One Big Ponzi Scheme


Is the entire financial system one big ponzi scheme?

Financial-sector profits have grown far faster than GDP over the past 25 years; everyone has become richer by lending money to everyone else. Household debt is running at about 100 percent of GDP in America and higher still in Britain. Credit derivatives are soaring in value and payment-in-kind notes (which pay interest with more debt, rather than cash) are in vogue. Last month Tim Lee, a strategist at pi Economics, described the whole financial system as "the equivalent of a gigantic Ponzi scheme."

In one sense, of course, he is right. Many elements of the system are Ponzi-like in that they depend on confidence – they would collapse if all investors demanded their stakes back – or they rely on new backers to keep them going.

Maybe we should rename the social security system the ponzi security system.