Updated on 09.04.14

Personal Finance 101: On Ponzi Schemes and Other Things

Trent Hamm

Understanding Ponzi Schemes and Making the Right Investments

personal finance 101One of the biggest financial stories of the last month or so was the revelation that Bernie Madoff, a legendary stock trader if there ever was one, had perpetrated a giant Ponzi scheme on investors, bilking them out of fifty billion dollars.

Personally, I found the story fascinating, and apparently many of you have as well, because I’ve received a ton of questions and comments about Madoff and Ponzi schemes and pyramid schemes. Here are some of my thoughts on the most common questions brought up by readers, especially in terms of understanding what happened and what impact it has on you and your future moves.

What’s a Ponzi scheme?

Most of the descriptions of Ponzi schemes that are floating around out there in articles are really confusing, so I thought I’d start off with a clear example of a Ponzi scheme.

Let’s say I wanted to start a Ponzi scheme to get rich really quickly. I’d put an advertisement out there saying that I had an investment opportunity that would return, say, 25% of your investment each year, guaranteed. Obviously, that’s a claim that I’m not going to be able to back up with any real investment, but it’s a strong enough claim that I’m likely to get a few people who want to invest.

Ten people invest in my scheme the first year at $10,000 each, giving me $100,000 to work with. At the end of the year, I actually pay out that 25% to each investor, sending them checks for $2,500 each, leaving me with $75,000. These ten people are amazed by the success, so they each tell five friends about the scheme, plus my original ad draws in ten more people.

So, at the start of year two, I have fifty referred people into my scheme and ten more from my ad. They send me $10,000 each, giving me $600,000 to add to my account, leaving me with a total of $675,000. I keep promoting, and at the end of the year, I write seventy checks for $2,500 (that 25% return to each investor), totaling $175,000. That leaves me with $500,000.

Now, during that year, I’ve managed to attract 100 more customers, who send me $10,000 each at the start of year three. I now have $1.5 million sitting there, but at the end of the year, I need to pay out $2,500 to 170 customers.

I don’t want to do that, so I take that $1.5 million and vanish to South America. Of the investors, the original ten got 50% of their money back, then the next sixty got 25% of their money back. Everyone else got nothing.

So what is a Ponzi scheme? It’s one where you promise rich returns in order to get a lot of investors into your scheme, then you pay “returns” to the early investors out of the initial investments of later investors, until it looks like you’re going to be paying out more than you’re bringing in, at which point you close up shop and disappear with the loot.

How did Madoff get away with this kind of scheme?

Madoff’s primary tool for making the scheme work was the respect from others he had built up during his long career on Wall Street. He had been the chairman of NASDAQ and was intimately involved in the organization and technology involved in setting it up. He had also been running a fund for many, many years and had discussed at length his investing strategies (which were pretty complicated).

At some point along the line, Madoff began to not see the success that he had been claiming with his investing strategy and quietly began to convert things into a Ponzi scheme. He began to focus heavily on marketing his investment fund, attracting new investors all the time, and when these people would invest, he would use that money to pay out to earlier investors who were leaving the fund. So, for example, if he were taking in new investments and could actually return 8% on them, he was claiming a 12% return and actually paying that out to investors who were leaving the fund.

It’s easier to think of this in raw numbers. Let’s say you have $100 of someone else’s money and you have that invested somewhere where you can earn 8% on it. You tell that person (and everyone else who will listen) that you can earn 12% on their money. After the first year, that initial person wants their $100 back (with that 12% return), but five more want to invest. You take the $100 they invested, plus the $8 you actually earned, plus the $500 the new investors gave you, and you pay out $112 to the original investor. Now you have five investors, but you have only $496 and it’s only earning 8%. Next year, four of those investors want out with their $112 each (total $448). You have only $535.68 on hand, but you pay out the money. You actually only have $87.68 on hand right now (earning 8%), but the lone remaining investor believes he has $112 with you (earning 12%). It won’t be good when that last investor comes to collect his money.

