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Fonzie Or Ponzi? One Theory On The Limits To Government Debt
Submitted by FF Wiley of Cyniconomics
Fonzie Or Ponzi? One Theory On The Limits To Government Debt

If you’re part of my generation and watched enough Happy Days back in the day, you know that “the Fonz” had a keen understanding of human nature. And that projecting confidence was a huge part of his alpha male badassness. He even admitted as much in episode #45:
Fonzie: I’m gonna do something for you, Cunningham, I never did for anyone before. I’m gonna teach you the secret of being tough.
Richie: Wow, you don’t think I could ever…
Fonzie: WHO told you to talk?
Richie: I’m sorry Fonz.
Fonzie: That’s the secret.
Richie: What? I think I missed it.
Fonzie: You see how nervous you just got.
Richie: Yeah, but I thought you were gonna kill me.
Fonzie: Hey, that’s the point – I intimidated you. That’s because I got a majestic bearing, I got style, I got an attitude, I got a tough voice.
Richie: Let’s face it, you’re a good fighter.
Fonzie: Hey, I’m the best. But in the entire time you’ve known me, have you ever seen me in a fight.
Richie: Well no, but that’s just because the other guy backs down first.
Fonzie: I rest my case.
I still remember watching the episode and puzzling over the revelation that the Fonz’s tough guy image was a confidence trick. And in the screwed-up way my mind works, Fonzie became my word association for other confidence tricks. For example, paper currencies are Fonzies because their value rests entirely on confidence in the governments that back them.
But some confidence tricks have characteristics that don’t quite fit the Fonz. Take the swindles known as Ponzi schemes. These are tricks that need an endless supply of participants to sustain confidence and stay alive. Once the participant pool depletes as it eventually must, the tricks are revealed as scams. Whereas Fonzies can persist indefinitely (at least in theory), Ponzis eventually collapse.
This distinction can be especially important for the asset class I’ll discuss here – government debt. Government debt usually fits the Fonzie category, but it moves into Ponzi territory in situations where public finances deteriorate. Needless to say, investors may like to know when this transition occurs. In other words, how can we tell when debt changes from Fonzie to Ponzi? I’ll give our best answers below, first by checking briefly with the late economist Hyman Minsky and then by drawing on a variety of research published on CYNICONOMICS this year.
Although Minsky may or may not have watched Happy Days, he did establish the best known criterion for Ponzi debt. He said that debt becomes “Ponzi finance” when the borrower needs to raise fresh capital just to cover interest on existing loans. But he focused on private rather than public borrowing. With due respect to the prescient professor, we’ll tweak the definition to apply specifically to government debt.
Defining the “Ponzi point” for government debt
Ideally, governments would cruise along in Fonzie mode at all times, relying on the confidence of their creditors without taking too many liberties with those creditors. This is what we’ve seen in America for long stretches of history, especially in times of peace. In recent decades, though, fiscal discipline has crumbled. Deficit spending has become addictive in America and elsewhere, leaving governments with two choices:
- Feed the addiction. Continue to borrow heavily and accumulate debt, kicking the can down the road.
- Cure the addiction. Acknowledge and accept the costs of past profligacy, eliminating deficits and possibly also haircutting creditors.
Our definition of the Ponzi point is based on the amount of austerity that’s needed if policymakers were to choose the second option, as well as the effects of that austerity. But we won’t use a numerical measure, at least for now. Instead, we’ll keep it simple and say that restoring fiscal discipline at the Ponzi point would cause the economy to break down for an unusually long period, failing to create jobs or growth. The downturn may or may not meet the textbook definition of a depression, but it would lead to depression-like joblessness. Think of today’s circumstances in countries such as Greece and Spain.
There are a few similarities between this “no growth, no jobs” scenario and a broken Ponzi scheme in the classic definition. The pipeline of new entrants to the system dries up in each case (in the government debt Ponzi, new graduates are unable to find work), while everyone else scrambles for a share of the dwindling wealth.
But the true Ponzi characteristics of the no growth, no jobs scenario are based on politics. Politicians are sure to second guess austerity in a depression or depression-like economy. Eventually, folks who insisted on fiscal responsibility lose sway and short-term thinking is reestablished. And with austerity considered a bad word, debt resumes its climb towards a different threshold, one that brings a far more devastating collapse.
This ultimate threshold – call it the Keynesian end game – is when investors refuse to lend more money, forcing the government to either default or start hyperinflating (probably with some wealth confiscation added in). It then becomes obvious to all that the government’s borrowing was essentially a Ponzi scheme.
