Technically a Ponzi scam consists of paying income out of income.
Say ten people each invest £100,000 because they are promised 20% return per year and nothing else happens (ie the £1m is kept under the bed or invested at 0%)
Say the manager takes out the usual hedge fund 2% management fee and 20% of the 20% fake "profits".
At the end of Year One the punters get £200k, and the manager gets 2% of £1m plus 20% of £200k ie £60k.
So £260k is distributed, and all of it is Capital.
Same in Year Two
Same in Year Three
The shit hits the fan at the end of Year Four when it's all gone.
But I cannot see how such a Ponzi scheme (the above being my understanding of a Ponzi scheme) is anything other than paying Income from Capital....
ThatBritGuy:
Money markets are inherently and unavoidably Ponzi-ish - stock prices can only increase when people throw money at them, which means more money is entering the system, which means that payouts can appear to increase.
Money created by credit institutions as interest-bearing debt is arguably as dubiously based as Ponzi schemes, yes.
As long as there's some connection to real wealth creation, this can work, for a while, although it's not a healthy way to run things. As soon as markets switch to speculation and a bubble appears, cash floods in - and then mysteriously disappears as the bubble pops.
As long as there's some connection to real wealth creation, this can work, for a while, although it's not a healthy way to run things.
As soon as markets switch to speculation and a bubble appears, cash floods in - and then mysteriously disappears as the bubble pops.
I would argue that the key difference lies between
(a) credit creation for the purpose of building new productive assets - where bankers such as Jerome fulfil a valuable role; and
(b) credit creation for the purpose of purchasing existing productive (or hopefully productive) assets, which is where Bubbles and Ponzi schemes come in. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
(b) credit creation for the purpose of purchasing existing productive (or hopefully productive) assets, which is where Bubbles and Ponzi schemes come in.
Surely that should be net credit creation, right?
If I borrow a hundred thousand € to buy stock on the margin, and the dude I buy it from uses that 100k € to re-pay a broker's loan, then Nothing Happens(TM) to the money supply.
The problem is when the dude I buy the stock from rolls over the loan and uses the money to buy other stocks - because then new money is infused into the stock market, which causes stock price inflation (unless a commensurate amount of real value is added to the stock market through IPOs).
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
I think the difference is more that speculation is - jargon aside - designed to make a quick buck from thin air.
The commodity that's being traded isn't income or ROI, it's faith in possible income which may - speculators hope - be created by the perception of possible profit by other investors.
In other words it's a stampede of greater fools, all of whom hope that they're not the ones buying at the top.
Buying and/or investing in existing assets isn't inherently speculative if it's managed in a sane way, and expectations of returns are reaonsable.
Someone I was talking to recently was regretting that she hadn't spent 20k on an existing cheese deli business which had been doing well on her high street.
There's no bubble there - just a business with an unspectacular but steady turnover and which should, recessions aside, repay an investment in a reasonable time, and then produce a profit.
A bubble would happen if the store became incredibly fashionable and decided to cash in by selling cheese deli futures.
With the right PR, the futures would spiral into the stratosphere and then crash. The buying and selling of cheese would be irrelevant - the actual commodities driving the price of the futures would be hope, optimism, guile, greed and wishful thinking.
