Catastrophic Success
By John Mauldin
September 24, 2011

400 Billion Yellow Aspirins
The US Government Is in the “No-Money-Down” Mortgage Business
Crash Alert?
Is Social Security a Ponzi?
Catastrophic Success
Europe, and Breaking the Light-Speed Barrier


Breathes there a man with brain so dead
Who never to himself hath said,
“Social Security looks like a Ponzi Scheme?”

- With apologies to Sir Walter Scott


Today we look at Social Security. In the US, Texas Governor Perry touched the third rail of Social Security and called it a Ponzi scheme, which of course immediately made him the leading candidate in the “shoot the messenger” category. Behind the rhetoric, we look at some actual numbers. No, not the unfunded liabilities, that’s too easy. Let’s look at what a heartless, uncompassionate man President Roosevelt was when he started Social Security (and that’s what many will call me after reading this!). Behind the tongue in cheek, there are some very real issues that do not get addressed when we talk about Social Security, but that need to be part of the discussion. And of course, we must start off with the results of the FOMC meeting, which has me feeling not at all amused. What are they thinking? Apparently, they are seeing the results from another, alternative universe. There is a lot to cover as I head off to London, where I will finish this letter.

But first a very important announcement. I am very excited to be able to introduce my readers to a new mutual fund offered by my friends Altegris Investments. This fund is a blend of five commodity trading advisors or CTAs. Normally, to access a CTA you be to be an accredited investor, with all the net-worth requirements and limited liquidity. But Altegris has figured out how to wrap a mutual fund around CTAs and create a fund of commodity traders with all the usual aspects of a mutual fund (daily pricing, liquidity, etc.).

I have long been involved in the commodity-trading advisor space (some 20 years) and am a proponent of CTAs as a way to diversify portfolio risk. I have written a detailed report on this fascinating sector in relation to the fund, and it is available for free at, along with more information on the fund (including the offering memorandum and important risk disclosures, which are also included at the end of this letter).

The fund has been very well received since its launch and has grown rapidly to over $1 billion. There has been very active interest in the professional community, as advisors and brokers are looking for simple and realistic ways to diversify their clients’ portfolio risk, as well as a way that is truly noncorrelated to typical stock funds and many other asset classes. Whether you are a professional or individual, you really should take the time to research what I think is a very solid fund. My partners at Altegris have decades of experience in the CTA space, with the largest database of CTAs and long-term relationships with many of the managers (I actually started my investment career in the commodity fund space, so have more than a passing knowledge of the arena). Given the potential for volatility in the global markets, I think it makes sense to have some exposure to funds that can go both long and short (depending on their models). I urge you to read my report.

400 Billion Yellow Aspirins

My mother used to tell me, “John, if you can’t say something nice, then don’t say anything at all.” So let’s see if I can find something to nice to say about the FOMC announcement. How about: “At least they didn’t cause TOO much damage”? As Rich Yamarone tweeted immediately after, they announced they would buy 400 billion white aspirins and sell 400 billion yellow aspirins. This was not something that should have been done, but thankfully they only did some $400 billion and not a few trillion, which could have really screwed (a technical economics term) things up.

With Operation Twist as part of their new mix, they announced they would sell short-dated and buy long-dated treasuries. This sent the ten-year yield down to 1.72% (yields were already dropping), although as I write it is back up to 1.79%, which without the recent action would be the all-time low. The 30-year is below 3%, at 2.85%, which makes those of us who have been predicting such an event for many years finally right. I think I will just savor the moment and not make any more predictions for a week or so. It was a long time coming. It would have gotten there anyway, even without this Fed action. Which makes what they did impotent and pointless. More below.

However, such low rates are not cause for merriment but for thoughtful pause, as low rates might be good for the government and for those looking for mortgages, but they threaten to wreak havoc on pension plans, as the bond portfolios on which they are built are paying less and less, and that means they are becoming more and more underfunded, and stocks are not helping. The problem pension fund trustees have is that lower yields require them to raise their assumption for future liabilities, which must be discounted at a lower rate. Lower bond yields, like falling share prices, increase funding gaps.

