behaving how they do always.

You are asking - If the Governments are so bad, how come we have them?

It's a great question, but understand that MOST Governments in the world are not based on any ideological principles of the people, who they govern. In the UK it is a traditional democratic dictatorship that was born out Monarchy and during the Kings and Tsars nobody asked your permission to govern them, it was the strongest, the most canning etc.

Today it is very similar just in different clothing. People need JUDGES, there is a NEED for a well established, fair and balanced ('blind') Justice system. That's where Governments really are needed. That and protecting the countries against military invasions.

Everything else that Governments end up doing leads to the destruction of the society at some point. Understand this: In the history of humans there was never a single time yet that a country that was once an Empire did NOT fall down. It is history it is true, it is inevitable, it is people.

That's how we are, the Governments do what they do because they consist of people and the people who they govern are not educated, not interested to keep the Government only where it belongs and nowhere else.

I compare this to a Boom/Bust cycle of sound Market: Governments Boom and then they Bust and so it goes in circles.

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