A Ponzi scheme: What is it?

A Ponzi scheme is a fraud that promises huge returns for investors, with little or no risk.

In a legitimate investment, on the other hand, the invested money is used to build wealth. Over time, this investment generates enough money to pay investors back their investment, plus a certain profit.

A Ponzi scheme promises high returns quickly. How does this happen?

Instead of using the money collected to create wealth, the Ponzi scheme uses it to pay other investors. The money from old investors will in turn be used to pay other new investors.

Because a Ponzi scheme does not generate its own wealth, it relies on gathering increasingly larger groups of people to invest in order to maintain functionality. In the end, either new investors can no longer be found, or a large number of early investors decide to withdraw their money at the same time, causing the scheme to collapse. During this time, the creators have made a lot of money, while many late-entering investors are left empty-handed.

We see the same thing in crypto or stock transactions, to some extent.

When the United States government needs money, it borrows from the Federal Reserve. The Reserve prints the necessary money and, in return, receives an IOU (I Owe You) from the U.S. Treasury. These IOUs are essentially government bonds. With the money obtained, the U.S. pays its bills and obligations. In the meantime, the Federal Reserve and the U.S. Treasury team up to sell government securities to pension funds, private investors, or individuals.

However, if the loans from the Federal Reserve are used to pay off other loans, where does the US get the money to pay its current debts and the corresponding interest to the Fed?

What actually happens is that the U.S. Treasury receives some money that is created by the Federal Reserve out of thin air, by pressing a few buttons. With this money, the U.S. pays off its debts. If this money is not used to grow the economy, and at some point, the U.S. needs to obtain some money to pay back the loan to the Federal Reserve, plus the corresponding interest, how sustainable is what is happening, and how much can things be repeated until everything collapses in the end?

So, you’ll never be able to pay off all your debts as long as you take on new debts to pay off the old ones. Since 1971, the USA has been in budget deficit with the other economies of the world. This is because the USA buys more from the rest of the world than they buy from them. The Japanese sell them cars and electronics, the Middle East sells them oil, and China sells them everything.

The money these countries receive from the USA is not converted into their own currencies because doing so would cause their own currencies to appreciate, making their economy less desirable for business. That is, their products that other countries buy would become more expensive, and no one wants to buy something expensive. Essentially, by increasing their own currencies with a quantity of USD, you will no longer be able to buy the same product as in the past. So these countries invest their profits in government bonds.

So, the countries of the world sell their products to the USA in exchange for dollars, which were initially borrowed by the USA from the Federal Reserve. Then, the countries borrow the dollars back to the USA by purchasing government bonds. The money obtained by the USA is used to pay off its debts and to pay interest to the Federal Reserve.

At this moment, the USA owes interest to the countries that have purchased government bonds. To pay this interest, the USA borrows even more from the Federal Reserve.

So, at first glance, we see that the whole world is investing its hard-earned money in an epic-sized pyramid scheme. For America’s economy to function, it must borrow money from the rest of the world. If at some point they stop lending to America, the entire structure collapses.