While few are mentioning this aspect, Spencer Jakab of the FT sent me this note: “A sensitivity study by Credit Suisse done in mid-August shows how big an impact this can have. The underfunding for S&P 500 members was then an estimated $390bn. A 25 basis point fall in discount rates would have inflated the deficit to $435bn – about the same as 4 percentage points of investment underperformance this year. In August alone the deficit among the broader S&P 1500 widened by some $75bn, Mercer Consulting found. Slumping equities and bond yields brought the deficit from 12 to 31 per cent since April alone.”

Not to mention what low rates do to people who are trying to live off their savings. How can you survive on 1% yields from a small income portfolio? That means you start reaching for yield in places that are not as safe or liquid, which is precisely what we do NOT want our retirees to be doing. Wrong, wrong, wrong. An unintended consequence of this Fed policy is that retirees are being put at serious risk. And it is an important consequence. So many retirement plans were formed ten years ago, assuming they could safely withdraw 5% a year. Now that is difficult, at least if we’re talking “safely.” There is going to be a plethora of schemes to entice retirees with “safe” higher-yielding investment programs. Please, remember that there are no free lunches. If you are getting above-market yields, you are taking above-market risks.

Now, let’s look at what the Fed is actually likely to do. They have indicated their actions will occur over the next nine months. This also means they will sell most of their short-term treasuries and increase their duration, but not necessarily their risk. It is still US government debt. These projections are from Bridgewater.

Treasuries the Fed will likely sell:

What the Fed Has Likely Sales
0-1 Years $138 $138
1-2 Years $156 $156
2-3 Years $221 $106
Total $515 $400

On average, $400bn at 1.5-year maturity

Treasuries the Fed will likely buy:

Eligible Total Eligible Outstanding Eligible New Issue Likely Purchase
6-7 Years $353 $179 $174 $140
7-10 Years $581 $383 $198 $160
10-30 Years $521 $395 $126 $100
Total $1,455 $957 $498 $400

Rates have already moved in anticipation, as seen below.

One has to go out beyond 5 years to get more than a 1% yield. Who is buying this stuff? Any pension plan doing so is locking in low returns and underfunding for that period. This is just a disaster in the making in the pension and insurance world. If you couple that with a recession, a Muddle Through Economy, and a secular bear market, it is a prescription for a pension-funding train wreck of epic proportions, which means that the large companies will have to start writing checks, which will be a hit on earnings.

Note: Adding to pension concerns about the stock market, the ECRI weekly leading indicator has been down for six of the last seven week. More evidence that we are in for a real slowdown, if not a recession, sooner rather than later. This just in from the Wall Street Journal:

“Providing fresh evidence of weakening global trade, FedEx Corp. said Thursday it is cutting capacity and trimmed its full-year earnings forecast amid weaker demand, mainly due to slowing sales of consumer electronics made in Asia.

“The news comes as a slide in Asian air cargo traffic that started in July has shown no immediate signs of abating. The slowdown extends to the makers of perishable foods, high-end apparel and automotive and industrial parts that fill the holds of planes flown by FedEx and rivals such as United Parcel Service Inc. and Cathay Pacific Airways Ltd.

“‘The consumer just doesn’t have an appetite’ for spending more, Chief Executive Fred Smith said during a post-earnings conference call. As a result, he added, ‘we don’t anticipate a significant peak [shipping season] this year.’” –Bob Sechler of the WSJ

But that’s just it. What happened with QE2? The money went into commodities and stocks (for which Bernanke again took credit), giving us inflation and a good feeling. But the economy, in terms of jobs, hours worked, incomes, and GDP, went south or sideways. Where was the carry-through? I somehow don’t remember that the stock market was part of the dual mandate, yet Bernanke listed its rise among the results of QE2. My bet is that with QE off the table, that will come to be seen as a temporary rise. A sucker’s rally.

