Ponzi Planet: The Danger Debt Poses to the Western World

By Alexander Jung

Countries around the world, particularly in the West, are hopelessly in the red, with debt rising every day. Even worse, politicians seem paralyzed, unable -- or unwilling -- to do anything about it. It is a global disaster that threatens the immediate future. But there might be a way out.

A work by the graffiti artist Banksy in London. Zoom
REUTERS

A work by the graffiti artist Banksy in London.

When Carlo Ponzi, a dishwasher from Parma, Italy, immigrated to the United States in 1903, he had $2.50 in his pocket and a million-dollar dream in his head. He was able to fulfill that dream, at least temporarily.

Ponzi promised people that he would multiply their money in a miraculous way: by 50 percent in six weeks. With his carefully parted hair and charming accent, Ponzi beguiled investors and fueled their avarice. The first investors raked in fantastic returns. What they didn't know was that Ponzi was simply using the next investors' money to pay them their profits.

The scheme continued. Ten investors turned into 100, and 100 investors turned into 1,000, until the scam was discovered. Ponzi spent many years in prison, and he died a pauper in 1949. But his name remains important to every criminologist today -- and every economist.

Economists use the term "Ponzi scheme" to describe a disastrous mechanism in which someone pays off old debt by constantly taking on new debt. The repayment of the debt -- the most recent loans, plus interest -- is deferred into the distant future, fueling an eternal process of debt refinancing.

It's the classic pyramid, or snowball scheme, practiced by thousands of con artists after Ponzi. The most spectacular case was that of New York financier Bernard Madoff, who was responsible for losses of about $20 billion by 2008. Snowballs are set into motion, becoming bigger and bigger as they roll along. In the worst case, they end in an avalanche that takes everything else with it.

Western economies have not acted much differently than the fraudster Madoff. In 2011, they were virtually inundated with bad news and old sins. Almost everyone -- in Europe and in the United States -- has been living beyond their means, from consumers to politicians to entire countries. Governments have become servants to the markets upon which they have become dependent.

Bigger Snowballs

On an almost weekly basis, the reports have become more worrisome and the sums of money involved more staggering. Many are now concerned that, as 2012 begins, the snowballs will only get bigger -- and roll faster:

  • There are the banks in Europe, which will have to repay about €725 billion in combined debt in 2012, including €280 billion in the first quarter alone. With the private market largely off-limits to them, the banks have had to rely on the European Central Bank (ECB) to bail them out. The ECB is now lending them fresh money -- as much as they want -- at minimal interest rates.
  • There is a country like Italy, which has an exorbitant amount of debt to service at the beginning of the year. About €160 billion in debt will mature between January and April; the total for the entire year is about €300 billion. The government in Rome is already having trouble finding buyers for its bonds.
  • There is the ECB, which is creating billions essentially out of nothing. On an almost weekly basis, it is acquiring bonds that no one else would buy from Portugal, Spain and Italy and, in the process, it is turning into a reluctant financier of nations. This financial aid already amounts to €211 billion.
  • There is the European Commission, whose president, Josť Manuel Barroso, supports the use of so-called euro bonds. These bonds, which would be issued jointly by the countries in the monetary union, would amount to an accumulation of collective debt on top of national debts.
  • There is the €440-billion euro bailout fund, of which €150 billion are already promised to Greece, Ireland and Portugal. But because this amount is still not enough, the finance ministers have decided to "leverage" the fund, a seemingly harmless term for bringing in additional lenders, thereby multiplying the volume of credit.
  • And then there is the United States, which only remains solvent because the Congress in Washington keeps raising the debt ceiling. The American government already owes its creditors about $15 trillion. Stay tuned for the next installment.

In other words, there are plenty of snowballs that have started rolling and getting larger with each rotation. Some aspects of the economic system in the industrialized countries resemble a gigantic Ponzi scheme. The difference is that this version is completely legal.

Living on Credit

Old debts are paid with new ones, with borrowers giving not the slightest thought to repayment. This has been going on for a long time, far too long, in fact. It was only with the eruption of the financial crisis in 2007 and the outrageously expensive bailouts of banks and economies that many people realized that the entire world is living on credit.

"Debt is rising to points that are above anything we have seen, except during major wars," economists at the Bank for International Settlements (BIS) concluded in a recent study. "The debt problems facing advanced economies are even worse than we thought."

This is even true of seemingly rock-solid Germany. In the third quarter of 2011, German public debt amounted to €2.028 trillion, an increase of €10.8 billion over the debt level just three months earlier. Germany's public debt grew by about €120 million a day -- or more than €80,000 a minute -- between July and September.

