The Sovereign Ponzi - Tick By Tick Research Email

Tick By Tick's picture


Dear All


In 1903, a young Italian man by the name of Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi (Charles Ponzi to you and I) arrived upon American shores aboard the SS Vancouver.  With dreams of becoming one of the worlds super elite, Ponzi swiftly moved from being a dishwasher to the Branch Manager of Banco Zarossi in Montreal (which ironically turned out to be already running a "Ponzi Scheme" far before Mr Ponzi's arrival).


Fast forward eleven years, including a brief spell in Atlanta Prison, and Ponzi was ready to launch his greatest scheme of monetary fraud.  In lay terms, Ponzi set out to arbitrage International Reply Coupons between Italian and US rates using investor money.  However, after running into a wave of red tape, Ponzi realised that the impressive returns that were being promised could simply be paid out of fresh money as long as he could secure a consistent flow of fresh investor capital.  A Ponzi Scheme if you will.


If we re-evaluate part of the penultimate sentence…"could simply be paid out of fresh money as long as he could secure a consistent flow of fresh investor capital"…we get to the point of today’s email: Confidence.  More specifically, confidence in Sovereigns.  


“Optimism is the faith that leads to achievement. Nothing can be done without hope and confidence.”


Helen Keller


At this point, I would like to ask how a Ponzi scheme differs from the modern sovereign bond market?  If the primary activity in government bond markets is the refinancing of existing debt, are we not in a Ponzi scheme of our own?  By this, I mean that Modern Governance and Treasury is based upon the idea of securing a consistent flow of investor capital to meet payments of the existing principal.  Is it not? 


If we look back to the origin of Government Bonds, it becomes clear that they were designed as a method to fund the activity of war.  An activity that, if successful, would produce future cash flows that are capable of settling the initial borrowing.  From a Finance standpoint, this lending would provide a positive CAPM value for the war. 


Compare this to the bulk of modern Sovereign Finance, by which I mean the process of refinancing, and it becomes clear that there is no future cash flow resulting from the activity and, as such, the whole system has become built on the idea of investor confidence; embedded with the idea that countries can inflate away the cost of borrowing over the medium to long-term.


Over the last 24 months, this practice has become increasingly comprehendible by the investors of government securities and we have already started to see the first few wounded being carried off the battlefield for treatment and we can be sure that they wont be the last.  If the continued trend of higher rate refinancing starts to spread away from just profligate European nations, it won't just be the PIIGS we talk about.  Think West meets East with a little island in the middle or UJU for short.


After that short introduction, I would like to introduce a number of articles that are worth reading as we enter what the Mayans believe to be the last year of the current era.


1) Brazil Overtakes the UK as the 6th Biggest Economy in the World - CEBR (Click HERE)


2) Things That Make You Go Hmm - Grant Williams (Click HERE)

Grant talks about the factors that he feels will be the most pertinent in 2012 


3) IceCap Asset Management - December Presentation (Click HERE)


4) New York Taxi Medallions - Bloomberg (Click HERE)

Arguably the safest investment in the world and up over 1000% in the last 30 years.


5) Graph of the ECB Balance Sheet - Zerohedge (Click HERE)



Over the festive period, I was fortunate to be given a copy of Keith Gessen’s Diary of a Very Bad Year, which in essence is a collection of interviews with an Anonymous Hedge Fund Manager throughout the credit crisis.  Whatever I may or may not think of the content, one fundamental topic emerges out of the book.  The topic of false hope (or Hopium) that exists in the market as we enter a downturn.  After every wrought of the market, the HFM still shows a quite aspirational confidence that the market has reached its bottom due to good economic data or a form of government intervention.  Yet the next month, the market takes a proverbial skydive once again.  Sound familiar?  It should.  You've been warned.   