And now that we have used that QE bullet, where are we? The stock market is tanking, as are commodities. Bond yields are making new lows. The dollar is getting stronger. Can someone tell me why we went through this exercise? It seems we are right back where we were, yet with even more uncertainty. And now we start something that my Dad would call a piss-ant (a small, rather noxious and foul variety of Texas ant) program called Operation Twist, which has no real hope of doing anything that will help the dual mandate. It simply creates the illusion the Fed is doing something.

I said at the time of the 2nd QE that the main problem I had was that we were wasting a bullet that we would (and now do) need when the next liquidity crisis came. And we have now kicked inflation up. As Rob Arnott wrote me in a private message, when you look at the next four months, which will “drop off” the year-over-year rate of inflation, it’s not pretty. Core could easily run up to more than 2.5%. The Fed may have handcuffed itself at the very time we need some liquidity. QE2 was a very bad and ill-conceived move, as is the current one. It is not smart to mess with Mother Market. (Can anyone say Fisher for Fed Chair?)

The US Government Is in the “No-Money-Down” Mortgage Business

The Fed was very clear in its statement that it wants mortgage rates to go down. But anyone with a pulse knows that the problem in the housing market is not that rates are too high. Dropping rates another 25-50 basis points is not going to help all that much if you can’t get the 20% down you need to finance a house, let alone get a nonconforming loan or, God forbid, a jumbo loan. With banks feeding into the market “REO” homes they get from foreclosures, it will be several years until we get close to a bottom in housing. But new homes are being built. So what gives?

This week I went to a fund presentation on new-home construction and sales. I was invited by a very knowledgeable real estate consulting firm (John Burns), and I was interested to know, how do you raise money in this market for new-home “spec” construction? The numbers and the company sales history they presented looked very impressive, but I could not figure out how they were closing the rather significant number of homes per development they did. No one else I knew of was close, from what I have seen (I watch these things). When the person who presented sat down, I looked at the mailer they send out by the millions. They send it to apartment renters. It says, “Why would you rent an apartment when you can buy a new home for $699 a month with NO MONEY DOWN?” And at very low rates, I might add.

These are starter homes, smaller but quite nice. (Note: a lot larger than the houses I grew up in with three siblings!) But they are on the outskirts of town, and that triggered a thought in the back of my head. Joan McCullough had tipped me to this.

“Are you using USDA financing to get the no-money-down?” The short answer was yes, along with FHA (3% down) and VHA. And what, you may be asking, is USDA financing? And how do I get some?

The USDA is the US Department of Agriculture. They currently have $24 billion they can use for government-guaranteed financing of homes (up from $12 billion last year). This is not Fannie or Freddie, this is the good old US D of A. As in farms and stuff (and food stamps and housing and… basically they got all these odd mandates long ago, when congressional agricultural committees wanted to expand their power). From Real Estate Economy Watch:

“Founded in 1949 to spur home sales and development in rural areas, the US Department of Agriculture’s popular direct and guaranteed rural housing loans today are one of the few places in America you can still get a mortgage with no money down at competitive rates.

“Borrowers don’t have to be lower income; in fact they can make slightly more than the median. To qualify for the government guaranteed loans, borrowers can earn up to 115 percent of the median income for the area. Nor do they have to buy in a rural area. They can live relatively close to a major urban area or in a popular resort community, however qualifying areas were recently redrawn to comply with the program’s rural mandate.

Best of all, no down payment is needed to get financing through approved lenders, which makes the USDA program more attractive to borrowers who qualify than FHA.” (emphasis mine)

And there are actually subsidies available, so that you might not need to make the entire payment. Now, you can’t use this to buy a McMansion. You have to be in a rural area, which has come to be defined as outside the city limits (except in certain areas). There are income limits. The program does attempt to help lower-income families, and I am not trying to be snarky here, but these are government-guaranteed loans (read: taxpayer-guaranteed) at 100%, being handed out in areas where in the city homes are going into foreclosure and need someone to live in them, yet right outside the city you can buy this cute new home. Which is a situation more or less guaranteed to keep home values down in the rural outskirts, yet we want first-time buyers to snap these up!

