Pyramid Is Crumbling — World’s Largest Ponzi Scheme

In November 2010, Fed Chairman Ben Bernanke wrote a self-serving (sorry, Op-ed) column for The Washington Post.

The title of this (largely fictional) piece was ‘Aiding the Economy: What the Fed Did and Why’.

Here’s a snippet:

Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

Let’s start with lower corporate bond rates will encourage investment.

Well, the ‘investment’ did happen, but not in the way Ben envisaged.

 …concern is growing that soaring [US] corporate debt will make the economy susceptible to a contraction that could get out of control. The root cause of this concern is the trillions of dollars that major U.S. corporations have spent on open-market repurchases — aka “stock buybacks” — since the financial crisis a decade ago.

In 2018 alone, with corporate profits bolstered by the Tax Cuts and Jobs Act of 2017, companies in the S&P 500 Index did a combined $806 billion in buybacks, about $200 billion more than the previous record set in 2007.

Harvard Business Review

Corporate executives took full advantage of the low rates to issue bonds to ‘invest’ in their own personal enrichment…putting their stock options seriously into the money…

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In 2019, a CEO at one of the top 350 firms in the U.S. was paid $21.3 million on average (using a “realized” measure of CEO pay that counts stock awards when vested and stock options when cashed in rather than when granted). This 14% increase from 2018 occurred because of rapid growth in vested stock awards and exercised stock options tied to stock market growth.

Economic Policy Institute

Did those higher stock prices do anything to boost consumer wealth?

Well, that depends on whether you’re a consumer in the top 10% or bottom 90%.

Guess which consumer group the corporate executives belong to?

Demographics Drive Stock Ownership

Source: WSJ Daily Shot

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If, as Bernanke stated, a boost to consumer wealth can also spur spending, then why after the greatest bull market in history is the US economy still unable to stand on its own two feet?

What’s that I hear from Ben and his central banker mates…deathly silence.

Did Ben’s ‘wealth effect’ theory lead to higher incomes?

Again, it depends on whether you’re in the top 10 or bottom 90%.

Those in the 90th percentile (top 10 percenters) have over the past 40 years enjoyed a real (after inflation) boost to household income…especially the aforementioned CEOs.

The remainder…well, wages growth for them has been firmly stuck in the slow lane:

Real Wage Growth Trends

Source: Congressional Research Service

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With the vast majority receiving (almost) sweet nothing in wage growth, how do they make ends meet?

The WSJ headline says it all:

Families Go Deep in Debt

Source: WSJ

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Here’s an extract from the article (emphasis added):

The debt surge is partly by design. A by-product of low borrowing costs the Federal Reserve engineered after the financial crisis to get the economy moving. It has reshaped both borrowers and lenders. Consumers increasingly need it. Companies increasingly can’t sell their goods without it. And the economy, which counts on consumer spending for more than two-thirds of GDP, would struggle without a plentiful supply of credit.

Bernanke’s wealth effect is a complete nonsense. There has been no real trickle down from the 10 percenters to the rest.

For the 90 percenters, lower interest rates have ‘afforded’ them the ability to keep up appearances by borrowing to make ends meet.

The imbalance between the haves (10 percenters) and have nots (90 percenters) is clearly evident in the assets and liabilities of both groups.

Debt Among The US Households

Source: WSJ

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According to the WSJ (emphasis added):

The value of assets for all U.S. households increased from 1989 through 2016 by an inflation-adjusted $58 trillion. A full 33% of that gain—$19 trillion—went to the wealthiest 1%, according to a Journal analysis of Fed data.

Everything Bernanke theorised about has, in practice, been completely and utterly disproven.

Yet, today’s central bankers keep using the same discredited playbook.

Are they stupid?


But I think there’s a bigger picture.

They know they’ve inherited the management of the world’s largest Ponzi scheme.

The base continually needs to be expanded to maintain the illusion of solvency…which in turn, keeps confidence levels up.

And like all Ponzi schemes, those towards the apex get most of the spoils….10% get 90% and the 90% get 10%.

However, the longer the pyramid scheme goes on, the more likely it’ll create unintended consequences.

As reported in The New York Times (emphasis added):

America’s economy has almost doubled in size over the last four decades, but broad measures of the nation’s economic health conceal the unequal distribution of gains. A small portion of the population has pocketed most of the new wealth, and the coronavirus pandemic is laying bare the consequences of the unequal distribution of prosperity.

In driving rates lower, the Fed (and other central banks) actually drove a wedge into society.

Which is why Donald Trump garnered so much support in voter land. That certainly wasn’t a consequence Bernanke expected in 2010.

How will the wedge be removed? If history is a guide, the answer is very painfully over a very long period.

The pyramid is crumbling…the 90 percenters (the ones who spend most of what they earn) are close to tapped out.

Therefore, in order to keep the scam going (and confidence up), governments are now playing a bigger role.

Last week, our Treasurer proudly boasted…

Today’s National Accounts shows the Australian economy is strengthening and the Morrison Government’s economic recovery plan is working.

In the December quarter, Australia enjoyed economic growth of 3.1 per cent, significantly beating market expectations of 2.5 per cent.

This is the first time in recorded history that Australia has seen two consecutive quarters of economic growth of more than 3 per cent.

As you would expect, the mainstream media and economic commentators ‘waxed lyrical’ about what a tremendous result this was for Australia.

But let’s do some back of the envelope maths here (using rounded numbers).

Australia’s annual GDP is $2 trillion. On a quarterly basis, that’s $500 billion.

$500 billion x 3% = $15 billion over two quarters, it’s $30 billion…give or take.

Not a single solitary sole in the economic commentariat bothered to ask this question of the treasurer…is that all we get for going $212 billion deeper into debt?

Budget aggregates and major economic parameters

Source: Australian government

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The whole show is a giant con…keep borrowing more and more from the future to get less and less bang for the borrowed buck, while enriching the few at the expense of the many.

I can see a backlash a comin’…especially when automation (introduced by the haves) starts to displace more and more of the have nots.

As Abraham Lincoln said, You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.

Don’t be fooled by this scam. It too will end like all others…badly.


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Vern Gowdie,
Editor, The Rum Rebellion

P.S: In a brand new report, market expert Vern Gowdie warns of the dangers waiting in a post-COVID-19 world. Plus, he outlines the steps you should take now to protect your wealth. Learn more.

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

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