Category Archives: economy

Ponzi Schemes in Ponzi States

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Is Florida a giant Ponzi scheme as Neil Macdonald of the CBC suggested?  Or is it perhaps that The United States is The Largest Ponzi Scheme in the World as Bill Bonner described.

Now Nouriel Roubini of Forbes confirms that view: it is The United States Of Ponzi.

Behold the Madoff in the mirror

Americans lived in a “Made-off” and Ponzi bubble economy for a decade or even longer. Madoff is the mirror of the American economy and of its over-leveraged agents: a house of cards of leverage over leverage by households, financial firms and corporations that has now collapsed in a heap.  When you put zero down on your home, and you thus have no equity in your home, your leverage is literally infinite and you are playing a Ponzi game.

If you are not sure exactly what constitutes a Ponzi scheme, here is how the Security and Exchange Commission (SEC) describes it

“Ponzi” Schemes

Ponzi schemes are a type of illegal pyramid scheme named for Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s. Ponzi thought he could take advantage of differences between U.S. and foreign currencies used to buy and sell international mail coupons. Ponzi told investors that he could provide a 40% return in just 90 days compared with 5% for bank savings accounts.

Decades later, the Ponzi scheme continues to work on the “rob-Peter-to-pay-Paul” principle, as money from new investors is used to pay off earlier investors until the whole scheme collapses.

As the SEC points out it is a type of Pyramid Scheme.

Pyramid Scheme

In the classic “pyramid” scheme, participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same.

The fraudsters behind a pyramid scheme may go to great lengths to make the program look like a legitimate multi-level marketing program. But despite their claims to have legitimate products or services to sell, these fraudsters simply use money coming in from new recruits to pay off early stage investors.

The SEC chart below shows how pyramid schemes can become impossible to sustain.

SEC pyramid

You may ask how does all this relate to what has been happening in the United States of America.  In what sense is that a Ponzi Scheme?  Perhaps the image below can typify what is involved.

ponzi pyramid

The top part of the pyramid is what a company or individual has created in the past in assets.  Often starting with zero, a worthwhile pile has been created.  Everyone assumes that things will continue to grow in the future in the way they have in the past.  People borrow to create the even bigger future that is the base of the pyramid.  The lenders believe the promises and provide the funds to support the growth. 

However just like the Ponzi pyramid there is a limit to growth. The Past was solid, the Future is unknown. They are all dreaming in Technicolor.  Eventually it turns out their pyramid is build on a base of sand.  The whole edifice collapses.  Welcome to the world of Ponzi.

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Unjustified Bonuses Paid By Taxpayers

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AIG bonuses are ‘an outrage’ says President Obama, and he speaks for us all.  How can the senior executives in AIG be so out of touch with reality that they rely on legal niceties to do what is so morally wrong?  Perhaps that lack of judgment and apparent unawareness of how the real world functions explains their appalling track record.  Well they seem to have shot themselves in both feet this time:

Barack Obama is vowing to pursue “every legal avenue” to stop a clutch of top executives at American International Group Inc. from pocketing multimillion-dollar bonuses, including some to employees who designed the risky credit instruments that helped topple the insurance giant.

The U.S. President joined congressional leaders and state regulators on Monday in demanding that the failed insurance giant, which has so far received more than $170-billion (U.S.) in government bailout cash, roll back $165-million in bonuses paid to employees over the weekend.  Outrage was the word of the day as news spread of the payouts, some reportedly as high as $6.5-million.

Not surprisingly, the Bonuses overshadow foreign bank payments, which could have drawn equally violent reactions.

When it emerged on Sunday that foreign banks had received more than $50bn of US federal funds as part of the AIG bail-out, big beneficiaries such as Deutsche Bank and Société Générale must have braced themselves for an outcry in Washington.

Any senior executive of any financial institution should have a keen awareness of what is going on around the world and consider carefully the most appropriate reactions. In the UK, the Financial Services Authority (FSA) will set out a banking clampdown.

Britain’s financial regulator, the FSA,  plans to clamp down on risky mortgage lending and City bonuses in a shake-up of banking rules due this week according to the British Sunday newspapers.