"So if a higher-than-usual unemployment and slow economy is something like a chronic risk, the government can deal with that by borrowing and spending on stimulus.  If the government takes all this risk onto itself, it may attenuate those chronic risks, but at the risk of you might get to the point where something goes wrong in the US and then the governments creditworthiness is in jeopardy and you have a huge mess" 


Anonymous HFM – 2009 – Diary of a Very Bad Year 


Best Regards

George Adcock 







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Georgesblog's picture

Following through on the line of reasoning, government bonds are an act of war, committed by governments, against their own people.

swani's picture

Oh my God. The UK has started raiding 'dormant' bank accounts and just taking the money. After hyper-rehypothecation, I wonder how much paper the stolen money will turn into.

Mr Lennon Hendrix's picture

This financial system is much more than a ponzi.  Because it is backed by nothing, whereas a ponzi scheme has one underlying asset, it is a Fiat Ponzi.  Fiat means, "Backed by nothing".  It is a ponzi with zero collateral.

disabledvet's picture

I've actually made this argument...a while back when TD was just another (albeit exceptional) raging maniac on Seeking Alpha namely: "relative to what the government is doing makes gambling a legitimate business enterprise. In other words "the government is simply robbing us blind in broad daylight." needless to say I have been completely wrong! Thay are indeed adding massive quantities of stimulus to the economy and in fact are free (apparently) to add more! You go figure cuz I sure can't! Anywho the one's we now know who are stealing are those who keep claiming "free market capitalism is the best path to (their) prosperity (by stealing your money/your gold/your wife/etc...)" that's right: The folks from New York City! Turns out any claim by someone who thinks there is such a thing as personal property in that town is in fact a complete moron and "they've got a Judge to prove it"! Again...have a happy New Year by avoiding everyone and everything in that place!

NotApplicable's picture

And what size of a ponzi does zero allow?

An infinite one, if they can manage the downward spiral of ZIRP4EVA.

As long as we keep accepting their notes in payment for goods and services, the game goes on. The instant they are shunned for an alternative form of currency though, is the instant it all blows up.

Got junk silver?

FeralSerf's picture

That is the reason that an alternative form of currency must not be permitted under any circumstances.

Vincent Vega's picture

Charles Ponzi was one man/crook who ran a scheme within the system. Today the system is a scheme/ponzi run by many crooks. If Mr. Ponzi had the bankster's and politicians in on the deal (as is the case today) it would have lasted much longer.

NotApplicable's picture

The creation of the Fed probably gave him the idea.

El Gordo's picture

By definition, a Ponzi scheme requires a steady stream of new investors to pay off the old.  I would submit that teh good old USA (as well as many others) is well beyond Ponzi since there are no new investors out there who have either the capacity or the desire to continue to fund our ever increasing indebtedness.  Thus we must resort to counterfeiting (or printing new money) to pay off the old as there are no new investment funds coming in.

toadold's picture

"Would I lie to you baby?"

"After reading Zero Hedge I must conclude that you have lied, you are lying, and you will lie to me."

It seems that slowy but surely the alternative media is providing better financial information than the Main Stream Media or the Talking Heads of government and Wall Street.

Peter Pan's picture

One wonders for how long the current Ponzi scheme of the USA can go on with money printing providing the "new" money. So many young people who would have provided the fresh funds are unemployed and indebted and thus unable to prop up an insolvent government and an insolvent Social Security Fund.

Government bonds of any nation lack credibility when nw bonds are issued not only to continue deficit expenditure but to also pay past interest due and payable.

Then again, governments get away with whatever stupid and/or complicit bankers allow them to do.


Blank Reg's picture

And I heard a voice in the midst of the four beasts, And I looked and behold: a pale horse. And his name, that sat on him, was DEBT. And Hell followed with him.
~ Book of Revaluations

CoolClo's picture

When the lamb opened the third seal, I heard the third living creature say, “Go!” I looked, and there was a black horse, and its rider held a scale. 6I heard what sounded like a voice from among the four living creatures, saying, “A quart of wheat for a day’s pay or three quarts of barley for a day’s pay. But do not damage the olive oil and the wine.

-Rev6, 6-7. (GW) translation.


Two days wages to purchase one day worth of food. In other words: food price Hyper-inflation.