I truly do enjoy your insights on the Whiskey & Gunpowder posts. These ideas are very much in tune with what is going on. But why do you and others insist that Social Security is somehow an entitlement? No matter what the immoral politicians did in stealing our contributions to the Social Security Trust funds, the fact of the matter is that I paid in all of my working life. And furthermore, so did my employers and this too distorted what I should have earned. This money, well over $300,000, was paid in and now I expect it to be returned, even if it is way more worthless now. You act like somehow this should be ignored and the State owes me nothing for my contributions. Bull shit, my man!

Dear patron, those funds you put in aren’t just “stolen into” the Social Security. They’ve been stolen out as well.

They’ve been used to pay earlier “investors.” That’s why we keep referring to this scam as one of the Ponzi sort.

If you were an early contributor, congratulations! You’re going to do a lot better than anyone coming after you. But you still probably won’t do as well as Ida May Fuller, the very first recipient of a Social Security check in the U.S. She received her first check for $22.54 on January 31, 1940. She continued to receive checks till her death in 1975.

Ida May only had to pay into the newly minted system for a mere three years. Her total payments came to a scant $24.75. (To be fair, her employer had to match that amount.)

Here’s the chart of her contributions and covered earnings as prepared by one Larry DeWitt for the SSA.

By the time of her death in 1975, however, Ida May had collected $22,888.92 from Social Security monthly benefits. Now THAT is an investment strategy. Warren Buffet, eat your tax-shilling heart out!

Like most successful investment strategies, however, it required some timing. In fact, since it’s a Ponzi scheme, the only real way to win was to be first in line or as close to it as possible.

In the case of Social Security, aside from being early to the party, it also helps tremendously to refuse to die so you can collect as long as possible. Ida May lived to be 100 years old and managed to collect monthly paychecks for 36 years.

Let’s review. Ida May put in $24.75. Ida May collected $22,888.92.

Total amount invested: $24.75

Total return on investment: $22,888.92

She got that money because a lot of other people were forced to “pay it forward” by means of their own involuntary contributions. They were forced to fund Ida May with the “contributions” (handed over on pain of imprisonment) ostensibly being put aside for their own Social Security payouts later on.

This is the very definition of a Ponzi scheme. Returns of earlier investors are paid for with funds from later investors. And this Ponzi scheme has a twist: It’s an offer you can’t refuse. You can’t opt out (unless you’re Amish). Contribute or go to jail.

Again, your Social Security funds are gone. They have already been handed over to your parents and grandparents. There is nothing there for you. The money you expect to collect from this scheme will have to come from your children and grandchildren.

Two wrongs don’t make a right last time we checked. The government stole your money. Would you have them steal from your children’s money…and your children’s children’s money to make up for it? Do you subscribe to the Warren Buffett school of morality wherein more theft is a fine way to cover up past theft and misallocation?

Not to put too fine a point on it, but I really don’t think you’re going to make out with this federally-instituted transfer scheme as well as dear Ida.

Ponzi Social Security Pays It Ever Forward was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The commission added the current budget trend is a disaster “that will destroy the country from within” unless checked by tough action in Washington. The tough action required is spending cuts in programs, including the so-called nondiscretionary, eating most of the federal revenues.

Federal tax receipts for 2009 totaled $2.1 trillion. The largest items in the federal budget were Social Security ($710 billion), national defense ($689 billion), Medicare ($456 billion) and Medicaid ($327 billion). The primary recipients of federal spending are seniors. Many of my readers have written me to argue that it’s unfair to characterize what seniors are getting as handouts because they worked all their lives and paid into Social Security and Medicare.

Jagadeesh Gokhale, senior economic adviser, Federal Reserve Bank of Cleveland; and Laurence J. Kotlikoff, professor of Economics at Boston University document the looming Social Security and Medicare crises in “Is War Between Generations Inevitable?”. They report that “A male reaching 65 years of age today (in 2000, the year of their study) can expect to receive $71,000 more in government ‘transfer’ benefits (of all kinds at both the federal and state levels, but mainly from Social Security and Medicare) than he will pay in taxes (of all kinds at both the federal and state levels) before he dies. A 65-year-old female can expect a net gain of more than twice that amount; she can expect $163,000 more in benefits than she will pay in taxes.”