That’s eventually what happened to Madoff. When the stock market tanked in late 2007 and 2008, investors wanted their money out in droves and he simply ran out of money to pay the inflated returns he had been promising everyone because he wasn’t actually earning those returns.

Can any of this possibly affect me?

Madoff’s scheme won’t directly affect you unless you were invested in the scheme.

So why should we pay attention to it at all? It’s a stark reminder of the danger of greed. Madoff got greedy with his own fund and kept seeking more investors so he could keep living the high life. The investors themselves were greedy because they were trying out investments that they didn’t really understand just in the hopes of getting a big return.

What warning signs should I look for?

Here’s the big one: if someone is promising you returns that blow away what can be found easily in the S&P 500, don’t believe it. They’re selling you something fishy. Investing returns in the double digits do not grow on trees, and if they’re guaranteed, something inappropriate is likely going on. Avoid it for your own safety.

That’s not to say you can’t earn returns higher than 10-15% or so – one certainly can. But a person is not going to find that return by investing in someone else’s investment package. You’re much more likely to find it in small events in your everyday life. For example, a couple years ago, I turned a nice and quick profit reselling Nintendo Wiis when they were very hot, earning far more than a 10% annual return. However, such opportunities aren’t sold as investment packages.

Similarly, if you don’t understand how an investment works, don’t invest in it. This is an investing rule I always follow. The only stocks I purchase are very broad mutual funds that basically amount to investments in the idea of American business as a whole. Why? I understand how they work. I don’t invest in individual companies. Why? I don’t have enough information to truly understand how they work. I don’t invest in non-index mutual funds. I don’t invest in hedge funds. I don’t invest in anything I hear about from friends or acquaintances.

If I don’t know how it works, I’m trusting someone else to understand it for me – and, more importantly, I’m trusting that person to always have my best interests at heart. With people like Bernie Madoff out there, it’s not a risk anyone should take.

Good luck!

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  1. Chapeau says:

    My personal favorite Ponzi scheme example is one that most Americans are familiar with: Social Security. While the promised returns aren’t jaw dropping, they’re certainly paying out money faster than it’s coming in. With at least 33 years to go until my full SS age of 67, I’ll consider myself very lucky if I get enough from Social Security to buy myself a Happy Meal once a month.
    Great article!!

  2. Miss Thrifty says:

    Thanks for the explanation – very helpful.

    From what I’ve read, the original Mr Ponzi sounds like quite a character!

  3. Jar says:

    Selling Wii’s? Why not unicorn princesses?

  4. Trevor - 14 Year Old Money Blogger says:

    Wow awesome article. Especially of the ponzi scheme that happened recently.

  5. Brandon says:

    Great article.

  6. Brooke says:

    You don’t have to actually be an investor to have been hit by this disaster. I am a nonprofit grant writer, and we have seen at least one, if not more, potential funding source disappear because the foundation’s assets had been invested with Madoff.

  7. Johanna says:

    Maybe something that’s worth addressing is how the housing bubble (and other bubbles too) was like a Ponzi scheme. People became willing to pay more and more for houses based primarily on the belief that even more people would be willing to pay even more for the houses in the future. The people who sold (or cashed out their equity) while the market was on its way up got a lot of money, which encouraged even more people to get in on the scheme. But when the pool of new investors started to thin, the scheme started to break down – and people who want to get their money out now find that they’re in trouble.

  8. Kevin says:

    25% of $100,000 is $25,000, not $2,500. So you wouldn’t have enough to pay all 10 of your original investors their 10%. Some would have to get shafted, or you’d have to convince them to “let it ride,” or you could use borrowed money. The rest of your explanation is pretty good though.

  9. Brad says:

    What people don’t realize is that Social Security is essentially a Ponzi scheme. It relies completely on more people coming in than are being paid. This is great when you have a growing base of wage earners like the Baby Boomers. It’s going to get interesting when they start demanding their money.

