Wednesday, 17 December 2008

State ponzi schemes

Much of the coverage of the collapse of Mr Madoff's investment business makes use of the phrase "Ponzi scheme". This denotes a scam whereby existing investors are paid money, not from the performance of the fund, but from the money paid in by new investors. The scheme works so long as a) new investors keep joining the scheme and b) the fund itself makes profits. As soon as the inflows of money from new investors dries up the fund can no longer afford to pay the high returns promised.

What interests me is that the UK is as a whole part of an enormous ponzi scheme. How else can you describe the public sector state pension scheme that operates in the UK? This scheme does not work by people paying their "stamps" into a fund, as many still believe, it works by paying current retirees out of current workers' contributions. As the numerical balance between retired and working changes over the next 10 years I expect to see more resistance to this method of funding, maybe that is what the stock of Tasers will be used to sort out....

Interestingly, I find that I first used "Ponzi Scheme" as a description of Gordon Brown's UK economy back in October 2007 when I was discussing the upcoming (or not) general election:
"The best the Conservatives can hope for is to leave Gordon Brown with a very small overall majority and so to limp on as a damaged Prime Minister for a few years as his Ponzi Scheme economy crashes around him, utterly destroying his reputation for competence. As I have blogged before, just like 1992, this is the General Election to lose."

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