The picture is not so rosy for people who entered the labor force in 2000. They will pay far more in taxes than they will receive from transfer programs. Expansion of elderly handouts, such as prescription drugs, will make things worse. “For example: A 20-year-old female can expect to pay $92,000 more in taxes than she will receive in transfer benefits over her lifetime. The future looks more than three times as bleak for her male cohort, who can expect to pay $312,000 more in taxes than he will ever receive in benefits.”

Why is Social Security a better deal for today’s seniors? Just look at what they paid in. From 1937 to 1949, the maximum annual Social Security tax was $60. It remained under $200 until 1956. After 1956, Old Age, Survivors and Disability Insurance was added and in 1966, Medicare was added. It wasn’t until 1969 that maximum Social Security taxes exceeded $2,000. Today, the maximum annual Social Security tax is $13,000 and the maximum annual benefit is $25,000.

As with any Ponzi scheme, the people who get on board early make out. This is pointed out by Geoffrey Kollmann and Dawn Nuschler of the Congressional Research Service in their report “Social Security Reform” (October 2002) They say, “Until recent years, Social Security recipients received more, often far more, than the value of the Social Security taxes they paid. … For example, for workers who earned average wages and retired in 1980 at age 65, it took 2.8 years to recover the value of the retirement portion of the combined employee and employer shares of their Social Security taxes plus interest. For their counterparts who retired at age 65 in 2002, it will take 16.9 years. For those retiring in 2020, it will take 20.9 years.” My question is: How can anyone who draws out every penny he’s put into Social Security in a few years say that he’s not living at the expense of another?

It takes a special form of callousness and disregard for the welfare of future generations of Americans for today’s senior citizens to fight against reform. Nobody’s talking about abolition of federal senior programs. We must accept that serious mistakes were made and we must take compassionate corrective action. But what the heck! Both today’s politicians and seniors will be dead so why should they make sacrifices now to prevent an economic calamity decades off into the future?

Regards,
Walter E. Williams
LewRockwell.com
for Whiskey & Gunpowder

August 25, 2010

Avoiding the Looming Disaster of Social Security was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Ponzi promised 50% profit in 45 days or 100% profit in 90 days; investor’s choice. He originally bought Postal Reply Coupons in other countries and then cashed them in the USA. Due to the foreign currencies exchange-rate differences, it was a form of arbitrage. But the paperwork to make this happen was so involved that there was just not enough profit to warrant all the work required. That didn’t slow-down Ponzi, however. He kept promoting his scheme despite the lack of actual Postal Reply Coupons in his vault.

So the concept of taking money from one person early-on and then repaying that early person with monies obtained from later investors has been called a “Ponzi Scheme” ever since. Sound like anything else in which you’re forced to participate?

It wasn’t even original to Ponzi. Charles Dickens described a similar scheme in “Little Dorrit” which was published before Ponzi was born. Speculation is that Ponzi actually learned of this concept from William F. Miller, a Brooklyn bookkeeper who used the same pyramid scheme in 1899 with which he took-in $1 million.

Charles Ponzi was always a ne’er-do-well throughout his life. Bernie Madoff by comparison, had developed an impeccable business reputation. Furthermore, Bernie kept within the realm of reasonable expectations; high though they may have been. Bernie also operated his scheme during a period of generally increasing stock prices.

So now that we’ve sentenced Madoff for “high crimes,” when are we going to sentence the SEC (the Swindler’s Encouragement Committee) for their crimes? After all, one Harry Markopolos sent letter after letter to the SEC over a 10-year period telling them that Madoff was doing something illegal. Markopolos even provided calculations to prove that Madoff couldn’t possibly have accomplished what he claimed. In their infinite wisdom, the SEC ignored Markopolos and allowed Madoff to continue his Ponzi scheme. Shouldn’t the SEC be held responsible? We’re told time and again that we needn’t worry – the SEC (read government) is here to protect us from financial fraud. Right! Most investors do rely on SEC oversight, and Madoff was right at the very top of their good-guy list. Now, the very agency that allowed this to happen right under their noses not only goes Scott-free but is being allocated still more money for their budget needs. Are you beginning to see the picture here? Talk about rot on the vine!