The difference between the Ponzi point and the end game is important. At the Ponzi point, the game isn’t over just yet, but it’s a foregone if not widely-recognized conclusion that you’re on a path in that direction. The path is firmly established because serious action to reign in deficits would wreak havoc on the economy and change the political calculus about austerity. Also, most investors remain in the game at the Ponzi point, happy to hold government debt, in the same way that successful Ponzi schemers are able to find willing participants right up to the end. Large, developed nations such as the U.S. and Japan can sail right past their Ponzi points with nary a flutter in the financial markets. As I’ll argue in a moment, Japan has already passed its Ponzi point.
Think of it this way:
You’re swimming in the ocean on a perfect, sunny day, unaware of a riptide that’s pulling you far beyond a swimmable distance from shore. Once you realize what’s happened, you’ll surely struggle against the current and may pay for your mistake with your life if there’s no help at hand. But the mistake was made earlier when you didn’t pay attention to the water conditions and drifted past your ability to swim back safely. Let’s say it was halfway between the shoreline and where the rescue helicopter pulled you out that you unknowingly let yourself drift too far. That halfway spot was your Ponzi point.
In this swimming scenario, you should have turned around and swam back to shore well before reaching the Ponzi point, even as there may have been no obvious signs of danger. By the same logic, governments should take serious action well before public debt rises to Ponzi levels, even though they, too, may not get a clear warning of the eventual catastrophe.
The Fonzie/Ponzi thresholds
Now for our two cents on where the Ponzi point may lie for today’s large, developed countries. Smaller and emerging countries are a different story, because they often lose the confidence of their creditors and choose to default or restructure debt before the Ponzi point comes into play. But here’s our theory for the big countries:
Needless to say, thresholds are inexact in economics. As stated in earlier articles, that’s why we use big, round numbers. It’s also why we’ve chosen a broad range for the transition from Fonzie to Ponzi. At some point between 100% and 150% debt-to-GDP, we think the sovereign debt of today’s large, developed nations fundamentally changes. Bondholders who were merely perpetuating a confidence trick become participants in a Ponzi scheme.
These conclusions are influenced partly by historical research, with a handful of studies marking the range from 100% to 150% as transitionary:
- We looked at all historical episodes of countries running debt-to-GDP ratios higher than America’s pre-GDP redefinition level of 105% (recall that the Bureau of Economic Analysis rewrote GDP history in July.) In every large country episode in which debt was successfully reduced below 90% of GDP without slamming creditors, this was achieved by balancing the budget. Not one of the large countries kept its creditors whole with today’s approach of running chronic deficits excused by Keynesian thinking. The small country results are more complicated but no less discouraging. See here for details.
- We looked more closely at all episodes of countries running debt-to-GDP ratios above 150%. Creditors were kept whole in a few of these episodes, but each one involved wartime debt that was relatively easily managed by either dismantling military apparatus (post-World War II) or exploiting the spoils of military success (19th century British Empire). Every other case is either still ongoing or required a debt default or restructuring. What’s more, had we not restricted our threshold choice to a big, round number, we would have reached virtually the same conclusions at a threshold of only 120%. See here for details.
- Many researchers have found connections between high debt-to-GDP ratios and sub-par economic performance. For example, studies have consistently shown that public debt above 100% of GDP (and usually slightly below) is associated with slow economic growth. Moreover, these results have withstood determined attempts to discredit them, as discussed here and contrary to erroneous reports that flooded the media earlier this year. Here are a few relevant links: Reinhart-Rogoff, Cecchetti-Mohanty-Zampolli, Cecherita-Rother, Kumar-Woo, Baum-Cecherita-Westphal-Rother and Balassone-Francese-Pace.
But history doesn’t do justice to current circumstances, which are more challenging than ever. This isn’t 1946 anymore, when factories could be converted from military to ordinary use and staffed up quickly to meet pent-up demand from years of excess savings. Compared to the relatively painless fiscal retrenchment that followed World War II, the retrenchment that’s needed today will cut to the bone.
Why the thresholds are lower than ever before
In a nutshell, most developed economies have unsustainable tax and benefit structures that are baked into current spending patterns. Due to rising dependency ratios, these tax and benefit structures will become less generous over time. And as they do, the middle class will find it increasingly difficult to maintain the same level of spending, let alone manage any growth.
To some extent, this story has already been playing out in Japan, parts of Europe, and also in the U.S. for the last 15 years or so. As of 2012, American median household income (inflation-adjusted) had fallen 9% below its all-time peak in 1999 and 1% below the previous cyclical peak in 1989. That’s 23 years without any growth, whatsoever, even with the benefits of massive deficit spending.
