Who Has Better Ethics, the Social Security System or Bernie Madoff?

 

According to Wikipedia, Bernie Madoff ran the world’s largest Ponzi scheme, with losses estimated to be as high as $65 billion. Madoff promised to invest his customers’ money in productive enterprises and pay them generous returns, when in fact he spent the money and manufactured fake statements. His generous returns to his customers were made with money from new customers. Eventually the scheme collapsed when money from new entrants slowed down. There were no productive investments to pay off his customers.

 

Like Madoff’s scam, Social Security is a vast Ponzi scheme. Although it claims to have “assets” of close to $3.0 trillion, these “assets” are not productive assets, such as factories, farms, or valuable commodities. They are book entries only and differ little from what Bernie Madoff was reporting to his customers. The government has spent the accumulated taxes of eighty years and now pays out what it receives in monthly taxes on retirees. According to some fiduciaries, soon monthly taxes will not cover retiree benefits. This could spell big trouble for Social Security.

 

Voluntary vs. Coercion

 

The main difference between Bernie Madoff’s scam and Social Security is that all of Madoff’s victims gave him their money voluntarily. They were victims, of course, but no one forced them to give Madoff their money. Many may have been gullible, avaricious, or both. But they entered into Madoff’s plan with their eyes wide open and were not coerced into doing so. They now receive nothing, and their initial investments are gone, probably never to be recovered or, if so, only fractionally after many years of legal machinations.

 

Compare Madoff’s scam with Social Security. All who earn incomes, whether wages or personal profits, are required by law to pay into the Social Security System. Failure to do so will result in fines and possibly jail. Like Madoff’s plan, all participants receive periodic statements explaining how much they and their employers have contributed and their current anticipated monthly payout upon retirement.

 

The main difference between the Madoff scam and Social Security is NOT that Social Security has accumulated real, productive assets and Madoff did not. Neither owned productive assets. The main difference is that Madoff did NOT force his customers to join his scam under the threat of violence; whereas, that is exactly what the Social Security System does. Therefore, if either system can be considered more ethical, or perhaps less unethical, it is the Madoff scam. Madoff was a confidence man, but he did not force anyone to join his scam. Targeted investors could join or not. But that definitely is NOT the case with Social Security. Yet Madoff is a modern pariah and Social Security is lauded by many as the savior of the impoverished elderly.

 

Current Victims Demand that Others Continue to Be Victimized

 

If both systems are Ponzi schemes, why was Madoff jailed and not the lawmakers and administrators of Social Security? If the Madoff plan can be unceremoniously shut down, why can’t Social Security be shut down just as unceremoniously? The answer most people give is that they were forced into paying for someone else’s benefits, so someone else can do the same for them. In other words, since they were victims they have a right to victimize others. I call this very common response to be highly unethical. At some point the Social Security Ponzi scheme must end and, when that happens, some will lose. Would a victim of the Madoff scam feel justified in allowing Madoff to peddle his snake oil to more victims just because he was a victim? I think not. Likewise, Social Security recipients have no ethical leg to stand on; neither do those who have been forced to pay into the Ponzi scheme for many years and have yet to receive any payouts. Being a victim certainly does not make it ethical to victimize someone else. Therefore, the only ethical thing to do is end Social Security right now. No more checks. No more taxes. Fire all the employees, destroy all the records, and sell all the buildings and office equipment. Cut out this unethical financial cancer that will destroy the body politic.

 

 

Consequences of the End of World Dollar Hegemony

 

In my previous essay I explained how over time the US abused its responsibility to control the supply of dollars, the world's premier reserve currency for settling international trade accounts among nations. This abrogation of its duties is leading to the likely adoption of a new reserve currency, commodity based and controlled not by one nation but by members, all watchful that the currency is not inflated.

 

Let us continue the analogy of an individual receiving a "magic checkbook" which allows him to write as many checks for as much money as he desires. Receivers of these checks could only pass them along to others through the normal course of trade. Over time the owner of the magic checkbook becomes increasingly irresponsible. He funds all kinds of welfare and warfare initiatives. Naturally dollar reserves build to levels completely unnecessary for peaceful exchange. Prices start to rise at a faster and faster rate. Then a reform consortium assembles a team to offer an alternative currency. Why, one may ask, is that such a problem for the dollar and dollar users?

