The Stock Market is a Giant Ponzi Scheme

EconMatters's picture

By EconMatters  



An Auction with Fake Buyers, that will end well!


The reason why is when you have the Federal government in the form of the Federal Reserve injecting 85 Billion worth of artificial capital, i.e., capital that wasn`t earned, or created through increased sales, revenues or increased productivity gains. 


The problem is that this ‘artificial capital’ is not real, it is temporary and the Fed will discontinue the artificial capital injections, and even remove the liquidity out of the system when they begin tightening. 


You call it Asset Purchases, I call it a Ponzi Scheme


So a Ponzi scheme pays out old investors with the proceeds of the new investors. Well, current retirees right now are benefitting from these ‘artificial injections’ into the stock market at the expense of future retirees who will be left holding the bag on depreciating assets once the fed stops the artificial injections, and asset prices go down. Moreover, when they take the additional step of removing the liquidity from the system, i.e., tightening mode, asset prices will go down even further.


Consequently, anybody who takes money out of the stock market while the fed is artificially raising asset prices is benefitting at the expense of all 401k money that is buying assets now at artificially raised prices. 


In short new investors are buying assets at prices higher than they would otherwise without the Fed`s involvement in the markets. 


These are ‘Temporary Purchases’ right?


Hence the cost basis of their investments is much higher with each artificial liquidity injection. This is great for current retirees, but at the expense of future retirees who now have inflated assets that will deflate once the Fed takes away the proverbial punch bowl. 



Throw in the fact that baby boomers will start withdrawing their retirement capital to live on and those are two deflationary variables that future 401k retirees must overcome.


Nobody likes the Re-Pricing Mechanism


By artificially raising prices in a temporary fashion the Fed is guaranteeing losses for the future for anybody who bought the assets under these ‘artificial circumstances’ and these policies are withdrawn and the very same assets re-price to non-artificially inflated levels.


3 Alternative Outcomes


The only way the Fed can avoid this guaranteed negative outcome for these investors is to hope real productive growth and private capital can substitute for the greatest artificially created liquidity market capitalization in history. 



Or alternatively, the Fed can never stop artificially raising asset prices with the same magnitude and level of involvement. So they have put themselves in a box, effectively committing them to QE eternity.


The other possibility is they lessen the liquidity as much as private capital can make up the difference, i.e. a QE lite. 


Should Retirees Gamble with the Fed?


But for future retirees this is entirely too risky territory to be caught up in a scenario which the Fed seems to have no solid exit plan. And I know that employees just sort of allocate money into the company sponsored plan with a given level of investment choices each month without really thinking about these deeper issues. 



But every asset that employees have bought over the last four plus years and put in the retirement account has been artificially raised through Fed involvement. When the Fed stops being involved investors should seriously move out of these investments and into money market funds to protect the gains made in the artificial liquidity driven period. 


Don`t be left looking for a chair, when the music stops


Otherwise, these investors are going to be paying the price, just like in a Ponzi scheme when the liquidity tide recedes back into the ocean of actual asset values.  Make no mistake current asset holders are reaping the benefits, at the expense of current investors, and future asset holders who will be left holding the bag of artificially inflated “Non- Stores” of Value! The Federal Reserve is guaranteeing that these assets will lose value in the future. 



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steve2241's picture

Ponzi Demography!

Edit: If you want to know why the U.S. government turns a blind eye to the 15+ million illegal immigrants and the border with Mexico is wide open, read this article.  It's about Singapore, but it explains why many countries are experiencing huge increases in immigration. 

More_sellers_than_buyers's picture

Move to money market funds HAHAHAHA..  Im sure they will be fine? When the first one breaks a buck, .... they will all be worth 30 cents on a dollar.

the grateful unemployed's picture

retirees are already gambling with the Fed, (through pension funds) they should be putting any discretionary money they have left n the cookie jar, and people know this, which is why consumer confidence is down. the Fed didn't know that by ruining the investment market they would cause another currency hoarding episode such as happened in the first depression.

geno-econ's picture

Polititians are haggling over 85 billion in sequester spending cuts while  Fed is pumping 48 billion in deficits every month.


Meanwhile Alan Greenspan the almighty maestro says everything will be okay, even with sequester cuts, as long as stocks do not tank.


vmromk's picture

The Fed will begin tightening ? Are you for real ?

The Fed is all in and going in deeper, there is ZERO, let me repeat, ZERO chance of them EVER tightening.

vmromk's picture

Thanks for the negative Bernanke, NOW GO FUCK YOUR MOTHER.

Shizzmoney's picture

I learned (in 2008) that the world including my government in the good old USA is ruled by sociopaths bent on strip mining me and everyone else through this Ponzi scheme writ large.  I'm late to the game but I'm learning fast.


Had a co-worker today call his broker, Habib (lol), to set up an IRA for his 18 year old daughter.

Man, are THEY gonna be dissapointed when the last bubble pops.

I proudly do not have a 401K - not that I could afford it, anyways (including my company, who doesn't match, despite their stock price going from 0.99 in 2007 to 11ish now).

