You are all Charles Ponzi!
“Give Ponzi a million”, the Wall Street Journal declared in an article on 2nd August 1920, “and in a twelve month he will expand it for you to some $25,000,000; in two years to $657,000,000; in three years to $16,885,000,000. Surely the Allies could spare him a million, and within three years clean up that debt tangle. Germany might hire him to wipe out the indemnity within four years”.
This newspaper, that was at the time the most trusted point of reference for all things financial, seemed to have found the solution for eradicating the immense debts created by the First World War. This martingale called Charles Ponzi promised his investors that he would double their capital every three months thanks to arbitrages on coupons involving the dollar and the Italian lira via postal services. “A huge line of investors, four abreast, stretched from the City Hall Annex, through City Hall Avenue and School Street, to the entrance of the Niles Building, up stairways, along the corridors…all the way to my office!”, Charles Ponzi wrote…because there were in fact not enough coupons on the global market to meet the crazy demand of these savers who were subservient to the thirst for profit. It was, then, extremely tempting for Ponzi to create a chain where fresh deposits paid for the profits of past investors.
It was a century ago, but the scheme has been constantly repackaged without anyone ever questioning the source of such easy profits, nor anyone taking interest in their magnitude and almost mathematical regularity. And why would they check any of this when only the juicy profits matter? Charles Ponzi put his finger on it himself: “Hope and greed could be read in everybody’s countenance”. So, then, the losers – that is to say those who didn’t get out in time – suffer a twofold grief, telling themselves they should have sussed that such profits were too good to be true, while others console themselves as best they can by saying they weren’t the only ones to get conned…
However, it would be wrong and naïve to believe that a Ponzi scheme is always illegal in nature. Speculative bubbles – innumerable since the modern era –,characterised by senseless and irrational take-offs in asset classes void of all economic justification, are the direct descendants of Ponzi schemes, because the new entrants always remunerate the older ones. These frenzies are admittedly not the work of a person with fraudulent intent, but the banal result of a collective contamination that has taken hold of bankers, the media, social networks, and ordinary citizens. In summary, Charles Ponzi is everywhere: when a company borrows to pay off the interest on its debt, and even when a government seeks out markets to take on more debt to be able to pay out on its citizens’ pensions, he’s there.