The intention here is all well and good. And the buyers are seeing it as a way to reduce their monthly payment, and a house is still the American Dream. And, over time, it will be. If they stay in them long enough and don’t need to move, etc. I just think the unintended consequences (there are those words again, as we’re talking about a government project) are likely to be larger than anyone thinks.

I invite you to go to Look around. Notice that 4 of the first 5 press releases on the home page have the words job creation in their titles. Plus a lot of other current buzz words, like energy, environment, etc.

This whole side trip got started with our analysis of the Fed and its recent actions. Let’s quickly return, before moving on to Social Security. This week’s action is not useful. It falls under the category of “Let’s do something to show we know there is a problem.” It will provoke suspicion or opposition among those of a conservative monetary bent, probably hurt small and medium-sized banks (as it drives down the yield curve, which bankers depend on to make money), and lower interest rates for savers.

Crash Alert?

This is from my good friend Art Cashin today (he’s head of floor operations of UBS, and you see him all the time up on CNBC). I thought it should go here, after the market action of the last few days. Just as a heads-up.

“The Thursday/Monday Syndrome – We had suggested yesterday that we should probably explore the history of what old fogey traders refer to as the Thursday/Monday syndrome. While it would be pretensions to say that was prophetic, it was, to say the least, serendipitous, for yesterday’s action looked like the perfect first step in a Thursday/Monday setup.

“We had intended to give you a more thorough history of the syndrome with lots of analytical examples starting with the classic one – October 1929. Unfortunately, events are moving too fast this week, so we have neither the time nor space to wax poetic on the topic. So, you will just have to rely on my recollections of 50 years of watching markets and hundreds of nights studying market history.

“The classic Thursday/Monday syndrome starts with the kind of action we saw yesterday. The markets open under pressure and selling accelerates in swelling volume. By early afternoon, there is a virtual stampede of selling. Then, later in the session, stocks stabilize a bit based on some reassurance. On Thursday, October 23, 1929, that reassurance came in the form of Richard Whitney bidding ‘205 for 10,000 steel’ on behalf of the bankers’ rescue pool. (Read a terrific account in the chapter ‘The Crash’ in Fredrick Lewis Allen’s marvelous and essential ‘Only Yesterday’.)

“The action on Friday (and Saturday in the case of 1929) is uneven, often ending choppily steady or somewhat weaker.

“Then on Monday, the trapdoor opens with liquidation and margin calls bringing tsunamis of selling.

“Is that what’s going to happen? Who knows? If it were that easy, kindergarten kids could do this. But chance favors the prepared mind. Old fogeys will guard against undue risk and exposure. Some may even get out a special shopping list. They will set their basket right, put in silly bids and hope some panicky soul throws a bargain in. Recall the story of the floor messenger boy, who, in 1929, according to legend, bought White Sewing Machine with his silly bid of one dollar when all other bids canceled.

“One final note on the syndrome. Not infrequently, the Monday massacre spills over into Tuesday morning – a capitulation bottom in mid-morning resulting in a massive reversal to the upside.”

Is Social Security a Ponzi?

Breathes there a man with brain so dead
Who never to himself hath said,
“Social Security looks like a Ponzi Scheme?”

- With apologies to Sir Walter Scott

Governor Rick Perry has been getting slammed of late for his comment that Social Security is a Ponzi scheme. Note: This is NOT an endorsement of Perry or any other candidate; it is a segue into the more important issue of Social Security.

Perry is not saying anything that has not been said for over 20 years. I seem to remember that back in my younger days (as in the ’80s) I actually published a book on Ponzis. The classic Ponzi is where you get money from one group and then find another group to pay the “returns” to the first, and so on, until you run out of people and the game is up. The difference between a Ponzi and Social Security is that SS is legal and is done in full view of the public with everyone knowing the deal.