The FSA is planning a crackdown on management bonuses that reward short-term risk taking and will propose new rules on how banks should be run, including forcing them to hold more capital against risky trading, according to the Financial Sunday Express.  The regulator will also table new vetting procedures to ensure bank bosses are qualified to run financial institutions.

This follows up on assertion by the UK Prime Minister, Gordon Brown, that We won’t pay for bankers’ one-way bets.  He laid out a four-point plan to end the excesses of the bonus culture

Everywhere I go in Britain, I sense and share the anger and dismay of millions of hard-working people who have watched in disbelief during a year in which irresponsible practices in global banks have brought the world’s financial system close to collapse.  Only bold action to protect those endangered through no fault of their own will do.

Responsible senior bank executives should not need to have the politicians clamp down on them in this way.  It goes beyond the issue of legality, it is a simple question of morality.  President Obama has a massive popular movement supporting him as he tries to do whatever it takes to re-establish this in the financial world.

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The G-20 Must Restore Credit And Resist Protectionism

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The eyes of the world will be on the Group of Twenty (G-20) major nations, accounting for 90% of the world’s gross domestic product, 80% of its trade and two-thirds of its population, when they meet in London beginning April 2, 2009. They plan to discuss the cooperative steps necessary to bring the current economic crisis to a speedy end.

According to Arvind Panagariya in a Forbes article, they must Restore Credit And Resist Protectionism as a high priority.

He points out that:

The G20 recognize that international trade today accounts for a much larger proportion of the GDP than at the beginning of the Great Depression in virtually all nations. The likely damage to their economies from a trade war aimed at securing domestic markets exclusively for domestic producers is many times what it would have been in the 1930s. Unsurprisingly, despite shrinking demand across the board, no trade war has broken out and few observers suggest that it is likely to break out in the future.

Clearly international trade will only function if buyers and sellers can find the working capital to support the goods in process and in transit for such trade.

A key factor behind the spectacular decline in trade flows has been the breakdown of trade credit. Once a firm has an export order, it needs credit to finance the production and sale until it receives payment from the buyer. The bank that offers such credit may require the firm to obtain insurance cover for the loan in case of nonpayment. The importer faces the risk of nondelivery.

In all likelihood, the general breakdown of credit markets has asymmetrically impacted international trade transactions. With the exporter and importer located in two different countries, information asymmetries and the resulting distrust are deeper.

The likelihood of such concerted action seems high, given that in a statement at the end of a meeting in Horsham, England, today the G20 Finance officials have pledged to take ‘whatever action is necessary’ to revive economies.  They will maintain expansionary monetary policies as long as is needed.  In the statement, the leaders also called for stronger financial regulation, which seems most necessary given the banking debacles in the UK and the USA.

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Save Or Spend In This Recession

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Can Canadians buy their way out of the recession? is the question posed by Parminder Parmar of CTV.ca News.  North Americans and Europeans appear to be getting mixed messages about whether they should save or spend to move the economy forward.

In the U.S., prominent members of President Barack Obama’s administration have said Americans should once again become a nation of savers — and end the era of carefree overspending. Meanwhile, in Finland, a national campaign featuring an angry looking piggy bank warns people not to feed the recession by saving.

If you want to explore further, here is a web page on President Obama’s administration ‘nation of savers’ thought.

The “Making Work Pay” tax credit, a focus of Obama’s economic stimulus bill, would become permanent. The credit is $800 for those filing jointly and $400 for individuals. It phases out for single taxpayers with $75,000 of adjusted gross income, $150,000 for joint filers.

Other increases in the budget include expansions of the earned income tax credit and child tax credit for low-income Americans, an expanded saver’s tax credit and a plan to automatically enroll people in IRAs and 401(k) plans.

As for the Finnish national campaign featuring an angry looking piggy bank, you’ll find more on that here.

University of Victoria economist Linda Welling says it’s natural for people to be concerned about the negative direction the economy appears to be heading in leading to a tightening of wallets.  So Ottawa should focus on trying to get more money into the hands of consumers to kick start the economy. A few options like offering tax rebates, extending employment insurance benefits or relaxing EI qualification requirements could boost consumer spending.  Anyone making purchases will find ready supply and really low prices.