  10. Kevin says:

    Doh, I misread. There needs to be a “delete stupid comment” button. :)

  11. kevinf says:

    So is Social Security a Ponzi Scheme?

    It seems like the original recipients of SS got money without putting any into the system.

    From the SSA page
    Ida May Fuller worked for three years under the Social Security program. The accumulated taxes on her salary during those three years was a total of $24.75. Her initial monthly check was $22.54. During her lifetime she collected a total of $22,888.92 in Social Security benefits.

    So the people at the top of the pyramid win, but if somehow the SSA ever ends, then the current generation of workers get the short end of the stick.

    How is SS different than a Ponzi Scheme?

  12. Mike says:

    Sounds a little like Social Security to me…

    I really like the comment about not investing in what you don’t understand. I’ve heard that from Warren Buffet and John Bogle no less.

  13. Rick says:

    Actually, this will be hitting a lot of investors if it hasn’t already. Lots of mutual funds and 401k funds were indirectly invested in this by investing in some of the feeder funds, or were invested in mutual funds that invested in the feeder funds (or directly to Madoff.) The web of interlaced transactions is starting to unravel and will effect just about every aspect of the financial system.

    On top of that there is a very chance that the Feds will go for people who’ve cashed this out early on as Madoff’s investors sue to get their money back. So suddenly THAT money is going be pulled out of a lot of investments that may not be related to this scheme at all.

    The lawsuits alone could take years. I believe the ramifications of this will be felt for years and have a huger impact on the financial markets then the S&L scandals did. At a minimum average returns are going to be reduced severely.

    I would not be surprised to see some already shaky banks totally collapse under this.

    Check out the various NPR stories on this: http://www.npr.org/templates/story/story.php?storyId=98393250

  14. Michelle says:

    I’d be very interested to hear your take on Amway. I’ve always heard it was a pyramid scheme, and so I avoided it, so I’m just interested in your thoughts on it.

  15. Mike McMahon says:

    Here is the reason this works even for the casual investor. We get greedy. A close relative approachs you and tells that they made x% investment return and would you be interested. You ask what them what is the underlying business or investment. Then reply with something like, it is a company that is involved with some high tech angle or something plausible. When you ask for more, the relative replies that they really are not sure, they maybe even doing something illegal (drugs, etc) but who cares. I got my x% check yesterday and you have to do is give me $x,xxx and you will a get a check too.

  16. Brandon says:

    I agree with Mike. Social Security = Ponzi Scheme.

  17. sara says:

    thats great- i’ve been wondering what a ponzi scheme was, but hadn’t taken the time to find out. Thanks for the clear explanation.

  18. Movingonup! says:

    Some of the articles were a bit confusing. THanks for the clarification.

  19. EXCELLENT article which really helped me to better understand Ponzi schemes. It’s easy to get the basic idea behind these, but a more in-depth understanding is always helpful.

    I love it when bloggers go the extra mile to teach by example. It really helps. Thanks, Trent!

  20. John says:

    Social Security is the biggest Ponzi scheme there ever was. My contributions today go directly to the current retirees. There ought to be an “opt-out” option. I’m 27 and would gladly walk away from all of my contributions to date if it meant never needing to pay into it again. Nobody my age expects to see a dime of Social Security when they retire anyway. The Boomers will bankrupt it long before then. Oops, it’s already bankrupt.

  21. Anastasia says:

    If you’re investing in an index based fund, why choose a mutual fund over an ETF?

  22. The Personal Finance Playbook says:

    A lot of his investors were reinvesting their “returns” as well. That helped the scheme carry on for longer.

