Ponzi Scheme

An analysis of the modern application of the Ponzi scheme

Introduction

Since 1920 when the first financial pyramid was established in the USA by Charles Ponzi, an Italian American, any scam which “…pays early investors returns from the investments of later investors.” (Zuckoff, 2009) has been called a Ponzi scheme. Some economists believe that the Ponzi scheme no longer exists. However in fact it may be that the Ponzi scheme is applied even today and there is some data to support this. Specifically evidence shows that the Ponzi scheme or a variation of it has been applied in Russia and, more significantly, it is currently being applied in the USA. It is reported in financial journals (Expert, 2004; Kommersant, 2005) that the Russian authority`s monetary policy of amassing state debt during 1994 - 1998 was tantamount to the famous Ponzi scheme. In addition, CNBC channel news and the Economic Collapse journal, 2011 state that the US government loan system which has been carried out by the Federal Reserve during last decade is a “prolonged Ponzi scheme” (CNBC news, 2010). The modern American monetary policy is proof of the assumption that the Ponzi scheme has been used to refinance the public debt. The last evidence of this was on the Second of August 2011 when the US government decided again to increase the “ceiling” of the state debt from 14.3 to 16.7 trillion dollars (BBC news, 2011). The credit rating of the largest economy in the world dropped from AAA to AA+ for the first time in its history with catastrophic results for stock markets around the world. This essay will investigate the existence of the Ponzi scheme in the US monetary policy during the last decade and assert that it is a key factor in the American financial meltdown.

1 A shot history of the Ponzi scheme

In order, to understand how a Ponzi scheme can be used in the monetary policy of different countries, it is necessary to explain how this scheme works. Historically, the first Ponzi scheme...