A Pyramid of Ponzi Schemes

I know it’s the 2nd August, but your editor is still scurrying to finish the July issue of Australian Small-Cap Investigator.

We had hoped to have it flying out the door by Friday afternoon, but that didn’t happen. But a weekend of reading, research and ‘riting – interrupted only by attempts to help the Sayce kids build a dolls’ house – means that we’re close to putting the final touches to it.

So, if you’re a subscriber to Australian Small-Cap Investigator you should expect to get the July issue in your inbox today or tomorrow.

And I promise to have the August issue delivered in August!

Just one more thing. Diggers & Drillers editor Dr. Alex Cowie is in Kalgoorlie this week for the Diggers and Dealers annual mining and resources bash. Each day this week Alex will be reporting in Money Morning on what he’s seen and heard, and who he’s met.

Anyway, on with today’s Money Morning…

It’s not often your editor is impressed by what’s written in the mainstream press. But Terry McCrann’s column in last week’s The Australian did fill us with some hope that not all mainstream writers are Keynesian Muppets.

Read it for yourself, but in a nutshell he’s having a crack at the drones who keep banging on about the need for a “Big Australia”. That the Australian population will get to, or needs to get to 50 million by 2050… Or whatever number the drones decide to come up with.

Mr. McCrann’s last two paragraph’s sum up the article perfectly:

“At core the new “populate or our future fortunes will perish” cry is the ultimate national pyramid scheme. We need to get to 36 — or 50? — million, to have the taxpaying workforce to support the now ageing baby-boomers. Beware of a Japanese-style population implosion!

“Oh yeah? And when all those younger new arrivals start to age, we will presumably then need to move to 72 — or 100 — million, to have a sufficiently large taxpaying workforce to support them. Just as every boom busts, even our China one will; the laws of arithmetic always topple even the most elegant pyramid scheme.”

Mr. McCrann calls it a Population Pyramid. You could just as easily call it a Population Ponzi Scheme.

It doesn’t matter which you use – although technically Pyramid and Ponzi schemes are different – it adds up to the same thing. And that is the mainstream economists, policy makers and commentators (excluding Mr. McCrann) have absolutely no understanding of how an economy works.

You see, the typical mainstream economist is really just a frustrated mathematician. They weren’t smart enough to take a maths or physics degree so they plumped for what universities misrepresent as an economics degree instead.

In reality it isn’t real economics at all, it’s just playing around with numbers and half-baked theories.

The problem is, economics is actually all about human interaction and human behaviour rather than fancy equations, pie charts and made-up indexes.

Economics isn’t about guessing what the latest Consumer Price Index (CPI) number will be, or the latest home loan or credit growth data.

But that explains why mainstream economists don’t understand the big picture. And it also explains why they’re only capable of seeing what’s immediately in front of them.

For example, here’s what they saw during the economic meltdown in 2008 – They saw an economy built on credit. Then they saw an economy which is faltering. Finally they saw a population that’s using less credit.

Their conclusion? Their conclusion is the only one they can possibly make. And that is to increase the supply of credit. Voila! Everything will be fine again.

Yet they fail to see that the economic growth was built on nothing more than a credit pyramid. A credit pyramid that needs ever greater loans in order to keep it going.

Once the lending stops, the whole thing collapses.

And rather than admitting that the growth of the last thirty years has been at the expense of growth over the next thirty years, these dopes are just determined to keep the party going.

Rather than the likes of the Baby-Boomers saying, “hey we benefited at your expense without you knowing it, so now we’re going to put the brakes on,” they’re more than happy to let the Ponzi scheme going and let the next generation keep paying.

Because that’s what the credit boom has done. The Baby-Boomer generation has benefited but they don’t want things to change. And funnily enough, it’s that very same generation who are now pulling the strings in government and the central banks.

Simply put, prior generations have lived beyond the economy’s means. And now that it’s time for payback, that same generation doesn’t want a bar of it. That’s why they’re trying to push the payback period out into the future – increasing the population should help!

But back to Mr. McCrann’s article. He makes a great point on the bogus population argument. Their mainstream’s only solution for the increased cost of welfare and healthcare is to encourage an increased population. But as Mr. McCrann points out, what happens when those people get old?

More immigration? An even bigger population? It all comes back to the issue of exponential growth that we wrote about a few months back.

At some point the exponential growth breaks down, because it isn’t sustainable. If the only reason for increasing the population is so those new-comers can pay for the old timers or to keep house prices up, then that’s a policy heading for disaster.

Besides, if you know that’s the only reason you’re being welcomed into the country what are the odds you’ll stay, or even come here in the first place?