    A common pyramid scheme I have seen recently deals with buying products from an online source at a discounted rate and getting others to do the same. You build up as many people under you as you can. They make money in multiple ways, from thin margins on the products they force people to buy, from training classes they teach on how to market this strategy to other people, and by selling necessary “software.” My wife was recently pitched such a scheme on the plane. I was pitched a similar scheme, involving health drinks, when I was in college.

    Pyramid schemes are illegal in the US, and I think the right thing to do is to file a consumer protection complaint with your state attorney general. This can typically be done online or over a hotline. I know that’s how it can be done in MO.

    In short, stay away from these schemes. Don’t let the large amounts of money the salespeople claim to be making or the treat of “owning your own business” draw you in. It isn’t a business, it’s a scheme, and only the people at the top make money in the long run.

  23. Johanna says:

    @Anastasia: One reason to favor a traditional mutual fund over an ETF is if you make frequent transactions – for example, if you want to deposit a percentage of each paycheck into the fund. With an ETF, you have a transaction cost every time you buy or sell, and that can really add up if you make a lot of small purchases. With a regular mutual fund, you shouldn’t have transaction costs.

  24. Ponzi Schemes would dry up if people understood the basic idea of making money: if someone doesn’t talk about the actual business going on, they don’t understand how money is made. Money isn’t made with a checkbook — that’s just how it’s paid. Money must be -made- through some sort of creative mechanism. Sigh. =)

  25. Sweet Em says:

    I second the comment #4. Non-profits (one of which I work part-time for) are feeling the effect of rich donors losing money by “investing” with Madoff.

  26. Amateur says:

    I knew someone who attempted the Amway thing, it is really difficult to make it work. There is a yearly membership fee to buy those products to resale and most people have not heard of these products to want to spend the cash on it when there are products on sale they know works from a local store. I believe they have some sort of green line of cleaning products, that could bode over pretty well, but nothing beats sale stuff or homemade cleaning solutions that are also green.

    Those crazy pamphlets they send out showcasing couples and their newly found financial independence look really shady. Who would these people really sell to? Memeberships to new members? Corporations buy products in bulk and they usually aren’t Amyway products. The whole thing doesn’t really make sense.

    I have used Amway products before and they are equivalent to what you can buy. In the early 90’s, they sold concentrated products like dishwashing liquid, laundry detergent, and tile scrub, long before it became a sensible to make smaller packages. They’re decent products, but it will be hard to resell the stuff since it lasts a while.

  27. Stephen Waits says:

    As a few others have mentioned.. you could have written this article as..

    What is a Ponzi Scheme?

    See: Social Security, Federal bailouts of banks, The New Deal (and the upcoming New Dealio).

  28. Brandon says:

    The thing is that the Taxpayer can’t ever request all of their “owed” money out like an investor can. If I could opt out of social security in exchange for being banned from contributing I think everyone middle class and up would do so, leaving the poor to finance the poor, which in my mind wouldn’t be a bad thing.

  29. Jerry says:

    Trent: That was a great explanation of a Ponzi scheme. Unfortunately, not everyone who got hurt by Madoff’s Ponzi scheme fell into the ‘greedy & gullible’ category. Some few pension and profit-sharing plans invested in the scam. The alleged experts who were supposed to carefully select investments got fooled, but they were not the investors who got hurt.

  30. The Other Michael says:

    One thing left out in this excellent explanation of Madoff’s scheme: People really were primarily suckered by their own greed.

    The whole selling point Madoff used wasn’t “I can make you 10% per year every year”, but rather “I can make you 10% per year every year, BUT ONLY A VERY SELECT FEW ARE PERMITTED TO INVEST WITH ME.”

    He baited rich folks with the feeling of exclusivity, and they bit.

    Yeah, blaming the victim is bad, but if you beg a thief to take your money, you deserve some of the responsibility. Many people looked into Madoff’s dealings and decided they were too suspect to invest in.

  31. Nick says:

    There is no get rich quick scheme out there, it just isn’t true. And if it sounds to good to be true, it most definitely is. Don’t let the thirst for money overshadow reason.