Mehmet Dalkir, economics professor at the University of New Brunswick, feels that is only part of the answer.  The real key to getting out of the recession is to boost business spending — and the best way for the government to encourage that is by initiating public capital projects.  Without that, continuing job losses will depress overall consumer spending.

As far as consumers go, a good rule of thumb is to have six months to a year of funds to cover net expenses. If you have that, then perhaps by spending you will do yourself and the economy a real good turn.

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Grey Power At The Top

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If you  needed any confirmation that gray or grey power is in the ascendant, the headline item is discussing The Distinguished-Looking President’s Other Gray Matter.

After just 44 days on the job, the 47-year-old president is showing a bit of gray in his hair.  “The gray, it’s not a whole lot, but he has a few strands,” explained Zariff, the president’s Chicago barber for 17 years, who goes by a single name. “It’s quite normal for his age group.”

“Seniors, listen up. I’m getting gray hair myself,” Obama quipped at a campaign stop in Indiana last spring.  “The gray is coming quick,” he told supporters a few months later in Colorado. “By the time I’m sworn in, I will look the part.”

It is a welcome reminder that grey power does not just refer to a cosmetic feature, but can point to all that grey matter that is available within our senior citizens’ crania.  It is not therefore just their disposable income that seniors can use to assist the economy, but perhaps their intellectual capacities can also come into play.

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UK Bank Of England Printing Money

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The somewhat unnerving headline is that the UK Bank Of England begins ‘printing money’ to fight slump.  This is an unprecedented step to prevent the deepest slump since the 1930s.

The Bank of England yesterday announced  plans to inject up to £75bn into the economy over the next three months.

Alarmed by signs Britain’s malfunctioning banking system is starving consumers and businesses of credit, chancellor Alistair Darling yesterday gave Threadneedle Street clearance to begin creating money – the last-gasp measure used by Japan to end a decade of recession and deflation.

The Bank said it would embark on quantitative easing next week, after its monetary policy committee cut the bank rate for the sixth time since the global financial system came close to collapse last October. The rate is now 0.5% – a level not seen before in the Bank’s 315-year history.

Since it is unprecedented, it is by no means certain that it will succeed.  Some suggest that the Bank of England Governor Mervyn King is ‘Groping in the Dark’.

BOE King, criticized for his initial response to the credit crisis, is now embarking on one of the biggest risks in British economic history.

The central bank yesterday won authority to print as much as 150 billion pounds ($212 billion) and pump it into an economy facing its worst recession since World War II, after cutting interest rates close to zero. With markets clogged and economic activity shriveling, King can’t be sure the gamble will work.

“We’re groping in the dark,” said Willem Buiter, a former Bank of England policy maker and now a professor at the London School of Economics. “Ultimately, we’ll know it works if the economy turns around, and that we won’t know for a couple of years.”

One can only hope that these desperate measures in the UK banking world do succeed even thought the road back is likely to be long and bumpy.

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Seniors Can Be Key To Economic Recovery

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Seniors like everyone else are rattled by the severe recession and may instinctively hang on more carefully to their financial resources.  However as John Lindsay of the group,  Friendly to Seniors, pointed out in Sudbury, Seniors are the key to stimulating the economy.

Friendly to Seniors has just published a report, entitled Greater Sudbury Challenges of Aging: Report and Recommendations.  The report outlined why the city needs to take the concerns of seniors seriously.  However seniors represent an untapped source of potential spending for any city.

Those over 55 years old control 75 per cent of the wealth in Greater Sudbury.  If you are older, you have a choice what to do with your money. You can pass it onto your children, save it for your declining years, or spend some of it now.  Older folks have more disposable spending.

The Greater Sudbury community can benefit because:

  • seniors tend to pay cash for big ticket items like cars or big screen televisions, sometimes even homes which benefits retailers and sellers
  • those 65 and up have more savings than the much touted baby boomers just now reaching the age of 60
  • only 5 per cent of seniors use transit-if they got free transit during off peak hours and the city received grants to support that, the city could benefit financially by keeping those buses running full
  • making it easier for seniors to get around the city increases the potential they will spend money in retail outlets or attend cultural events such as the Sudbury Theatre Centre or art shows

John Lindsay is asking city council to respect what seniors have to offer to the community and make it easier for them to reside in the city and contribute to the economy.

