Ponzi State

Michael Miller

A Journal for Western Man-- Issue XXXVIII-- July 20, 2005

The welfare state is a fraud. 

What kind of fraud is it? Thanks to Charles Ponzi, we have a name for it, and a model by which to understand it. Mr. Ponzi was a cut above the usual run of grifters, most of whom grab your money and run, never to be heard of again. 

Ponzi paid dividends. He promised huge returns, and he delivered. 

This was a stroke of criminal genius. It attracted new suckers in droves and flocks, and when his scheme started to fall apart his suckers rallied to support him, muttering dark words about the “unscrupulous bankers” who were blackening his reputation. This kept the scam alive far longer than most others, and dramatically increased the loot. 

At least $8 million of the $15 million he took in was never accounted for. In other words he skinned Bostonians for at least 8 million (1920!) dollars! 

In a world where most crime is sordid and cheap, Charles Ponzi is rightly legendary. He made it sordid and very, very expensive! He can be one of the great teachers of mankind, if only we will learn from him. 

The root of his success was a longer-term view than most criminals can muster: he applied sound business principles to a criminal scheme. He had a regular place of business, kept his promises and re-invested for growth. 

These principles worked as well for Charles Ponzi as for the most honest man in the world. He rapidly gained wealth and reputation, and his “investors” profited along with him. Everybody was happy. His early investors had fat returns, and his later investors could see an impressive track record to justify their hopes of fat returns. 

What went wrong? Nothing “went wrong:” it was all a fraud, from first to last. It was based on no profitable enterprise; there was no wealth to back his promises. The only source for the dividends Ponzi paid out was his ability to find new suckers. 

A Ponzi scheme is pure re-distribution: money comes from later suckers to earlier suckers with the operator skimming as much as he can without queering the deal. 

A Ponzi scheme is “an investment swindle in which high profits are promised from fictitious sources and early investors are paid off with funds raised from later ones.”1. 

A welfare state is a political swindle in which endless handouts are promised from fictitious sources, and early taxpayers are paid off with funds raised from later ones.  

Fictitious sources? Sure. “Tax the rich” is a fictitious source; the rich have nowhere near enough wealth to redeem the welfare state’s promises. “The greater efficiency of state enterprise” was a popular fictitious source for decades—now it is just a joke. 

The ultimate fictitious source in the minds of most of the welfare state’s suckers is “the government.” But the government produces nothing; government is not a source of wealth. Whatever it has it gets from private citizens. If they stop paying taxes,2. or go broke, the government is out of luck! Government is a fictitious source of wealth. 

This is why the collapse of the Soviet Union threw welfare statists into shocked paralysis. Despite their fervent denials, statists took Communism’s survival as proof that government could provide wealth. The collapse of Communism—its economic collapse—destroyed their secret hope that absolute power would make government an inexhaustible source of wealth. 

That the welfare state’s later taxpayers pay for the handouts of earlier taxpayers is clear to all. It is notorious as “mortgaging our children’s future.” Friends of the welfare state call it a “contract between generations.” Recognize it as a defining characteristic of a Ponzi scheme. 

The welfare state is a Ponzi state.  

Consider the Canada Pension Plan (or Social Security in the US). It started cheaply; everyone paid, only a few collected. Those who collected were pleased, and the rest paid for it, hoping to collect also. 

Now many are collecting, and many more hope to collect. But without yet another generation of suckers to pay for it, they’ll be left holding an empty bag! 

“But,” they might sputter, “I’ve been paying into this for years. It’s mine! Where’s my money?” Ask Mr. Ponzi! 

The government spent it long ago—and spent borrowed billions besides! There’s nothing to back the promises but the hope that others are willing to be skinned in their turn! In a galling theft of the language of financial responsibility, this is called “pay as you go.” It’s pure Ponzi. The trust funds for these schemes contain nothing but government IOUs! 

Investors hold other government IOUs. The handout-hopers will stand in line behind investors. To default on debts to investors is to invoke financial apocalypse, instant and prolonged ruin. 

Default shuts off government access to loans, and throws all debts into doubt. Capital dries up, even for legitimate businesses. Why invest in a country which is in crisis? Just wait till they sort it out. 

If push comes to shove, the government will let old folks (and sick folks, and kids, and the unemployed) go hang! The alternative would ruin everyone. 

A Ponzi scheme needs a continuously growing supply of suckers. If the supply stops growing, or grows too slowly, the scheme’s promises are defaulted. Then it fails because the supply of new suckers dries up. 

A Ponzi state fails when taxpayers see that its promises are worthless, that all it offers is high taxes with no hope of big handouts. A Ponzi state, too, can run out of suckers. 

Polls report that 4 of 5 young people have abandoned all hope of collecting Canada Pension. They see that their CPP “contribution” is no provision for their future: it is just another damned tax!3. Men are buying “income replacement insurance” to dodge the ban on private medical insurance. They are buying “waiting list insurance” so they can afford treatment in the US when Medicare threatens to ration their lives away. 

Ponzi state promises are worthless.  

Taxpayers know it. 

The Ponzi state is dead! 


1. American Heritage Dictionary, Third Edition, 1992. 
2. It’s happening! See Quackgrass Press #13: Tax heroes 
3. My father was perceptive enough to point this out to me decades ago, before CPP became law. 

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You needn’t despair at the delay in burying the Ponzi state—you can become a Quackgrass activist! Copy this article! Keep the original for future copies. Paper meetings with it! Paper your office! Leave a stack on your business counter! If you expect hostility, use stealth and cunning—it’ll drive your opponents wild! Be ingenious! Have fun! 

Michael Miller is an engineer and Objectivist filosofer with thirty years of experience. He had been a member of Boycott Alberta Medicare in 1969 and of the Association to Defend Property Rights from 1973 on. He writes in-depth philosophical theory at his publication, Quackgrass Press, which can be accessed at http://www.quackgrass.com.

This TRA feature has been edited in accordance with TRA's Statement of Policy.

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