  32. Rob says:

    I won’t put money into exchange traded fuds. I think they are just another complex financial instrument that will likely not turn out well in the end. You are paying someone a nice little annual skim (MER) to buy and hold stocks of someone else’s choosing.
    I stick to buying stocks in companies that are in a business that makes sense.

  33. Craig says:

    I have heard of schemes like that but never that specific case study. Thanks for informing. Bottom line, if its too good to be true, it probably is.

  34. Attagirl says:

    Sigh. Social Security is not a ponzi scheme. It is insurance, a floor to prevent abject poverty among our children, elderly and the disabled. Surely we are all in favor of this. It was never intended to be a money making venture. It is a safety net. I am happy to support this with my taxes, just like the armed services and the county library.

  35. GayleRN says:

    The best point made is that if you don’t understand exactly how the money is to be made, don’t go there. No matter who is trying to persuade you. And there is no investment that won’t wait for you to get information. Scams are always exerting pressure to do it now. That being said, increasing your knowledge of investments will over time open up opportunities to invest in different vehicles. For example, when you are employed you take some time to learn about Social Security (whether you like it or not you are invested there) and your 401k and pension options. You learn about the 401 k mutual funds available and how they work. Then you buy a house and learn about real estate. You may spend some time learning about bank cds and treasury bonds because they look safe to you. Don’t make it harder than it is by trying to learn a little tiny bit about the entire investing universe. Study as your needs evolve.

  36. Sandy says:

    Thanks for the explanation, Trent…really well done.
    If anyone wants another interesting view of Ponzi schemes and really how the entire financial system works, have a look at :
    Who knew finance could be so interesting!

  37. LDH says:

    It should be noted that a good ponzi schemer doesn’t need to abscond to South America for quite a while. After you pay out the first few returns, people are so excited about the interest they are accumulating that they just “reinvest” it in hope of a huge profit all at once in a few years, and so then all you need to do is just issue statements and show their “gain” on paper, even if you never get new investors.

    Mpls is dealing with a huge ponzi schemer right now (not as big as Madoff, but big) named Tom Petters, who managed to cover the whole thing up for over 10 years. The feds had ZERO idea until someone went to the AUSA’s office and tattled in exchange for a deal.

  38. CPA Kevin says:

    Atta-girl, Attagirl.

  39. Fred says:

    Banks like HSBC lost $1B with Madoff… You have to wonder why in heaven a bank like HSBC, that has 1000s of traders, analysts, money managers on staff, would be so sloppy and lazy as to “outsource” its money management to some outfit… What were they thinking?
    Or is it common practice in finance to charge clients fees for a work that has not been done?
    I wonder if it could be the same for your mutual funds…

    Now on to some comments on Trent’s advice:
    “…if someone is promising you returns that blow away what can be found easily in the S&P 500, don’t believe it.”
    That’s right, VERIFY it! It does not mean that someone is selling “something fishy”, it means that out of range returns are unlikely and need to be verified.
    The corollary is also true: “in range” returns may be someone selling “something fishy”… VERIFY it!
    Then you can make an informed decision to get in or walk away.

    “That’s not to say you can’t earn returns higher than 10-15% or so – one certainly can. But a person is not going to find that return by investing in someone else’s investment package.”
    Wrong! however unlikely to find these returns in retail packages.

    “Similarly, if you don’t understand how an investment works, don’t invest in it. This is an investing rule I always follow.”
    I disagree! the rule I abide by is: Don’t invest into it UNTIL YOU UNDERSTAND IT!