That same message applies to all communities across Canada.  It’s called Grey Power.  There are lots of ways Grey Power can contribute to healthy communities and helping to boost the economy is only one of them.

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Personal Finance Software For Seniors

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To help handle personal finances in the best way during a tough recession like this, many people turn to Personal Finance software. As a result, there is a plethora of personal finance software programs to consider. The right choice is always a very personal matter given particular needs. However everyone wants a good user experience. In other words it should be a pleasure to use and it should do the job.

If you have this software choice dilemma, you may find the reviews at Personal Finance Software a good place to start your exploration.

Of course everyone and particularly seniors is looking for something that is easy to use and install. So we list below the Top Ten choices in descending order of attractiveness. In each case, the comments on Ease of Use and Installation from the review site are displayed. By clicking on the link, you can see the full review, which clearly you should do before homing in on the choice that works for you.

Personal Finance Software – Top Ten Reviews

with Ease of Use/Install Comments

    Quicken Starter Edition – Gold Award
    Quicken Starter Edition was easy to install, and easy to use. It’s not packed with a bunch of clutter, so finding what you need and figuring out how to use features is a snap.
    Microsoft Money Essentials – Silver Award
    Microsoft Money was easy to install, and very easy to use. We found it had a little more of a polished interface compared to Quicken Starter Edition and Moneydance. The update process was simple, and Money’s home page provides a great at-a-glance summary of your finances.
    Moneydance – Bronze Award
    The main page of Moneydance is visually simple, which is one of its strengths. The navigation bar and buttons can get you to any section, and the main content area neatly summarizes your accounts, even displaying bill reminders and a tidy calendar. Adding new accounts is a snap as well, and Moneydance 2009 connects to a large number of banks and credit unions the world over.
    AceMoney
    AceMoney was easy to install, and even easier to use. It’s not difficult to figure out what you need to do to access your portfolio, schedule bills and deposits, or run reports, to name a few. AceMoney also supports importing data in a large number of formats, including qif, ofx, ofc, qfx, and xml, so even if AceMoney can’t automatically update your account information, it can read files your bank exports.
    BankTree Personal
    BankTree was easy to install, and easy to use, with large navigation buttons at the top that make it apparent where to go to look at accounts, reports, etc.
    RichOrPoor
    We were disappointed RichOrPoor doesn’t have a setup wizard to guide you through the setup process. RichOrPoor doesn’t import any of the standard formats that most banks use, such as qif or csv. You have to locate where the information goes and then type it in. This becomes tiresome, considering some personal finance software packages connect directly to your bank accounts, and most import a standard set of file types. If by chance your bank exports your accounts to a .rop file, your data entry would be diminished significantly. Once you have entered all of your information, accounts, balances, transactions, and so on, the program is fairly easy to navigate. It’s getting there that’s a chore.
    Budget Express
    Budget Express is a software program that focuses primarily on budgeting and does a good job—this combined with its functionality make Budget Express one of the top ten money management products. If Budget express wanted to compete with some of the all inclusive financial software packages, they would have to add financial planning and investing features.
    Account Xpress
    Accounts Xpress doesn’t offer a setup wizard to help you initially input your financial information. This is a real downfall for people who are not familiar with finance software.
    iCash
    iCash has the ability to reconcile your accounts with your
    bank statements and form a budget for everything in your books. We only found five different reports available within this product: balance sheet, profit and loss statement, profit and loss summary, account statement and taxes.
    Home Bookkeeping
    A user-friendly toolbar, that allows you to quickly access all your accounts, expenses, income, planning and debt, makes Home Bookkeeping a good program for the computer novice. The program was easy to install and we didn’t encounter any errors during installation.

Given the importance of the software working for you, if you have either good or poor experiences of any of these personal finance software programs, why not add a comment here. You then will be helping others to make a better choice.

Footnote: If you are interested in books on Personal Finance, then why not visit the Personal Finances Bookstore.

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Frugal Tips For Thrifty Seniors

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In these hard times, everyone is having to learn how to do more with less.  For some seniors there is little change.  If they have had to get by on Social Security then they often lived a lifetime of frugality.