Looking forward, America’s finances are becoming even more challenging as baby boomer retirements bend the debt trajectory upwards, putting more pressure on the average taxpayer. We’ve illustrated this on several occasions, using projections from the Congressional Budget Office as well as our own research to correct for delusions in the CBO’s work. (See here and here, for example.) These pictures show annual increases in debt-to-GDP getting larger and larger as interest costs grow and demographics worsen.
When even the CBO’s optimistic number crunching shows debt ratios climbing exponentially, you have to wonder if Charles Ponzi is looking you right in the eye and making his best pitch.
We’ve also examined the CBO’s projections more closely and put some hard numbers on the potential economic ramifications. The key question is: What are the differences between the primary budget balances that are cooked into existing policies and the balances required to stabilize the real value of debt? The answer is that these differences are bigger than ever and growing, which is disturbing because it tells us that any attempts to truly restore fiscal discipline would require unprecedented austerity.
We’ll share the details of the primary balance analysis separately, as this is a key part of our argument behind the Fonzie/Ponzi theory, at least for the U.S. We already presented the debt stabilization math and one piece of the analysis, though, in this post. If you’re willing to entertain our theory, we suggest reviewing it together with the other links showing our historical research and future debt projections, while checking back for more research on primary balances. The Fonzie/Ponzi thresholds are based on our interpretation of all of the above.
Note also that the U.S. has already passed its Ponzi point by Minsky’s definition. According to Minsky, borrowing qualifies as Ponzi finance whenever fresh issuance is needed to fund interest on existing debt. Based on the common assumption that the U.S. would miss its interest payments without regular increases in the statutory debt limit, this is indeed the case.
Where we stand today vis-à-vis the Fonzie/Ponzi thresholds
I’ll conclude with a look at the International Monetary Fund’s (IMF) projected debt ratios for 2013 for the ten largest “advanced” economies, ordered from highest to lowest GDP:
The chart shows two countries in our Fonzie/Ponzi range and one full Ponzi. But these happen to include the two largest of the advanced economies and three of the largest six.
If you’re buying into our theory, this is not a pretty picture.
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Heyyyyyyyyyyy
Your FEMA-CAMP nextdor
Before the collapse u will be killed:
USA: FEMA-Camps + 1,6 billion bullets
http://homment.com/fema-camps
Nice analogy. But what is the real purpose of this ponzi? Are they (whoever 'they' are) really out to ruin us? If so, who are 'they' really and why can't we put them out of business?
The REAL purpose of the ponzi scheme?
Take a look!
http://www.youtube.com/watch?v=iFDe5kUUyT0
(...and PLEASE SHARE: make this b*tch viral!)
29:34?
tl;dw ... maybe if you can edit it down to about a minute and a half ...
Watched it. Great video. Thanks for sharing. To the other post (Urban Roman) on your link, there is no way you can explain the debt ponzi system in one minute. This does a pretty good job. Dump your crappy FRNs and get silver!
duplicate - only website I have problems with is ZH - it's like it's being fucked with every time I try to read or make a comment.
The REAL purpose of the ponzi scheme...
http://www.youtube.com/watch?v=iFDe5kUUyT0
(...and PLEASE SHARE: make this b*tch viral!)
Sounds Like a Potsie scheme.
Excuse me, ZH, but has ANYONE got any idea what the spending limits are for this proportional CR?
In other words, yes or no on Sequester compliance?
No idea whatsoever..
we will need to wait for Obammas decree on that....
Jump the shark bitchez
Yes, .gov and.edu jumped the shark a long time ago.
Jump a lot of sharks, and land in Austrailia. I hear of more movement in the direction of New Zealand among my acquaintances.
Hope you like Cesium 137 if you are planning on living in Kiwi land.
Red team and Blue team are trying to give the taxpayers the Malachi Crunch.
I wonder what it would be if we used real GDP numbers.
at least 30% higher
Could be 300% higher.
Ahha! You must be a terrorist!
The Fonzi Ponzi....
"Thanks, Alex...I'll take "Rhymes With 'Fonzie Dream' for $800."
The Ponzi scheme will last as long as the targets of the scheme want to believe in it. So far in the US that has been way longer than I ever could have imagined. And still they believe.
Exactamundo!
LOL
The MSM controls the minds of the peasants. They are firming plugged into the matrix and could care less about reality.
They won't believe for much longer.
They'll believe it to their last breath as long as there's a convenient scape-goat to blame.