The crazy part of their theory if you work it all the way through to the logical conclusion is that the exponential growth would mean Australia needing the entire population of the world to move to Australia in order to maintain the welfare and health payments.

Our question would be what happens next?

Of course, everyone knows that isn’t going to happen. The whole idea that you can get an economy out of economic strife just by increasing the population is ridiculous. It isn’t sustainable, full stop.

It’s no more sustainable than their claim that you can solve a credit bubble by issuing more credit.

The fact is, these mainstream dopes have no more clue about economics than a fourth grader. In fact, you could argue that young kids actually have a better idea on how markets and economies work.

As an aside, your editor was mightily impressed by our youngest daughter and her practical understanding of how markets work a few weeks back.

On Friday evenings the Sayce kids skip off to the local Uniting Church for what we can best describe as a Friday version of Sunday School. On one particular evening they were holding a market night.

The idea being that the kids would turn up with stuff from home, or stuff they’d made, or even stuff they’d bought. They would then sell it to the other kids and any money raised would go into the church coffers.

Well, Sayce kid No 2, spotted what you might call a mispricing in the market. How so? One of the other kids was selling bags of lollies for 15 cents a bag. Each bag contained about 10 lollies.

What Sayce kid No 2 figured was that if she bought these bags of lollies for 15 cents she could split the bags and sell them individually for 10 cents per lolly. And that’s what she did to great effect – and profit, none of which she got to keep of course!

But here’s the thing. Your average mainstream economist or commentator probably wouldn’t have identified the mispricing opportunity. They would have been too busy suggesting that more lollies need to be made in order to keep the price low and satisfy demand, whereas in reality the market was quite content to pay a higher price.

Of course the population nonsense isn’t the only area where they’ve got no idea. But it does help to explain why they think as they do on the issue of credit and borrowing.

You know the story. Apparently the solution to a credit and debt crisis isn’t to stop spending. And it isn’t to stop going further into debt. The solution – they say – is to spend more!

The solution is to go further into debt. To encourage the banks to lend again.

Just like their solution to a housing bubble is to lower interest rates and provide buyers with taxpayer funded grants.

A nine year old could figure out that’s not gonna do anything to solve the problem, it’s just going to push prices up even higher. Yet it’s the very solution you read every day in the mainstream press.

Not content with having stuffed the economy by shoving debt down the throats of Australians – “because it’s good for you” – the same pointy-heads are now throwing their weight behind the only way they know of keeping the credit Ponzi scheme going…

And that’s to back it up with a population Ponzi scheme.

So now we’ve got the beginnings of a pyramid of Ponzi schemes. Great!

Again it just proves that the people with the most power and influence are the ones least capable of doing what’s best for the economy and for you, because ultimately their own vested interests take greater priority.

Cheers.
Kris Sayce
For Money Morning Australia

From the Front Line in Kalgoorlie
By Dr. Alex Cowie, editor, Diggers & Drillers

This week Diggers & Drillers will be attending Diggers and Dealers!

The one ending in ‘Drillers’ is the commoditie and resources investment newsletter that I write.

The other is Australia’s leading mining conference in Kalgoorlie. It’s where hundreds of mining companies, mining service companies, brokers, bankers, and investors get together to talk shop.

I can see the Diggers & Drillers/Diggers and Dealers similarity causing a bit of confusion when people read my name badge. I reckon all week everyone’s going to be asking me for directions, or what time the next presentation is on.

The conference grows each year. This year about 3,000 people are expected to be there. But I was lucky to get a ticket. And I also nearly missed out on getting a seat on the plane, and was looking at catching the train from Perth to Kalgoorlie at one point!

As editor of Diggers & Drillers I get along to as many of these industry events as I can to get my hands on new ideas, sniff out a good story, and meet with as many companies as possible.

Here there will be a presentation every twenty minutes or so. So all in all it’s a great opportunity to update your knowledge on dozens of companies at once, as well as check the whole industry’s pulse.

I even hear that some of the guys have a quiet beer at the end of the day as well…

As well as this I’ve been getting out to mines quite a bit, with recent trips taking me to mines in remote parts of Queensland, South Africa and Botswana. It’s all great experience and you can’t beat checking a mine out for yourself, and meeting the team behind it.

So, this week I’ll be sending in reports from the front line straight to you in Money Morning. So keep a look out for those.

As for the best investment ideas that come out of the conference, that’s only for Diggers and Dealers, I mean Diggers & Drillers readers!

Alex Cowie
Editor, Diggers & Drillers
For Money Morning Australia

A Pyramid of Ponzi Schemes, 8.2 out of 10 based on 16 ratings

Tagged as: companies, credit, economy, investment, market, mining, population, pyramid, sheme