    ” The only stocks I purchase are very broad mutual funds that basically amount to investments in the idea of American business as a whole. Why? I understand how they work. I don’t invest in individual companies. Why? I don’t have enough information to truly understand how they work.”
    ……It is not a degree of information, but a degree of control. If you cannot understand how an individual company work, how can you understand how multiple individual companies put together into a bag will work? A mutual fund allows you to be lazy and not do the homework of understanding an individual company… it basically says:
    “because we are unable to figure out who will go bust, we bought them all and averaged your returns down and will charge you fees for the sub-par result”

    I don’t invest in anything I hear about from friends or acquaintances.
    Mr Trent, maybe you want to change the friends and acquaintances you are hanging out with? …and swap them for people that can bring investment ideas you are comfortable with to the table…

    A last thought… investing in the mutual fund company was a better idea than investing in the mutual fund… I wonder why? Who made the money?

  40. typome says:

    Excellent post! I literally couldn’t understand what in the world was going on, so thanks for breaking it down in a way that’s easy to digest.

  41. loup says:

    @attagirl: social security was supposed to be financially solvent so long our voted and paid for by taxes officials didn’t dip into the fund for other things. many people are upset to pay taxes for schemes like social security, a hyperinflated military, and even sometimes public libraries that they don’t use. Still, they do it anyways, because there’s just some part about being a good neighbor.

    @all: many jewish charities were tied up into this ponzi scheme, and as a result, these charities are making it very hard for alot of people in a tight knit community. Even if you don’t see the direct damages from this yourself, there are entire communities of people who live very different lifestyles than many readers here and many of you may never meet. still, there are many people whose lives revolved around these charities, and things have become more ‘interesting’.

    (i don’t mean to make any one here feel excluded, when i talk about such communities. we still live in the same country, and are all affected by the same issues one way or another. it’s just a plain fact that someone from kentucky isn’t going to meet someone from colorado every day, and the same applies here. but who knows? maybe lots of orthodox jews are reading this blog and no one knows about it.)

  42. GayleRN,

    You never responded to the assertion that it’s a ponzi scheme. Sure it’s a safety net. That doesn’t mean it’s not -also- a ponzi scheme. I’m not saying we should get rid of it (though I think my chances of ever seeing a check are next to nothing), but you have to realize that it meets the basic definition of a ponzi scheme. ::shrug::

  43. AnnJo says:

    “Social Security is not a ponzi scheme. It is insurance.”

    It’s true there is an insurance element in Social Security in the disability and survivor benefit part of it, but even that is weak, because, whatever benefit levels are written into the law while you are paying your “premiums,” you are not guaranteed those levels when you put in your claim.

    It is a Ponzi scheme because it takes the money you pay today based on what most people are convinced is a promise to pay benefits in the future, and gives it to the people who believed that promise in the past, whose money was taken to pay the ones who came before them. It makes NO provision for keeping its implied promise to you and has no – zero – chance of keeping its implied promise indefinitely. Classic Ponzi scheme, except that Ponzi’s promise was explicit, while anybody who wants to know that Social Security’s implied promise is false can read the fine print on their annual benefits statement.

    A pension plan is required to invest toward its future obligations, not just give all its current receipts to current retirees and hope for the best in the future. An insurance company is required to maintain reserves to meet likely future claims. Intentional failure to do that is a crime. The Social Security system has no such obligations.

    Most people believe they have a legal right to their benefits because of their contributions, but the U.S. Supreme Court disagrees. You have NO legal right to benefits at any specific level or at all, Congress has the ability to cancel the program.

    When you retire, it will only pay you if it is politically feasible to collect the money from future workers. When 20 workers were paying for one retiree, that was no problem. At the inception of Social Security, the average life span after inception of benefits was less than two years. Now, even though the retirement age has been increased, it is more like 10-12 years (might even be more, don’t remember exactly).

    When three workers are paying for one retiree, it won’t be pretty. Not to mention that abuses of the disability system are increasing dramatically, as well.

    When health care is entirely controlled by the government, it will eventually become necessary and politically feasible to ration care for the elderly, and that may at least partially reverse the problem if it can bring life spans down. Also not a pretty picture.