Simply put, sheeple are incapable of the introspection necessary to see through the facade, as it would leave them without a bedrock for their belief system. And without our beliefs, what are we?
Rastafarians?
In other words, it's Bush's fault.
Now Fonzie is busy making a living selling reverse mortgages to senior citizens. It seems that he's conformed and become part of the system. It's kind of ironic Fonzie is now selling the Ponzi.
I don't think we should blame the character for the actor being a wiener.
Not even 1/2 way to Japan, and their still going...boy would Ponzi be pissed
Where are the bond banditos?
This is the thing. Confidence in the currency is about more than government debt. If anything, trade balance is more important than government debt. If trade is in surplus (as in Japan until recently) it is a domestic issue. If trade is in deficit, the rest of the world has to continue to send valuable goods and resources for ever-more-dubious paper promises. This is the US and how they abuse their exorbitant privilige of reserve currency status. No other major country (except maybe Japan as it goes into deficit) is as far past the ponzi threshold as the US, and no other currency really matters except the almighty dollar that denominates basically the whole global financial system.
The USA is dead...finished. boom headshot.........just waiting for the body to fall now.
The bigger they are the harder they fall. The sad thing is, people used to have respect for the USA, used to like the USA.......It was always a source of pride to see the sacks of food with USA written on the sides going to help the worlds starving.
But after the bullshit that was 9/11 and the Iraq/Afghan War...and now all this utter bullshit with the NSA, Drones and the economy.....people WANT the USA to die..........and it is going to. 100% stone cold fact. It is killing itself.
The very sad thing is, that people here, who do know how bad it is, will STILL chant USA USA USA whenever anyone points out to them what a shithole their country has become..........
"You have to understand, most of these people are not ready to be unplugged. And many of them are so inured, so hopelessly dependent on the system, that they will fight to protect it. "
If Japan can ride this bitch for 2 decades, the US can string it out for a while longer before the party is over. There is going to be a hell of a price to pay and a bad hangover the morning after though.
Which is why the ponzi here will go on for quite long time before the whole fucking world explodes into chaos.
When currencies die all hell braks loose but it takes quite a bit to destroy that inherrant belief in one's money. Since the US is the Reserve currency everyone believes in it and uses it. When the dollar dies everyone is going to be scrambling.
Debt to GDP is a bullshit number. GDP is not earnings, revenue is earnings. If I want to borrow to fund my lifestyle, I need to show how much I earn and demonstrate a surplus. I can't borrow based on turnover if I run a spending deficit.
Ahh, Barry Zuckerkorn. He's very good.
...Citizens and Vets should build "symobolic" Gallows and wheel them on to the Washington Mall
...And Obama is always "Late" for his Speaches, because He's in the "Puppet Backroom" receiving a Last minute, updated "Bullshit Speech Memory Card" that is inserted into the back of His Head
Excerps of barry not prepaired...
http://www.youtube.com/watch?v=T_AAMa_X2dM
You don't need memory to read a Teleprompter. Obama is running on Kenyan time.
It's a Chachi Scheme, and Joanie loves it.
For future refence, especially those who might be swimming out in an effort to find their PMs that previously fell overboard, when you realize that you are caught in a potenially dangerous rip-tide, first swim parallel to the shore to escape the tide, not directly against it!
I used to wave my arms frantically until Pamela Sue grabbed a bouy and swam out to me and held me close to her silicone.
That girl could float.
The US is Pinky Tuscadero and we are about to get the Malachi crunch.
Ponzi.
The United Scams of America: Social Security, Food Stamps, Medicaid, The Obummercare Corporate Welfare Plan and an estimate of at least 75% of government projects and "wars on whatever".
First we got a gay Vinnie Barbarino...
And now the Fonz...
My life is crumbling away.
Don't forget, the debit limit wasn't raised... it was "suspended".
In other words, it was eliminated.
Perhaps this lady has the reason! After 20 years of listening to the shite that is spewed in that chamber she may have some decent insight.
http://www.prisonplanet.com/bizarre-freemason-rant-on-house-floor-during...
I know, Prison Planet, but it has a shitty link to source, Washington Post.
ETA- Apparently what was said by this broad is now in dispute. Some are saying that the audio has been altered. Look here, where I found this speculation:
http://12160.info/page/the-c-span-crazy-lady-audio-is-fake-there-is-no-h...
Just for FUN!!
FSA isn't goint to allow for austerity......until collapse at least
It would be interesting to apply the Fonzie/Ponzi distiction to the major city level.
