While Ponzi schemes can take many forms, they are often structured as a "debt ponzi scheme." In this variation, the promoter issues debt instruments, such as promissory notes or bonds, to investors. The "returns" they pay out are then framed as interest payments on the debt.
A real-world example of this is a case where individuals were invited to invest in "consumer debt portfolios" of defaulted loans. They were told their money would be used to purchase these debts, which would then be collected on and resold for a profit. In reality, payments to investors were made with money from subsequent investors, not from any actual debt collections.
Taking into account, government bonds, student debt… Someone needs to be going into debt to pay old debts from before with new bigger debts. Can this ever end?
Are we in a debt ponzi scheme?
byu/CaregiverOriginal652 ineconomy
Posted by CaregiverOriginal652
6 Comments
I think the same thing. They keep telling me the system is going to come crashing down but it feels it never does. There’s always some type of bailout, loophole, or just more debt to cover the debt. It’s all a big scheme.
Your continuing labor is what generates actual wealth. So no, technically not a Ponzi scheme. However, at a very basic lever, debt = profit. This is a direct correlation. Rich countries are rich partly because their high earning citizens generate more debt. That is to say, for one person to make a million, others must lose a million.
Banks also engage in fractional reserve banking. They will loan out the same money to multiple people, and as is if by magic, the money supply has increased.
There’s also inflation, which will shrink the state’s debts over time.
Government and consumer debt often involve **rolling over debts** by issuing new bonds or borrowing more money, especially to pay interest on existing debt, which superficially resembles a Ponzi scheme. In a **debt Ponzi scheme**, old debt interest or principal payments are made by issuing new debt rather than from productive economic output. Governments borrow by issuing bonds, and to pay the interest on existing debt, they often issue new debt, effectively “rolling over” debt. This “money printing” is effectively creating new claims on economic output to pay old claims, a key Ponzi dynamic. Fiat currencies have historically failed because of this unsustainable process: governments print money to pay debts and fund deficits, inflating the currency. If you don’t own assets, you are going to get bend over backwards get clapped on the daily.
Yes. It’s an intended coercion feature by central bankers who are in control of politicians and governments.
“Give me control over a nation’s currency, and I care not who makes its laws.”
Mayer Amschel Rothschild (1743–1812)
Wages are not keeping up with the cost of living (aka “real wage stagnation”), and that is a fast growing already very significant problem. Debt is increasingly necessary to fund consumer demand, filling that gap. Debt will have increasingly a lot of room to grow as consumers earn relatively less.
That gap is created by institutionalizing market failures, primarily to enrich rent seekers. The costs in terms of labor and capital, to produce everything that makes up the cost of living, has been getting cheaper year after year (almost uninterrupted), longer than living memory.
Is the debt a ponzi scheme? Really it is more a part of a broader fixed asset ponzi scheme, that enclosed the commons and places inheritance as gate keepers of jobs, and economic and social mobility.
You’re kind of right in that in a ponzi scheme new investors’ money goes to pay for promised returns to older investors, but in the government’s case, newly created money is going toward paying older debts.
It’s like getting a cash advance on a new credit card to pay off debt on older credit cards. In this example, and here is where the problem arises, the government can create its own card cards. It simply issues new bonds to pay off the debt it owes on older bonds.
A credit card holder could go on getting new cards to pay off old ones if they could get away with it forever and never have the “ponzi scheme” come crashing down. Of course, that’s not going to happen because there are limits and safeguards to prevent it.
In the government’s case, though, there are no debt limits except what Congress sets, and as we know, Congress allows more borrowing year after year so that today, the U.S. debt-to-GDP ratio is about 125%, meaning we owe more than we produce.
If the US government was a person, I think we could tell that person that they are in slow motion bankruptcy. But since the government can continue to borrow more and more, God only knows where it ends.