Ponzi scheme? Can you explain what exactly a ponzi scheme is? Do you have an example?

To understand the financial structure of a ponzi scheme, think of an upside-down pyramid. To pay back the first investor you need two new ones. Within the timeframe promised to pay those two, you would need to find three new investors. And to pay back those three, you would eventually need to find four more in order to cover the principal plus promised interest. Then five to pay the four, then six to pay the five and on and on until you’ve built a precarious structure that must eventually fall.

The two predominant characteristics of a ponzi scheme are that they promise outrageous returns in any market (10% to 25% and up) for short-term investment periods and they don’t really have a tangible investment, it’s just money from new investors paying earlier investors (thus it is a fraud).

A third predominant characteristic might be that they are promulgated by charismatic con-artists who target the naive and often unsophisticated wealthy.

As another example, think of our social security system. It is the same exact financial structure with two important differences: there is no fraud because it is not presented as an investment opportunity from the beginning; and it is promulgated, not by charismatic con-artists, but by charismatic con-gressmen and women who target the naive and often unsophisticated working stiff.

This entry was posted in Finance. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s