As long as each succeeding generation is willing to pay and is large enough, SS can go on. But now we have trillions in unfunded liabilities. All Perry is suggesting is that we admit the problem and fix it. Not exactly radical or suggesting we end Social Security, as Romney and the others claimed.

(Side note. I found that use of the attack mode disgusting and totally devoid of the leadership I want to see on that stage. It was trying to create a “gotcha” moment. Why not turn it into a teaching moment, to say how you would fix Social Security or admit you have no clue as to the true nature of the problem? Afraid to touch the third rail of Social Security? Then get out of the race. You have no ability to lead this country through what will be a crisis presidency if you can’t even admit to some basic, obvious truths. And how will you even get to the real problem, Medicare?)

Most of the “fixes” are some combination of increasing the retirement age, raising the cap on how much is subject to SS taxes, and/or some form of means testing. Social Security can be fixed if the political will is found to do one or all of those. Some comments on those choices:

First, there is some resistance to means testing, as it would be an admission that Social Security is a form of welfare and not a “savings account” that is in some hidden lock box. By now, anyone with a neuron firing knows there is no lock box and the Social Security funds are an entry into a government accounting book that don’t really exist except as an IOU. Politicians of all stripes have used the Social Security money to pay for other government expenses. Those funds were even counted to offset the deficit, although now that Social Security is no longer in a surplus, that has gone away.

Isn’t that what Ponzi did? He took money from one group, telling them they would get it back later, and then spent the money with another group, telling them the same thing.

OK, think using the term Ponzi is harsh? Some Republican theme? Then let’s quote uber-liberal Paul Krugman from 1996:

“Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today’s young may well get less than they put in).”

Let me say, I am all for Social Security. While I supplement my mother’s income, her Social Security check is very important to her. Not enough to live on, but every bit helps. (I have friends whose parents’ sole income is Social Security, and I totally get how small it is in today’s world.)

I also have seven kids. Hopefully, most or all of them will not need Social Security when they retire in 40-50 years. But some might. I want it to be there for them if they need it. But if we don’t properly fix it, it won’t be. I want it fixed.

I turn 62 next month. I am eligible for Social Security. I have paid in a lot of money over the last 45 years of working, for the last 20 years at the max level (with some off years here and there). Am I “due” something? Based on the current law, I am. But I must confess that life has been good of late (there have been times when I thought I would need every penny of Social Security!).

I think Social Security should be means tested. We should recognize it for what it is, for what Krugman called it: a redistributionist scheme. And a good and necessary one from the perspective of civilized society. Means testing would go a long ways to “fixing” the problem. But it doesn’t get us there.

We need to raise the retirement age, and by more than a few years. And this is where I get called a heartless (insert expletive)! “How could you want us to work until 70 or even later? How can we do that? Is that fair?”

Let’s use as our model that icon of the left, the King of Compassion, President Franklin Delano Roosevelt (FDR). He created the Social Security Act in 1935. He put the retirement age at 65. From today’s perspective, that seems about right, if not a little early. But what did it look like back then? I refer you to a report from the US Senate in 2006 on life expectancy in the US. Interesting reading, but for our purposes we will scroll down to page 26 and the detailed life-expectancy tables. (

In 1900, the average life expectancy was 47 years (shockingly, the life expectancy for black males was only 32). By 1930 it was 59, which, if they kept such records then, would have been what they were looking at when the designed Social Security. In 1935 it had risen to 61.

So FDR set the retirement age four years above the average life expectancy. So much for compassion. He (they) assumed you would work into what was for them advanced old age. Today, 62 does not seem all that old (at least from my vantage point!). Look around – there are lots of people in their 60s and 70s with very active lifestyles.

Why is that? Let’s fast-forward. In 2003 life expectancy was up to 77. Today it is 79 and change. Life expectancy has been rising more or less steadily rate at about 1 year for every 4 years of the calendar. So that means that in 40 years life expectancy, if it continues as it has, will be around 90. Under today’s laws one could retire at 62 or 65 or 67 and, if you just lived an average lifespan, get far more in benefits than you paid in. Remember, 90 will just be the average.

