A Bigger Ponzi Scheme than Madoff?

It's mind boggling that anybody is surprised by the Madoff scandal, since ponzi schemes are at the heart of our entire financial system and without the ponzi game, it would be impossible to have any financial market. Madoff's scheme is merely different due to his malicious intentions. But, in general, much of the financial system is a vast ponzi scheme.

The confusion mainly lies in a misunderstanding of what a ponzi scheme really is. The classic ponzi scheme is merely a subset of a more general ponzi-like financial structure. Quite simply, any business entity that requires continued infusions of outside, and new, capital to function on an ongoing basis is a ponzi scheme. Of course, this criterion would label many financial markets and businesses as ponzi schemes, but there is no way around it. If there is not, at some point, sufficient internally- generated cash-flow to pay back initial investors or lenders, the business is a ponzi scheme.

By the above measure, the stock market itself is one gigantic ponzi scheme, since without new infusions of capital from new investors (or new money from early investors), it is impossible for any of the original stock holders to cash out. This is why there is so much marketing pressure for middle class workers to constantly fund the stock portion of their 401-K's, and other retirement accounts. Without these infusions of capital into the market, the stock market would simply collapse since early investors would have no way to cash out of their original investments. Of course, some will argue that the internally generated dividends are what makes the stock market non-ponzi like. While that is true I'm not sure anyone buys or holds onto stocks solely because of the dividend, if there even is a dividend. In fact, the most profitable investments are always in companies that have never and will never pay a dividend.

But, don't take the above as being pessimistic. Once one recognizes that ponzi schemes are at the heart of modern capitalism, the trick then becomes understanding that one can win in a ponzi scheme.

It's simple: Get in early and exit early. There really is no better strategy. Don't worry about investing in stocks, sectors etc. that nobody has even heard of, and when the bubble begins to inflate, just get out and don't worry about missed gains. Get in Early and Get Out Early!