One of the best scams of the century... it draws admiration
In the happy world of fraudulent schemes, my favorite scam is no doubt the pyramid. It’s the most elegant, the classiest, and the cleverest of rip-offs. There are many variations of it, but here’s the principle that corresponds the best to the needs of this article...
Let’s admit that I want to start a pyramidal system: I put on my broker’s suit and introduce myself to some clients (you!) as an investor. I tell you about appealing interest rates of 30% a year.
You give me an amount of money (you "invest"), let’s say $2,000. After a year, I present you with $600, your so-called interests. The scam lies in the fact that this money does not come from some juicy investment made with your capital, but is simply a fraction of your own money (I’m giving you back $600 from your initial $2,000 input). Every year, I give you back $600.
Of course, after three years I’ve given you back $1,800 out of your $2,000 and I’m broke. In order to go on paying dividends back, I need to find other suckers; it’s their capital that will allow me to pay for your dividends. And to pay back those guys the following years, I’ll need even more "investors". Never is there any creation of wealth; at every step, it’s the capital of newcomers that allows me to pay back previous investors.
The system is clever for many reasons. If it’s well administrated, no one feels like one’s loosing anything. Each actor regularly receives great interests and I get my commission. Most of the time, pyramids stop because of the police getting in the way. Activities come to a standstill and therefore inputs stop, preventing me from reimbursing anyone, and thus everyone looses money. You see the trick? You’re ruined, but not because I didn’t do my job well. It’s the intervention of justice that did it. All con men have the same excuse: "if I had been given the time, I would have paid everyone back", which can also be translated to "if the law hadn’t prevented me from working, I would have made my investors richer", a sort of cry for liberalization of the markets. Another cause for stopping activities is when "investors" get scared and ask for their capital back. That’s what we refer to as "market confidence", or lack thereof.
Things look already great so far. They become just sublime with what follows, you’ll have to admit. Of course you know it’s illegal (otherwise all banks would be offering interest rates of that scale) and you’re a willing victim. Better yet, since you can only keep earning dividends as long as the system expands, it’s in your best interests to make other suckers enter the pyramid. From being victim, you become an accomplice. That’s where the brilliant part of the scam lies: transforming all its victims into accomplices. Every participant becomes a devoted organ of propaganda.
But, alas, this system is illegal. The reason is simple: when a pyramid reaches its maximum expansion, it totally collapses and whole countries (Albania) went down this way. Indeed, when there aren’t enough new suckers joining the pyramid, the interests paid back to the "investors" decrease until they finally become null. Since the people who are in the pyramid do not earn any money anymore, they ask for the restitution of their capital. The pyramid can reimburse the first few people (thanks to money that hasn’t been given back as "dividends"), but after a while it goes bankrupt and nobody gets anything back anymore. Since the dividends are paid thanks to incoming money, in the end everybody has lost some dough. The subtlety lies here: at each step of the pyramid, the participant thinks he’s earning money; but, on the whole, the system doesn’t create any income, it just moves around more and more money (at a local level, one thinks one’s getting richer whereas at the global level one’s just running in circles).
The pyramid is the most important scam of the century. It’s according to this blueprint that the stock market has been working for approximately 15 years.
More than ever before, financial markets have been observing growth ratios larger than the true growth of the economy. Activities have grown only a few percents every year, but the stock markets have been showing two-digit ratios. Here’s a difference that must be justified.
The stock market in itself does not create any wealth: in a sane system, it centralizes capitals to invest them in the industry. The global value of the market increases only through the augmentation of activity in the industry, the dividends paid to the investors being a part of the profit obtained from the activity. Thus, logically, the stock market should progress according to the same rates as the activities (it’s these activities that create wealth, the stock market being only a reflection of it). This is the naïve theory of capitalism.
Since the markets do not create any wealth, how can the growth rates of the previous 10 to 15 years be justified? Money has to come from somewhere, right? Stock market money is not born from the market itself, because that would be tantamount to simply printing more bills.