Just how unusually evil were Madoff’s actions? Not that unusual. In fact, the whole notion of paying off past investors with the funds of present investors is at the very core of our Social Security system. At least Madoff sought the consent of his investors who let him “invest” their money based on their own free volition. Do you have anything to say about the withholding of Social Security taxes from your paycheck? And at least Madoff didn’t attempt to then defend himself with the claim that he was conducting wise public policy.

It never ceases to amaze me that “the folks” continue to permit the government to play this charade. Invariably, the government messes-up some program and then says by way of excuse, “we were overworked, understaffed and didn’t have enough money to do it correctly.” And then they get even more money for that failed project, yet the project continues to fail. Many of FDR’s “programs” from the 1930s were later ruled unconstitutional yet they still exist in Washington, District of Criminals. Their excuse is that they are still “winding-down” those programs in preparation to then end them. Don’t forget that the Department of No-Energy created under the Carter Administration now employs over 100,000 bureaucrats, operates with a budget in excess of $100 Billion, and has yet to accomplish it stated objective – that of helping the USA become energy-independent.

Back in the 1980s, a “creative” teenager by the name of Barry Minkow, formed a company in Los Angeles called ZZZZBest. He took his company public in 1986 and was considered a real hot shot in the business world. Well, of course, it was a sham and Barry went to jail. But now Barry works for the government helping them ferret out other crooks. “It takes one to know one” seems to work. So why not put Madoff to work helping the government root-out all the other Wall Street crooks? Chances are he knows all of them on a first-name basis.

Sincerely,
Tex Norton

July 7, 2009

Bernie, Ponzi and Social Security was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

And what if you went to bed one night and thought that you had money on account in a fine silk stocking firm? What if you believed that you and your family were well provided for? What if you were sure that you had made all the right choices and done all the prudent things? You saved your money. You placed it with a reputable outfit. You were in the bluest of blue chips. And you woke up the next morning and it was all gone? Poof. Vanished. You’re broke! It would change your world, right? Maybe your life would fall off a cliff. Your standard of living would crater.

The World’s Largest Ponzi Scheme — $50 Billion

Well, this is exactly what happened to a lot of people a few days ago. These unfortunate souls invested their funds with Bernard Madoff’s firm in New York. Apparently, Madoff (pronounced “made off”) was running what The New York Times said “may be the largest Ponzi scheme in history.” He may have wiped out as much as $50 billion of other people’s money. $50 billion. No typo.

For about 48 years, Madoff took in people’s money and claimed to invest it through his proprietary “split-strike conversion.” What’s that? Actually, I’ve never heard of it. It’s some sort of investment hocus-pocus that promises something for nothing. But Madoff always claimed he was making solid returns, in good times and bad, of 8-12% per year. Like clockwork. Such a deal.

Madoff’s investment firm was not for just anybody. You had to be somebody to be part of this firm. You had to be invited to invest with Madoff. So at fine country clubs up and down the East Coast, people would politely mention that “I invest my money with Madoff.” And other people would say, “Oh? Can I invest with Madoff too?” Then maybe they would get a discrete solicitation in the mail offering the opportunity to open a modest account. Maybe.

Or maybe they wouldn’t get that solicitation. And the people who were rejected wanted to know why. “So how come my money is no good with Madoff?” they would ask. And thus did the cachet grow. People wanted in. “Hey, tell me how I can invest with this guy?” was the topic at many a dinner of lobster Newburg or veal a l’Oscar. Over the years, thousands of people, firms, businesses, charities, pensions, hedge funds and even government entities placed money with Madoff. And Madoff took it. With pleasure.

It was all a swindle. Madoff was taking in the new money and paying it out to the previous investors. He had no real system of investing. Madoff just dabbled in the markets, making some money here and losing it there. He lived well. He owned a yacht. He attended fancy parties. He was a patron of the arts and charity. He contributed generously to politicians in the Democratic Party (Hillary Clinton, Chuck Schumer and Charles Rangel, among others, in recent federal campaign filings). He was polite and distinguished. He was a counselor to many a family, always good for wise advice about how to make the next right move in life.

Financial Sociopath, Money-Murderer

Indeed, Madoff pretended for decades that things were all right. But things weren’t all right. Madoff and his firm just took money from one group of people and paid it to others. He sent out elaborate statements, documenting how well people’s accounts were doing. Yet in the process, Madoff lost billions of dollars. The funds vanished into money heaven. And Madoff did it all under the noses of auditors, lawyers, accountants, tax agencies, the Securities and Exchange Commission (SEC) and a host of other pretend regulators.