Things will only change, and the older people will only start to wake up, when they lose their 401Ks and pensions.  Until then, "ALL IS WELL"

Grand Supercycle's picture

Wile E. Coyote sell off is getting closer as SP500 daily & weekly uptrends simultaneously complete a protracted topping process.

It’s taking longer to roll over because daily AND weekly trends are terminating together.

Therefore the resultant downtrend should have good momentum.

El Hosel's picture

"Investors" "Assets" "Value" "trends" ... Its all crap.  Warren Buffet, the great american "Investor" and poster child for the glorification of legalized robbery and gutting of the republic. As long as we have "heroes" like Warren eveything will be fine.

falak pema's picture

I'm shocked that the blogger media now calls the Vatican of capitalism as the den of Lucifer. Thats Petrarchian blasphemy.

WHat will the rich and less rich do with their money if they can't put it in stocks n shares?

Putting it in gold bars in not capitalism, as it sterilises all risk taking by defintion.

Capitalism is made of yin and yang, according to Orly's recipe, risk and return...that's all the capital market is, a trade off between different risk return profiles for us to invest in, depending if we are Billy the Kid or Rip Van Winkle. 

If the whole shooting match is dishonest that's the end of Americanism and we go back to pre 1492 days. 

No wonder Draghi feels he is the new drag queen of money; the Oscar will now be given to third sex categories, neither male nor female, neither Annie Oakley nor Wild Bill Hickock. 

I'm having withdrawal pains just at the thought of this heresy. No woman no cry...just carnival queens who are in-between.

Jeeez, we are as MAdoffed as bird man in Alcatraz. Stymied. 

NEOSERF's picture

Great article except for the minor problem that the Fed will never stop asset purchases...other than that it is spot on.

marathonman's picture

Well of course the stock market is a Ponzi.  Bonds are a Ponzi.  Our monetary system is a Ponzi.  In nominal terms the value is sky-rocketing.  In real terms - i.e. what you can buy with purchasing power - its going tits up.  Most people have no idea how this game is played.  It wasn't until 2008, that I got the least bit curious how this thing blew up.  My whole world view changed after 2008.  I learned that the world including my government in the good old USA is ruled by sociopaths bent on strip mining me and everyone else through this Ponzi scheme writ large.  I'm late to the game but I'm learning fast. 

CH1's picture

I'm late to the game but I'm learning fast.

Looks to me like you're doing just fine, my friend. Good to have you here.

fourchan's picture

strip mining us is a good term for it.

orangegeek's picture

Not really.


The context of the stock market is sold as a place to make money.  This is a lie.


And Ponzi schemes are created from this context.  People are too lazy to invest on their own, so they hand over their life's savings to strangers called banks.


The real context of the stock market is to deceive for the purpose of taking your opponents money.  There are winners and losers in the markets every day.  Newspapaers/media are one of the biggest purveyors of deception - they are promotion vehicles for insiders to exit at tops and buy at bottoms while the public does the opposite.


MFLTucson's picture


The whole financial system is a fraud why narrow this to the stock market.  The labor reports are a lie, the bond market is a lie, the earnings are a lie, this governments reporting of economic activities are lies, the housing market is a lie, the bankers balance sheets are a lie ...dare I waste anymore of your time??  Gold down, the dollar up.  Thats the biggest sham of all!!


moneybots's picture

" Well, current retirees right now are benefitting from these ‘artificial injections’ into the stock market at the expense of future retirees"


aren't current retirees in fixed income?


Alternative outcomes are contrary to the statement of re-pricing mechanisms.  QEternity would just continue to push prices upward.  Value of coarse is another matter.  As Kyle Bass noted recently, the best stock market of the last decade was Zimbabwe, "where your entire protfolio would buy you three eggs."   Now that's a stock market.

tango's picture

Many pension funds have switched to stocks from bonds (the FED's goal) and are getting a good return.  Others are forcing states to shove more and more money into the foods to make up for the absurd 7.5% return they havenn't got in 6 years.  Most folks have zero idea how their retirement funds are invested.

LawsofPhysics's picture

Exactly.  401ks also being pushed into equities.  The treasury "market" and retirement funds will be the last thing to get nationalized as all paper promises die.  When fruad becomes the status quo, possession is the law.

LawsofPhysics's picture

"Shocker" - Humanity is a giant ponzi, anything else obviousman?  

DUNTHAT's picture

The world's economy is run by a Banking Cartel led by the largest central banks.

As in all cartels sooner or later it will dissolve when self interest outweighs mutual interest.

I think the currencies will be the driving force that breaks this ponzi scheme up.

rsnoble's picture

Hard for the elite to keep plowing along and have everyone convinced they are our friends when the markets are crashing.  Meanwhile all is well and they are implenmenting "kill crush destroy plans" all over the world and soon in the US.

tango's picture

The eite would have a hard time convincing folks if the markets were crashing.  But they're not,  Instead we're aiming for new highs (yes, I know it's a result of QE). If you are invested this is a good thing.  It's reality is an entirely different question.  After all, many companies are still making money although productivity has been taken as far as possible.  And with gas, food and healthcare zooming, folks are not paying too much attention to the stock market. 

boogerbently's picture

When will the "Ponzi Bubble" burst ?