The Big Ponzi

 Bernie Madoff sleeps behind concrete walls now, separated from the $60 billion he stole from gullible investors. For those of you who were too busy watching your retirement accounts waste away or searching for a new job, what Madoff created was the classic Ponzi, or pyramid scheme. He established a plausible sounding investment fund and convinced people to hand him their money. He invested none of it, but paid off early investors with the investments of later investors. Those investors, in turn, received healthy returns on “investment” from later investors. And so on, till he got caught. He should have gotten caught earlier. A money manager named Harry Markopolos notified the Securities and Exchange Commission that the returns coming out of Madoff’s fund were mathematically impossible, but he was ignored.

Ultimately it would have all come to light, for that is the foible of a pyramid scheme – it can’t last forever. The person running the scam has to plunder an ever-widening circle of suckers to pay off the existing suckers. Eventually the scamster runs out of human beings with sufficient money and the flow of returns stops. Only the man in the cell knows what he intended to do at that point. Run for a non-extraditing country? Go into permanent hiding? Give himself up?

Madoff’s investment con, at $60 billion, has been called the biggest pyramid scheme in history. Not so. We are in the middle of a larger one, planetary in scope, and named for its scale: globalization.

The corporate giants of the world have taken advantage of an economic trifecta. Its three parts are:

• The post-WWII prosperity of the United States
• Cheap and safe trans-oceanic shipping
• The so-called Green Revolution, which applied petroleum to farming in the poorer parts of the world, increasing productivity per acre. Combined with commodity cropping it resulted in driving peasants off their land, creating a hungry, cheap industrial labor force.

The push of these factors, plus the pull of the re-regulation of the banking industry sucked investment out of U.S. manufacturing. The best way to make money, if you don’t give a damn about humanity, is to have impoverished people make things for you and then sell these things to relatively wealthy people who have borrowed money to buy them.

The U.S. trade deficit stands at about $700 billion per year, double what it was back in 2000. We borrow a Wall Street bailout every year overseas, mostly to pay for consumer goods, oil, and automobiles. Our total debt is about $6.5 trillion, with the interest payments amounting to roughly $2000 per American worker per year. Another decade of this and we’ll be $12 trillion in the hole. That is, if the Asians and the Arabs keep lending us money. At some point the U.S. foreign debt will get so ridiculous that we will be unable to support it. Like the Ponzi artist, we’ll run out of suckers. Except that we are the suckers.

Historical note: The British ran into this problem a couple of hundred years ago because of their national addiction to tea. (Also porcelain and silk.) They imported tons of the stuff from China, the world’s sole producer at the time. The Chinese imperial government wanted silver, and only silver, for their commodity. The British coffers were draining. Their solution was to promote the use of opium, grown in British-controlled India, in China. They created millions of Chinese addicts and accepted only silver for their commodity. The silver went back to England and was recycled to China for tea.

The international corporations that buy cheap and ship across oceans to sell dear have sold us on the idea that restricting imports is bad. Never mind that control of the flow of money, goods, and people across national boundaries is part of the basic definition of national sovereignty. It is called “protectionism” and it has acquired the 1950’s taint of “communism.” Better that we should go bankrupt as a nation than actually control our borders for our own benefit. I’m not advocating a cessation of trade, but a modification of trade rules that will eventually eliminate our trade deficit.

Radically improving our energy efficiency in terms of transportation and heating would cut our oil-based deficit, presently hovering around $300 billion. The roughly $325 billion we blow overseas annually on consumer goods would require changes in both domestic and international politics. We need to revamp farm subsidies in the U.S. back to price supports, rather than the present practice of forking over cash. That would stop the flood of ultra-cheap grain that puts small farmers around the world out of business and feeds the labor demand of sweatshops. (Side effect: a slowing of the flow undocumented workers, formerly farmers, from Mexico.) We should scrap the present General Agreement on Tariffs and Trade (GATT) and start over with something more beneficial to ordinary Americans.

There are a couple of things we could do to even the odds with the sweatshops of the third world. One would be a sweat labor tariff. We can estimate the advantage a country such as China or Malaysia gets by either having lax labor laws or unenforced labor laws. Let’s say that underpaying and overworking people in unsafe conditions gives them a 10% price advantage over a situation where their people earn a living wage in decent conditions. We should put a 15% surcharge on their goods so that fair wages and safe conditions are to their advantage. Many countries also have nonexistent, lax, or unenforced environmental laws, which give them an economic break. I’d advocate the same tariff format for that issue. China in particular has engaged in manipulation of its currency, pegging it to the dollar at an artificially weak rate. This gives Chinese goods the equivalent of a 40% discount and discourages imports into China. The Chinese government would fight hard to retain this advantage, and there is not much the U.S. can do by itself to combat the currency manipulation. China and the U.S. are locked in mutual dependency – they need our bottomless demand for consumer goods and we need their bottomless supply of loans.

There are three end games for the U.S. trade deficit. We could essentially go bankrupt when international creditor nations decide we are no longer financially sound. International trade could shrink dramatically due to energy costs and political instability. We could decide as a nation to stop participating in the global Ponzi scheme and restart the U.S. manufacturing sector. The second option could end up being the only option by petro-geological default. Still, it would be beneficial to develop the third option before we run out of energy or money.