WOnder how Detriot, Sacratomato, Fresno, woud do?
Especially as compared to cities that supposedly have their house in order?
The fact is that the US has no need to issue debt. You could issue zero interest US Treasury Notes and be an order of magnitured better off than that provided by FRNs.
The gov't overspends on defense to the order of $350+bn.
The gov't overspends on healthcare at least $250 bn.
The gov't underspends on infrastructure by 1% to 3% of GDP.
One might make the case that the entire debt is odious since the constitution does not allow the private regulation of money and credit.
The debt ceiling is nothing but a circus to distract people from the true depth of the corruption,
It would be simpler to issue the United States Notes and take banksters out of the money creation.
http://en.wikipedia.org/wiki/United_States_Notes
The SDR is the way forward according to the IMF. When the USD dies as the reserve currency, it will be be replaced with SDRs.
I always felt that it was a bit ironic that the US implemented Federal Income Tax in the same year that the Federal Reserve came into being, 1913. If there were no Fed, then there is no need for income tax as their fractional banking system is nothing but a ponsi scheme that creates currency out of thing air, all of which is debt to the public, payable to the Federal Reserve plus interest. Of which, Federal Reserve "owners" draw a 6% dividend annually. Talk about a cushy ride, while Joe Sixpack gets to pay for it. Things that make you go hmm.
Madoff and Forzine for the next French Republican Ticket, Back down and bend over Party,
aka Republikickdadans, "Boner" can dress up in a dress and cry at the inauguration.
Print Yellin, print print print....
Fonzie was an Austrian.
Going on about 11 years now, I have long been a proponent that the world's socioeconomic systems are fragile, rapidly decomposing and that a collapse of the system will come soon.
Most people with our view have been astounded that the “system” keeps afloat and has not imploded yet. Most would say it was the Fed, the banksters, or the various “dependent on unlimited fiat injections” world government is the reason it has stayed afloat.
I am realizing more lately that the ultimate strength of any complex system is the faith and belief the dependent participants have in that very same system. That faith comes from the common man, the guy down the street, not from the Fed, the governments or the banks. I think we can agree that these entities do not create our faith and belief, but rather are the recipients and abusers of this faith and belief.
To measure the fragility of any socioeconomic system we must actually measure the strength of those who support it. After several generations of conditioning and increasing dependence upon the very system that we feel will collapse quickly and completely, may I suggest that this faith and belief, and ultimately the false hope that it engenders, may very well die a long and hard death surviving long past it's perceived expiration date.
When looking at the masses, even the financial classes, they have a very limited view of the macroeconomic and historical political landscape and are blindly and easily duped into the stability of the system. This stability is all they know. Until this is broken the abusers will have the upper hand. Lately it seems the public is waking up from a long slumber, but still the numbers are small and therefore the end still seems far off.
I think the main thing that keeps this afloat is the financial community - they know the whole thing is a big joke but they play along in spite of that.... because they make money by playing along .... by rights, what they should do is just tell all their clients to buy physical gold... but that makes them no money...
It's almost as if they are playing a game of Monopoly - everyone knows it's not real...
Sit on it, Bernanke!
Did America jump the shark a-la Fonzi when it elected an illegitimate foriegn born moslem homosexual pot-smoking Kenyan to the presidency?
Crap is, as always, crap. To fix this we need to do 2 simple things: Reduce taxes across the board and reduce gov't spending at the same time. We know how much to cut because 73% of the gov't was still on the job in this last go-round and the world did not end. It worked for Gladstone when England nearly borrowed itself to death in the 19th Century; it worked for Harding after he inherited the WWI debt, collapsing GDP & 12+% unemployment from Wilson and it worked for Sweden in 2008 when Anders Borg reduced that country's tax rates from the 60+% area and reduced its spending by 25% over the next 4 years. Sweden missed our 2008 bank collapse, a first for the socialist country that used to have them quite regularly and posted the highest GDP growth in Europe in 2011. The problem is that it takes a bit of political courage which we know is in short supply. It takes a rejection of the Keynes-clone monster created by those in power and it takes a working knowledge of history and economics. Not promising.
Correctamundo
The Fonzi-Ponzi analogy would only hold if the money were created worldwide by the states and all transactions were interest free. In the real world, money is lent by the Central Banks to the states at an interest The "interest" money has to come from a new loan from the Central Banks at an interest. Away from Fonzis and Ponzis this is a positive feedback system and the thresholds you describe are nothing but numbers in a monotonicaly increasing sequence or moments in a prewriten timeline.
You know Rogoff-Reinhart was discredited, right?