This is where the connection with the scam mentioned previously becomes evident: the progression of financial markets comes from nothing else but the injection of new money in the system through new suckers. Stock values do not increase because the activities increase (we all know it’s not the case), but because the total sum of money going through the system grows regularly. The large amounts of money involved in the system do not enrich it, because there isn’t any creation of goods. As with the pyramid, the financial movements serve only to justify the existence of the system. In order for everyone to feel like he’s getting richer, we need to increase the global amount of money that circulates thanks to the arrival of new suckers.
The new suckers are, in this case, the transfer of riches from the productive activity towards the stock market through different methods: the search for maximum profitability, the privatization of common goods and world globalization. Finding new suckers is simply liberalism.
The first step is to get more money from the production activity than the simple creation of goods would make possible. Investors only had to ask more from the firms they finance. That’s what is called, in liberalist propaganda vocabulary, the search for "profitability". This profitability can be obtained by lowering the costs of the firm (wages, for example) and by limiting investments to reap more dividends. Thus, the money exits the work-world (salaries and development investments) to enter the stock market-world. A good firm is therefore not a creator of activity, but of money. It becomes a mean of transferring money from activities to financial places. The acme being the development of firms that provide useless services (the model being Microsoft).
But the sole transfer of money from firms towards markets isn’t enough to generate the huge dividends demanded by the investors. The second method used to introduce new money into the system is the privatization of common goods. This consists in giving a stock value to things that didn’t have any before. The "thing" itself did exist, but its social aspect made it untouchable. Privatizations of public services give a value to whole sectors of activities that previously escaped the system: privatizing train and bus systems didn’t only mean giving a value to state firms, but to the entire corresponding sectors. Transforming social protections (health, retirement funds) through redistribution (the incoming money being immediately redistributed, the global "value" of the system being null) into hedge funds (through capitalization) comes from the same basic idea: increasing the amount of money inside the system without creating any real activity, to give the impression of a growth.
Finally, once the profitability of these firms has reached its pinnacle and privatization has been taken as far as it could be, the system needs to find new sources of money to justify itself (as in a pyramid). It simply expands geographically. That’s globalization, which is only the expansion of the system for its own survival. We saw in the 80’s new suckers arrive, elegantly dubbed "emerging markets" (South-east Asia and Latin America). The 90’s saw the arrival of an enormous other sucker: the Russian federation. That’s the best example: one day, a whole continent found itself given a market value whereas it didn’t have any the day before. The wealth that existed before (firms, services, people), through their own value, helped increase the value of the global system.
To make the comparison complete between the stock market of the 80’s and 90’s and the pyramidal scam, we must recall that, in that fraudulent scheme, the sucker is willing and becomes an accomplice of the system. To get his capital back, he needs to convince other people of the validity of the system. This is the last brushstroke to the picture of liberalism: to the search for extreme profitability, the privatization of all sectors of activity and the globalization must be added a great tool that helps to keep the system going: propaganda.
Thus, what we’re dealing with is indeed a scam of the type of the pyramid: people partake, in the naïve belief that they’ll make a lot of money but, in its entirety, the system is only moving more and more money in circles, expanding without creating any wealth. When it cannot expand anymore, it collapses, people finally realizing that the riches they had been splitting amongst each other never grew and that they’re not any richer than before.
We’ve witnessed the first signs of wear of this system in the last few years. Expansion endeavors became harder and harder, as well as more and more irrational. The last unexploited sectors were conquered at all cost, thanks to an unbelievable brand of propaganda. The salaries of industrialized countries would have to be lowered (in spite of automation) and more "things" would need to enter the stock market (why not pollution?) to keep the system growing.
This month (September 1998), we saw the logical conclusion of a pyramid reaching its expansion limits: crumbling. No more suckers to enroll, no more fresh money to pay back previous investors, the system is bankrupt.