So when someone suggests that we move the retirement age to (gasp!) 70 in a few decades, I just smile and think back to what FDR would do. If Social Security had been set up to track life expectancy in 1935, when it was formed, then retirement would be set at 83 or 84 today! Not exactly the golden-years concept, is it?

Catastrophic Success

But then we come to what I call Catastrophic Success. Advances in medicine and biotech in the next 10 and then 20 years are going to radically alter life expectancy. Alzheimer’s disease will be gone. I will tell you about a potential cure for cirrhosis of the liver (and all kinds of cirrhosis) in a future letter. Heart disease? Soon be something that can be dealt with. Diabetes? Will be controlled or gone.

And cancer? There are numerous approaches, but I am following one that will be in human trials next year and that, in numerous mice studies, shows the potential to be a silver bullet for cancer in general, and relatively inexpensive (not a public company).

I could go on and on, but the point is that this Boomer generation is not going to live up to its part of the generational Social Security bargain. We are not going to die on time in anything close to the actuarial certainty the government now assumes (nor do the private pension funds!). Short of a Soylent Green-type debacle, Boomers will not only break the deal, they may destroy it, if we do not tie Social Security to the average lifespan.

Health care will soon be a Catastrophic Success. Wildly successful from the point of view of the individual, but a catastrophe from the point of view of Social Security. And we are debating whether to raise the retirement age from 67 to maybe 70 at some distant time in the future?

We need to be raising the retirement age by one year every four years. That means in 20 years the retirement age needs to be five years higher. I can hear the screams and moans from those 45 and under. “What a heartless [insert expletive] Mauldin is. How long does he think I should have to work? It is all well and good for him,” etc.

I want the Social Security system to be there for my kids in 40 years. And not dealing with the rapid age increase is one way to make sure it is not. OK, I will offer a way to retire earlier. If you agree to forego any new medical treatments introduced after, say, 2014, then I will say you get to retire at the current SS levels. Like that trade? I didn’t think so.

Think I am being overly optimistic about lifespan? I am not even close. I am having a small private dinner in a few weeks with Mr. Optimistic Future himself, Ray Kurzweil (among other books, he wrote The Singularity Is Near – a very important work on the waves rolling toward us from the future). We will talk of many things, and I hope to get him to contribute to my next book, The Millennium Wave, which is all about how the world will look in 20 years. If we stay on his track, then shortly after that time (by 2032) we will be regenerating the entire human body. Ray (and many others) see a path to humans living to 150 and beyond, in good health, with younger bodies. It doesn’t make you immortal. You can still look the wrong way and step in front of a London bus or climb the wrong mountain and fall off. (Note: Ray does see a path to immortality of a sort, when we can download our minds into machines and then reverse the trip. But that’s a whole different level of discussion and farther down the road.)

I am talking to scientists who are doing the human trials on the first real regeneration of a human organ, the cardiovascular system. How about a 50-year warranty on your new heart and cardio system? Then it’s on to the next organ system. One down, 203 to go. (Start with cardio, as it’s the easiest to deliver the targeted stem cell to.) Sadly, it will be done in Asia and not in the US, so we lose tens of thousands of high-paying jobs and don’t get to train a cadre to physicians on how to do it. Nothing against Asia, but this is US-developed technology … that would take five years to get through the FDA. For the management team of the company doing the work, who really do hate the concept of people dying from old age, that’s too many deaths as a result of waiting. And there is still a long way to go before we get true regeneration. We (as in those of us over 60) won’t have time for 20th-century regulators to get in the way. The clock is ticking.

(Side note for those of you who don’t want to live a very long time: I am sorry your life is so boring. I see nothing but wonder and new worlds to explore and cultures to find and tens of thousands of books to read. Ask me in a few thousand years how it’s going. I’m in no hurry to knock on the gates of the Other Side. We get there soon enough.)

