The truth shall set you free, including the truth about Social Security

A Ponzi scheme is a pretty simple animal:  You pay old investors using money put in by new investors.  When you run out of new investors, nobody gets paid.

Social security is also a simple animal:  We pay old taxpayers money put in by new taxpayers.  Because there are more old taxpayers than there are new taxpayers, and because these old taxpayers no longer contribute much, if anything, to the pot,  pretty soon nobody gets paid.

Ponzi schemes cannot be reformed.  They are inherently flawed.  Their painful death is inevitable, since it is programmed into their composition.  We know with certainty that the sun rises in the east and sets in the west.  It always has and it always will.  We also know with certainty that Ponzi schemes inevitably run out of money.

Perry used his prominence to state something that all honest people know to be true:  Social Security is inherently unsustainable.  It’s not a fraud, but it’s destined to failure.  As demographics change, and as we suffer through the repercussions of the Stimulus, that failure will occur sooner, rather than later.  No amount of tweaking will prevent that from happening.  The only way to “fix” Social Security is to do away with it:  give some lump sum payment to those who already depend on it, give phased out payments to this who are uncomfortably close to depending on it, and tell everyone else “We’re sorry we screwed you.”

As far as I’m concerned, Perry gets big kudos for having the honesty to take his high-profile and use it to announce that the Emperor has no clothes.

Economic collapse and bailout predicted in 2001

I was doing some research for a post I’m planning, and came upon an articled entitled “The optimal design of Ponzi schemes in finite economies” which Utpal Bhattacharya wrote in 2001 and published in 2002.  The summary reads as follows:

As no rational agent would be willing to take part in the last round in a finite economy, it is difficult to design Ponzi schemes that are certain to explode. This paper argues that if agents correctly believe in the possibility of a partial bailout when a gigantic Ponzi scheme collapses, and they recognize that a bailout is tantamount to a redistribution of wealth from non-participants to participants, it may be rational for agents to participate, even if they know that it is the last round. We model a political economy where an unscrupulous profit-maximizing promoter can design gigantic Ponzi schemes to cynically exploit this “too big to fail” doctrine. We point to the fact that some of the spectacular Ponzi schemes in history occurred at times where and when such political economies existed—France (1719), Britain (1720), Russia (1994), and Albania (1997).

If the language I’ve highlighted sounds familiar, it should, because it accurately predicts both the economic collapse and the bailout mentality that followed. Someone give Bhattacharya a Nobel Prize for economics, because he nailed it.

One can only wonder now if it was pure happenstance that things played out as they did, or if rational actors were gambling on the bailout Bhattacharya predicted.