To make matters worse, this increase occurred in a quarter marked by plentiful tax revenues and a significant decline in unemployment. But debts increase independently of whether times happen to be good or bad.

The End of the System

The same thing is happening almost everywhere. In the first decade of this century, which was by no means a weak period economically, countries more than doubled the level of debt -- to an estimated grand total of $55 trillion by the end of 2011.

The United States leads the pack with its national debt of $15 trillion, followed by Japan with about $13 trillion. Germany's €2 trillion looks almost paltry by comparison. Today, the three major rating agencies award their highest credit rating to only 14 countries in the world.

The fact that nations are continually spending more than they take in cannot turn out well in the long run. The word "credit" comes from the Latin "credere," which means "to believe." The system will only function as long as lenders believe in borrowers. Once the belief in the creditworthiness of borrowers is destroyed, hardly anyone will be willing to buy their securities.

When that happens, the system is finished.

This is precisely what happened with Carlo Ponzi's scheme. And now entire countries are suffering suspiciously similar fates. They are no longer being taken seriously.

Greece is effectively insolvent. Italy and Spain are forced to offer higher interest rates to find buyers for their government bonds. And France threatens to lose its impeccable credit rating. The debt crisis has arrived in the heart of Europe.

Meanwhile, it is also flaring up in the United States once again, with Democrats and Republicans blaming each other for the nation's debts. Instead of taking responsibility and consolidating the budget, President Barack Obama prefers to rail against the Europeans' approach to crisis management. They, in turn, refuse to tolerate any interference, especially from the United States, which they blame for being the source of the financial crisis in the first place.

In this fashion, the Old World and the New World are tossing the blame back and forth, while confidence in politics and its ability to avert collapse is dwindling on both sides of the Atlantic. Is there still a way to stop the avalanche, or at least to diminish is destructive force? Why do countries that collect taxes have to borrow money in the first place?

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1. Herr Jung
didigermany 01/06/2012
Zitat von sysopCountries around the world, particularly in the West, are hopelessly in the red, with debt rising every day. Even worse, politicians seem paralyzed, unable -- or unwilling -- to do anything about it. It is a global disaster that threatens the immediate future. But there might be a way out. http://www.spiegel.de/international/world/0,1518,806772,00.html
Waeren Sie so nett und wuerden z.Bsp. diese Aufstellung fuer GB machen. Sie waeren erstaunt, denn dann waere GB inclusiv PPI bei 200% des GDP.
2. Austerity and Flagellants
devisitor 01/07/2012
The article has a 'chicken little' air about it, the sky is falling because of debt, while neglecting the more immediate concern of the state of the economy. Worries about debt are driving austerity measures to the point that nations are behaving like Flagellants, lashing themselves while walking en mass into a European recession or worse. It should be obvious that contractionary measures are contractionary, and if austerity is implemented on faith as opposed to reason then be prepared to live with the possibility of an extended downturn. As mentioned in the article a more practical approach is for governments to implement austerity when the economy is doing well, and to assume more debt if needed in order to get the economy going again as debt is cheaper in hard times. Interest rates in some areas are almost at historic lows, in spite of the fears of the Inflationistas, a different tribe of chicken littles. As far as managing the debt long term, remember that we get the governments that we deserve.
3.
londonium 01/07/2012
Zitat von sysopCountries around the world, particularly in the West, are hopelessly in the red, with debt rising every day. Even worse, politicians seem paralyzed, unable -- or unwilling -- to do anything about it. It is a global disaster that threatens the immediate future. But there might be a way out. http://www.spiegel.de/international/world/0,1518,806772,00.html
Thank you very much for a top notch article. It's all there, in a nutshell. Should be required reading for any voter and politician. In particular the article shows that there is hope - the quoted successes of Spain, Italy and Belgium in managing down their debt during the 1990s. I am also heartened by the clear distinction of the deficit and the actual debt burden - who cares if the deficit is reduced? You correctly point out that it's the reduction in the actual debt is that truly matters in restoring confidence. Most recently the voters of Spain have explicitly voted for austerity, showing that it is possible to resist politicians' attempts to bribe their voters as deficit spenders have done for several decades. Extremely important to point out the huge burden that unfunded pension liabilities represent for Germany. Thank you again.
4. Planet Ponzi - www.planetponzi.com
www.planetponzi.com 01/22/2012
Fantastic article! In fact, I have recently written a book titled Planet Ponzi on precisely this topic I would like to send you a promotional copy! itís available in English on 2 Feb 2012 and will be published in German soon! My website is www.planetponzi.com. Best. Mitch
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