Social Security as it is set up today is close enough to a Ponzi scheme for government work. That can be changed, but we have to have the will to do so. Let’s hope that not just Perry can decide to lead us there.

Europe and Breaking the Light Speed Barrier

Heads up, you Junior Rocket Man Kids (remember those days?). Physicists are doing amazing things. My son Trey and I got a private tour this summer of CERN, the great physics lab in Geneva. Very cool. But Wall Street is also legendary for the number of physicists it hires to work on high-frequency trading programs. Evidently, they have figured out how to get trades done 190 milliseconds in the future. Is the race on to see who can cross the one-day mark? What is the speed of light when compared to the speed of money?

“Nanex: On September 15, 2011, beginning at 12:48:54.600, there was a time warp in the trading of Yahoo! (YHOO) stock. HFT has reached speeds faster than the speed-of-light, allowing time travel into the future. Up to 190 milliseconds into the future, or 0.19 fantaseconds is the record so far. It all happened in just over one second of trading, the evidence buried under an avalanche of about 19,000 quotes and 3,000 individual trade executions. The facts of the matter are indisputable. Based on official UQDF/UTDF exchange timestamps, there is unmistakable proof that YHOO trades were executed on quotes that didn’t exist until 190 milliseconds later!” (

Going forward in time is cool, and the same day I got the above notice I read that the physicists at CERN and in Italy have found subatomic particles that move slightly faster than the speed of light, making it possible to travel back in time (only a few nanoseconds, but it’s a start):

“But now it seems that researchers working in one of the world’s largest physics laboratories, under a mountain in central Italy, have recorded particles travelling at a speed that is supposedly forbidden by Einstein’s theory of special relativity.

“Scientists at the Gran Sasso facility will unveil evidence on Friday that raises the troubling possibility of a way to send information back in time, blurring the line between past and present and wreaking havoc with the fundamental principle of cause and effect.

“Researchers on the Opera (Oscillation Project with Emulsion-tRacking Apparatus) experiment recorded the arrival times of ghostly subatomic particles called neutrinos sent from Cern on a 730km journey through the Earth to the Gran Sasso lab.” (

Now, just in case you buy this (and if you did, contact me about a bridge I have), let me attempt to disappoint. First, as my curmudgeon PhD from MIT and VC friend Bart Stuck writes, “I think they both had time-stamp errors.” I can’t vouch for the Swiss and Italians, but I would bet the keys to the kingdom that there is a computer glitch at the NYSE. High-frequency trading (HFT) is distorting the markets. It is enriching a few pockets (and that of the exchange), and I simply do not see how it is in the interest of the public to allow it.

I also know that fighting HFT is spitting into the wind, as faster tech comes along every few months. If you force the HFT funds to put their servers across the street (losing the time advantage of not being co-located with the exchange servers – milliseconds count!), it will only be a few years until technology has given the edge back to them. In ten years, when artificial intelligence and connection speeds are far more advanced, how will human traders compete? Hire yet another AI to fight back? Wire yourself into the system (already being done, by the way, in rudimentary ways)?

The only way to effectively end HFT is for the exchanges to stop giving incentives for such trading. I can see the profits for the traders and the exchanges. I just don’t see the benefit to the rest of us. The SEC should step in and settle some hash over missed time stamps. If a small broker-dealer has a wrong time stamp, they are all over us, and you can bet there are fines. Something is wrong here. If one trade can go “back to the future” then how many more? Really? A one-off or a symptom? And to finish this on a light note, here’s a cartoon from my favorite cartoonist, Gary Larson.

It is getting close to time to hit the send button. It has been good to be home for almost seven weeks and let my body recharge, and spend more time with my kids and grandkids. Life is not easy for all of them at times. Poor Lively (perfect angel that she is) was getting a “spanking” as I left for the airport. I can’t imagine her doing anything naughty, but her mother (Tiffani) thought otherwise. Two of the adult kids needed some help. It is never the same two at the same time. And on and on.

