The Greatest Ponzi Scheme Ever - In the 1920's, a man named Charles Ponzi began engaging in an ancient form of investment fraud in which he promised investors returns of 50% on their money in as little as 45 days. He achieved these results by paying early investors with money collected from later investors. Thereafter known in our times as the "Ponzi Scheme," it has been replayed by swindlers many times over. The defining feature of all these schemes has been to payout dividends from new investment, as opposed to profits. However, all of the previous swindles combined would not add up to the scope and scale of the Ponzi Scheme being run by the United States government.

As you may well be aware of, the US government has run a budget deficit for the majority of the last twenty years. This means that the government spends far more each year than they collect in taxes and transfer payments. The budget gap is bridged through borrowing money from investors by selling government debt. Through decades of economic supremacy, the average investor (institutional or otherwise) has come to view the chances of our government defaulting on these debts as trivial. This can be seen in the simple fact that the yield of the shortest term government debt is known as "the risk free rate of interest." This is very good for our government as investors around the world line up to pour their money in the governments cup, even at today's low rates of interest. As a result the government has issued a very large amount of debt: $9,682,116,996,293.84 (as of 9/11/08 from www.treasurydirect.gov). Stripping out debt held by other US governing entities the number drops to $5,526,828,606,295.84, still a ridiculously large figure. Assuming a average rate of interest of 3% (its definitely more), that means the government must pay a net $165,804,858,188 per year to service its debt. This figure is approximately equal to our government's entire budget deficit for 2007.

THIS MEANS THAT THE GOVERNMENT MUST BORROW MONEY TO PAY ITS CURRENT INTEREST LIABILITIES.

This meets the criteria of a Ponzi Scheme, paying early investors with the capital of later investors. If this were a publicly traded company its debt would be rated junk. Like the "original" Ponzi Scheme, our government's situation will last as long as there are willing investors. Much of the capital comes from countries with extreme export driven economies like China and Japan. The large trade deficits the US runs with these two countries provides a ready supply of investment capital once it reaches their central banking system. These countries, especially China, actively suppress the value their currencies by purchasing US treasury debt instead of selling the dollars for the local currency and investing in domestically denominated assets. This keeps their goods cheap and keeps US consumers buying their products.

Since the US has the most advanced and interconnected capital markets, a collapse in any of the following quantities could bring the whole global financial system to a grinding halt: US consumer spending, US consumer credit, Chinese or Japanese exports, Chinese or Japanese US investment, or any number of things that impair the ability of net saving nations (like exporters) to buy US government debt.

The default of our government is a question of when, not if.