 

A Lesson in Supply and Demand from the Weimar Republic

 

A successful alternative reserve currency would dilute demand to hold dollars. When demand for dollars drops, its price must drop unless and until its supply drops. (A drop in the dollar's "price" is just another way of stating that its purchasing power falls; i.e., more dollars are required to buy the same goods and services.) Through irresponsible use of the magic checkbook you have obligated yourself to funding a free-for-all of entitlements; i.e., Social Security, Medicare, and the military-industrial complex being the largest by far. Politically, it may be almost impossible to cut any of these three categories of spending to the extent necessary to arrest the dollar's drop in purchasing power.

 

The world has seen all this before, and not just in less developed nations like Zimbabwe. The US will find itself in the same trap as experienced by Germany's Weimar Republic following World War I. The Reichsbank, Germany's central bank, printed papiermarks in order to placate powerful constituencies within Germany. As the Reichsbank printed more money, the purchasing power of papiermarks dropped. And herein lay the trap. Rising prices led powerful constituencies to demand increases in pay and benefits. Industrial labor unions, government civil servants, welfare recipients, old age pensioners whose life savings were being decimated--all demanded more money. Strikes and violence became endemic. So the Reichsbank printed more money...which, of course, simply led to higher prices and another round of payment increases...which led to even higher prices, etc., etc. until the papiermark became worth more as wallpaper than money.

 

Why did the Weimar Republic government continue to increase payments, and why did the Reichsbank continue to print papiermarks? Many sophisticated answers have been advanced, such as that the government and the Reichsbank deliberately destroyed the papiermark in some kind of roundabout plot to thwart the financial terms of the Versailles Treaty in which a defeated Germany was ordered to pay reparations to the Allied powers. But the simplest answer is that both believed that there was no other choice than to increase payments and print money in a crisis. It was felt that powerful constituencies must be placated in the short run. But short run tactics just made things worse. There was neither the political will nor the economic understanding of the need to end excessive spending and currency debasement and endure the pain thereby induced.

 

The Lack of Both Political Will and Economic Understanding in the US and the UK

 

I fear that the same is true today. In fact the seeming lack of adverse consequences (all in the long term) and advantages of money printing in the short term have led to a knee-jerk response by the US Treasury and the Federal Reserve Bank to increase the money supply and lower interest rates in the face of any economic problem, even higher prices themselves. As a example, just look to Britain. Its energy shortages have caused prices to rise. The government's response has been to pledge payouts to households! That's right. No pledge to dismantle barriers to increased energy production...just a pledge to increase the government's deficit, which requires more money printing! As the saying goes, you can't make this stuff up.

 

One thing is certain though. What Britain can do, the US can and will do in spades. Hyperinflation is a real possibility. Remember, the Reichsbank in Weimar Republic Germany actually had to print physical money. The US Federal Reserve Bank need only click a few buttons on a computer. As prices rise, powerful groups demand more money. Police, firemen, road workers, etc. demand that they not suffer a lowering of their lifestyle. Since government is spending someone else's money, it accedes to these demands.

 

Back to our British example. The exchange value of the pound has been plummeting in currency markets, leading to serious consequences. The Bank of England was forced to raise interest rates and now government debt has become unaffordable. So the Bank, as handmaiden to the government, has applied the only politically permissible remedy that it knows: its computers' money-printer is forced into overdrive, just to keep up.

 

What Happens on the Ground

 

Where in reality does government get its money? State and local governments get money from state and local taxes. So captive property owners get increased tax bills to pay for maintaining public school teachers, police, etc. Social Security recipients must be compensated, of course, so payroll taxes are increased, which depresses business. American products become less competitive on the national and world market. The price spirals continue to destroy all in their path until the dollar loses all purchasing power and society descends into chaos. And not one politician in a thousand understands what happened or, if he did understand, did not have to political will to do anything about it; i.e., reduce public spending, liquidate the Fed, and tie the dollar to our still significant gold reserves. It can be done.