In short, Madoff is a financial psychopath. He’s a money-murderer. He is to money management what Ted Bundy was to unsuspecting young women.

“No Innocent Explanation”

Along the way, a few people raised suspicions. They said things like, “No one can deliver those kinds of results year after year. It’s impossible.” But many other people didn’t want to believe anything was wrong. The final whistle didn’t blow until Madoff’s sons turned him in to the FBI last week. (The sons claimed that they “knew nothing” about the scam.) And according to press reports, Madoff confessed everything to the FBI arresting agent, saying, “There is no innocent explanation.”

Many of Madoff’s clients are from the Jewish community. That was Madoff’s heritage, and thus did Jews form much of the clientele that Madoff cultivated. According to The Wall Street Journal, some Jewish investors called Mr. Madoff “the Jewish bond” because of his solid and predictable returns.

The “Old Money” Is Now Gone

Now with Madoff’s demise, there is an entire swath of Jewish “old money” gone down the tubes. There are personal wipeouts that will devastate entire extended families. The legacy economy of many trust fund families is wrecked. A lot of country club bills, condo dues and school tuition statements are about to go unpaid.

This will impact communities from Boston to Palm Beach and even overseas as far away as Buenos Aires and Johannesburg. That is, for some overseas Jewish families, Madoff held the “safe” money, the strategic reserve for when it was time to pack the bags and move away. (An old African expression comes to mind: “When the Jews leave, it’s time to leave. When the Portuguese leave, it’s too late to leave.”)

Some charities are hitting the rocks too, totally wiped out by Madoff. There are several hedge funds going down like the Titanic, with one fund losing nearly $1.8 billion. Just in Geneva, Switzerland, a number of banks reportedly may be out of $4 billion invested with Madoff. French bank BNP Paribas is said to be on the hook. Japan’s Nomura Holdings, which markets Madoff’s funds, also has been swept up in the financial wipeout. HSBC is taking a serious hit. Kingate Management of Bermuda has reportedly invested part of its $2.8 billion fund with Madoff.

How Bad Is It Out There?

So it makes me wonder. How bad is it out there? How many other Ponzi schemes are there besides Madoff’s? How many more financial psychopaths are ginning up fake account statements? How many little old ladies are there out there who think they have money in an account, but it’s all just some big scam? How many more bad banks? How many bad brokerage houses? How many more bad companies with bad stock? How many more bad government entities with bad finances and worse bonds? How many bad pension funds?

It drives home the point of wondering whom you can trust. And how bad is it with even the U.S. government? Do you really trust government statistics, like the one for the rate of inflation or unemployment? And how about the numbers in the national budget accounts? We’re spending how much? Does money even have any meaning to the people who have the power to appropriate it? Our whole national accounting process has turned into an intergenerational Ponzi scheme.

Really, our $10 trillion national debt is not enough? We are looking at trillion-dollar deficits in just the next year or two. How long can it last? And whom can you believe in any position of authority? So Bernard Madoff had a “system” for investing? And Ben Bernanke has a “system” for managing the monetary policy of the country, right? Hank Paulson has a “system” for managing the Treasury accounts? And Congress and the president — G.W. Bush, and after him B.H. Obama — have a “system” for spending the nation’s limited wealth on important things, yes?

Own Gold and Silver – Just Do It!

How do you know that you don’t own a big fat piece of nothing? It’s why I believe you need to own some real gold and silver. I’ve said it before, and I’ll say it again: You need to own some gold and silver in addition to whatever else you own on account. Just do it! Go out and buy some. Today. Now don’t get me wrong, I’m still very positive about the potential in our ESI portfolio — believe me, we hold plenty of quality assets that will soon have their day. But when all else fails, if you have the precious metals, you still have something you can hold in your hand.

And when someone comes along with that great deal that looks just too good to turn down — steady returns forever, with minimal risk — remember what happened with Madoff. He was a pillar of the Jewish community. “Such a nice man.” Now his fraud has collapsed like the temple around the ears of Samson. Let me mix my Old and New Testaments on this one and quote Matthew 10:36, “A man’s foes shall be they of his own household.”

Until we meet again,
Byron W. King

December 22, 2008

Madoff Makes Us Love Gold Even More was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.