  44. Broken Crock says:

    Seems to me that as the proportion of SS recipients increases, the political will for keeping SS also increases. After all, the people receiving it will likely vote to keep it.

    Meanwhile, like any Ponzi scheme, it needs a growing pool of investors in order to succeed. We therefore need to open the border with Mexico. This is doubly powerful since illegal immigrant workers must pay into SS but cannot vote to abolish it.

  45. Attagirl says:

    People who are unhappy about Social Security are usually looking at it as an investment. I don’t. I fund it with my taxes, just like the police and fire department and hope never to have to rely on it, just as I hope not to make use of police or fire services. However, I’m glad it’s out there for those who do have to rely on it.

  46. Jan Dillaha says:

    As a CPA I have been very interested in this story.

    For those larger investors who trusted Madoff, I would really like to understand the answer to one question. “Why didn’t you check out the firm that audited his financial statements?” To those who understand audits it seems obvious that this CPA firm didn’t have the resources to audit this enterprise.

    With very little effort any one of those investors could have called the AICPA and inquired about the CPA’s membership and their peer review status. A peer review is an audit of the auditor and is required for AICPA members who do audits. At this point one would have discovered that the CPA had reported, in writing, to the AICPA that it didn’t perform audits. It would have been very difficult to rely on the information in those statements at that point.

    The truth is that Mr Madoff used a sophisticated investing theory to keep people from asking questions. Very few people are willing to continue to ask reasonable questions to ensure that they fully understand something simply because they fear being seen as stupid.

  47. AnnJo says:

    @Attagirl, comment #33

    You “hope never to have to rely on it.” Does that mean you’ll decline your checks when you qualify (assuming it’s still there)? I doubt it.

    And what about the people who will need it, but for whom it won’t be there because it was used up first paying out to Bill Clinton and Bill Gates, along with millions of other wealthy or otherwise unneedy or undeserving (you can collect almost as much in benefits if you work 10 years as 40 years) Americans?

    As a “safety net” aka welfare, Social Security is highly inefficient. It’s also dishonest, because it was and is sold to the American people as something other than what it is: A Ponzi scheme. And, like all Ponzi schemes it’s terribly unfair to the people at the end of the line, who will have paid in for decades only to get back a pittance, if anything.

    Your comments do help me understand, however, why it is impossible for our politicians to reform Social Security, and why so many people are turning to gaming the system. A lot of people apparently would rather hide their heads in the sand that face reality.

  48. Sandy says:

    @AnnJo comment #35
    Well, you may feel how you like about it, but as an advocate for the elderly poor in my community, the ovewhelming majority are quite happy to receive it. The same with my friend whose husband died an untimely death. She surely doesn’t hide her face in the sand…she needs the money to raise their daughter.

  49. Bill in NC says:

    Madoff also targeted large charitable foundations.

    The above are only required to spend 5% annually (most never exceed that), so Madoff knew they’d never ask for 100% redemptions.

    That also lent him an air of credibility in soliciting business from private investors and financial institutions.

    And as for Social Security – there were huge abuses from self-medicating getting disability for a very long time.

    It also is a very expensive “insurance” policy, costing over 15% of your gross income for a meager cash annuity at nearly age 70 (for full benefits) and a medical benefits program not available until age 65.

    Both of the above age limits are likely to increase.

    The reality is as they operate today Social Security & Medicare are direct transfer (welfare) programs, nothing more than expensive federal entitlements.

  50. AnnJo says:


    I’m sure that that the majority of the elderly poor are happy to receive their Soc. Sec. checks. So are the majority of the elderly rich and the elderly middle class, most of whose checks are even bigger because they worked longer and at higher paying jobs.

    My points are two:

    1. It is a Ponzi scheme. That’s what the post was about, and just because you and Attagirl LIKE this particular Ponzi scheme, does not change its essential nature.

    2. I am not saying that the elderly poor should be left to starve, but that it is inefficient to feed them by a system that gives most of its money to people who would do just fine without it.