Long before the recession deepened, they were experts at making ends meet. Long after the recovery comes, they’ll still be masters of frugality.

Many retirees worked their entire adult lives but never qualified for a pension or earned enough to put anything aside. Others started retirement with a nest egg but never thought it would have to last 20 or 30 years. 

Now they are also becoming models for younger Americans forced by the recession to trade in their spendthrift ways for a leaner lifestyle.

On the Web there are quite a number of places to read how these seniors have learned to cope with hard times.  For example, you can find 5 Thrifty Tips From Our Mothers and Grandmothers.

  • Repair, Don’t Replace.
  • Cut Grocery Bills In Half by Cutting Out Cleaning Products.
  • Refurbish Your Closet Without Hitting the Stores. Repair or remodel or arrange a clothing swap
  • Skip the Drug Store and Make Your Own.
  • Cut Energy Bills by Hanging Wash and Closing Vents.

Perhaps the 12 Thrifty Tips to Stretch Every Dollar on Frugal Living may be more useful to you.

  • Tip #1: Think before you buy.
  • Tip #2: Know what things cost.
  • Tip #3: Grow your own food.
  • Tip #4: Unplug the “Energy Vampires” in your home.
  • Tip #5: Embrace the simple pleasures.
  • Tip #6: Hold an annual “Swap Party.”
  • Tip #7: Take advantage of free entertainment.
  • Tip #8: Get maximum mileage from coupons.
  • Tip #9: Shop smart.
  • Tip #10: Get free stuff.
  • Tip #11: Eating day-old bread won’t kill you.
  • Tip #12: Treat yourself once in awhile.

If you’re looking for even more ideas, then why not check out what Beth VanHoose, the Thrifty Guru at LifeTips has assembled.  She boasts she has a collection of 631 Thrifty tips with more being added weekly.

Finally if you’re looking for thrift, we should not overlook the thrift stores as they’re called in the US.  The Thrifty Chicks blog showcases the Thrift Store Gurus, a nation-wide network dedicated to a more robust global repurposing market.  This is win/win as your dollars work even harder than in regular stores.

At the other end of the spectrum, if you would prefer to be finding ways of making more money rather than making your money go as far as possible, then perhaps the Smart Cookies may be able to give you advice that is more to your taste.

Footnote: If you have any particular thrifty tips for seniors, why not add them in the Comments.  Someone may very well be very appreciative of your idea.

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Single Senior Citizens Struggle

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This story is from California but the same picture probably applies throughout North America.  Senior citizens who live alone may well be struggling to survive.  On average, renters are in greater difficulties than those who own their own residences.

A newly released study shows that Nearly Half of California Seniors Living Alone Are In A Money Struggle.  The report was issued by economists with Oakland’s Insight Center for Community Economic Development at UCLA.  They base their findings on the Elder Index, an estimate of the minimum income needed for seniors living alone.  In 2007, that figure was determined to be about $24,000 in California.

The report says housing is the biggest cost for California seniors, with older renters more than twice as likely to be in economic trouble than those seniors who own homes. Economic security also varied among races and genders, with about three-fourths of Latino seniors who lived alone unable to meet their costs, according to the report.

The problem is becoming more severe as seniors are living longer.  The present severe recession which has cut the value of assets has magnified this problem enormously.

The majority of these single Senior citizens are women and poverty hits them much more frequently.  Women are living longer but this has a downside.

75% of the elderly poor in the United States are women and the poverty rate of women is highest among those over age 65. Women live an average of five years longer than men; therefore, they will likely live at least some part of this time of life single and, most probably, end their lives living alone. This has important consequences for women. Unless they plan ahead, they stand the chance of living in poverty after the death of their spouse or partner.

An increasing number of women are single because of divorce or because they never married or partnered.  If single, they are five times more likely to live in poverty than married or partnered women, and older women of color have the highest poverty rates of all. Many women have worked in jobs that did not provide a retirement income; therefore, without Social Security and Medicare, the degree of poverty for these women would be much worse.

The problem of senior poverty is being increasingly recognized, but solutions will not be easily found.

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