  51. Fred says:

    @ Shaun Connell, (comment #17):

    “Ponzi Schemes would dry up if people understood the basic idea of making money… Money isn’t made with a checkbook… Money must be -made- through some sort of creative mechanism.”

    May I respectfully disagree Shaun?

    Money is born into existence first between the Treasury and the Fed: The Treasury (King Henry) writes a nice piece of paper that they call a USTBill or Bond that they give to the FED that will account for it as “reserves”; in exchange of that colored paper, the FED (Ben Burnthebank) writes a check (it is check kiting because there is no money in the account!) that the Treasury gives to congress to spend.

    Second, the Fed writes another check, this time backed by the “reserves” (remember the TBills & Bonds issued by the Treasury?) to the commercial banks… These banks accept this check and account for it in “reserves” (remember, there is no money backing the Fed checkbook).
    Then, you show up at the bank wanting a loan to purchase a house, (or whatever with a price on nowadays…) – the bank looks at its “reserves” and says sure, we have 1,000 in reserves, we can lend you 10,000 (please read that again!).
    The bank prepares a nice loan document that you sign. AT THAT MOMENT, 9,000 have instantaneously, one would say “magically” been created into existence…

    Of course, you must pay an interest on this loan… But WAIT A MINUTE! Only the principal of the loan has been created, where do I find the money to pay for the interest?
    Well, that is called “scarcity by design” or control by competition, whatever – you are now on a treadmill where you must by wits, cunning, speed or whatever skills you may have, take MY money to repay your obligation to the bank!

    No mystery here, one of us will go bust – by design.

    …Don’t believe me? the whole process is called the “Mandrake Mechanism” – yes, like in Mandrake the magician (I wonder why?) – Check it out…

    So, as you wrote Shaun Connell: “if people understood the basic idea of making money…”

  52. Fred says:

    Madoff is a side show to keep the plebe busy looking in the wrong direction while the real and most outrageous counterfeiting action, which consequence is the largest transfer of wealth in the history of humanity, is happening right now!

    From the pockets of the many to those of a few, wealth and value is transferred in the open, but it is invisible to most:
    1- There is no flow of money towards the final destination of the wealth; the transfer is made via the balance sheet, there is no movement to catch the eye, via the systematic destruction of the value of the Federal Reserve Note (abusively called Dollar).
    2- This is made possible after nearly 100 years of Fed rule, coercion and “dumbing down” of Americans.

    Where are the tar, feathers and pitchforks? The citizenry has been castrated, the ideals of your great-great-great-grandfathers that sent the Brits home violated… The Republic is an Empire and the “Dollar” is not worth a “Continental”!

  53. Jennifer says:

    Social security is unquestionably a Ponzi Scheme. I am only 18, paying large percentages of my paychecks to social security (even more than my federal income tax per paycheck, I believe…) and yet there is no reason for me to believe that any of it will be there when I’m retired – which frankly, is quite depressing. The whole reason why this Ponzi scheme is crumbling as we speak is because the massive number of Baby Boomers are reaching retirement age and relying heavily on Social Security and Medicare…Thus the demand begins to exceed the supply of funds.
    I have a feeling by the time I’m retired the whole Social Security Program will have ‘flown the coop,’ so to speak…unless there is drastic reform. Which, considering the current state of the economy, I forsee a $700 billion Social Security bailout looming on the horizon…..Not.

  54. almost there says:

    One can go to the social security website and see changes made to the system since it was created. The Ponzi scheme never invested the money it took in from the taxpayers in an outside earning source. When Pres Johnson allowed the excess contributions to go into the general fund and be spent to pay for the vietnam war that is really when things went south. If the treasury had invested the excess contributions into an outside source like any foreign country’s central bank, like they do with us, we would have trillions of money in excess since the program was instituted.

  55. almost there says:

    oops that is “trillions of dollars…”

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