This trip should be fun. I love London. And I’ll be in Malta with my European partner, Niels Jensen of Absolute Return Partners. I will be hosting CNBC Squawk Box on Wednesday in London. Then it’s on to Dublin and lots of meetings, as I try to get a handle on the crisis there (my first trip to Ireland). And a little time driving through the Irish countryside, on our way to Galway. Then to Geneva to be with friends and clients for two days as I turn 62. First, dinner with the always fascinating Lord Alex Bridport (the only lord I know, so I love applying that title) and then a birthday dinner hosted by Herwig van Hove of Notz Stucki. And then it’s back home to Texas.

In four weeks I head to Cape Town, South Africa, where I will speak at the Momentum Wealth Investment Summit, and then, back in Texas, I’ll speak November 6 for a charity fund-raising event sponsored by Hedge Funds Care, a wonderful group that raises money for children’s causes. You can learn more by going to I hope to see you there!

Have a great week and enjoy the weather if you can. The forecast for Europe is beautiful.

Your wondering if he’ll find his Irish ancestors analyst,

John Mauldin

Category: Taxes and Policy, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

57 Responses to “Catastrophic Success”

  1. Moss says:

    It is quite remarkable how the Texas meme about SS spreads like a wild fire to those of similar beliefs.
    It is irresponsible to label SS as a Ponzi scheme since it implies it is illegal. This may be the intent of the all government is bad crowd who want to liquidate everything (except the War machine) from Federal purview.

    At the heart of this nonsensical argument is that the States of the union should individually determine most of everything. At times like this, when rational thought is at a deficit, it is instrumental to remember that the Civil War, and specifically slavery, was at the root of these so called States rights.

  2. MayorQuimby says:

    It is a ponzi.

    1. People cannot opt out. Want to know why? Because ponzis require ever increasing contributions on the front end. When that stops, well the ponzi crumbles.
    2. Everyone gets to take more out than they put in. Don’t believe me? Look at your statement. It TELLS YOU you will receive more than you put in!
    3. There is no fund and money is paid out as quickly as it comes in.
    4. It requires perpetual growth…forever.

    Look….insurance is OPTIONAL. Insurance plans do not collapse when people stop contributing! If there are no disasters or accidents etc. then an insurance company could theoretically stockpile the inflows of contributions and save them. Social security is obligated to pay out an ever increasing amount on a perpetual basis until the end of time. If social security is an insurance plan…THEN IT IS ONE BY WHICH EACH PERSON FILES A CLAIM EVERY WEEK FOR THE REST OF THEIR LIVES once they reach a certain age!!!

    Not only is social a ponzi but it is the absolute clearest and best example of one!


    BR: A Ponzi scheme is fraudulent and illegal.
    It misrepresents what it does, and the people who are duped by the scam believe money coming tot hem is investment profits, not the cash from new investors. There is also an enticement to new investors of high returns real investments cannot guarantee.


  3. Transor Z says:

    When Krugman (c. 1996) and Mauldin use the word “Ponzi” in connection with Social Security, I think they are self-consciously making a diagnostic observation about the dynamics of long-term Social Security funding using an attention-getting rhetoric. Mauldin and Krugman write for a more sophisticated audience, folks likely to smirk knowingly and nod in amusement when they see the word “Ponzi” in connection with SS funding — while understanding that there are concepts like pooled risk in play based upon life expectancy and knowing full well that, as a matter of fact, SS is not a true Ponzi.

    But when Rick Perry calls SS a “Ponzi,” on the other hand, I think he may be dumb enough to believe it as a literally true statement. As a candidate for national office, he is speaking to a lower common denominator audience using loose populist rhetoric. The agenda behind his rhetoric is set by GOP marketing strategists.

    In comparing the two uses of “Ponzi,” you’re in that scary area in which Krugman can be accurately “quoted” by the right as calling Social Security a “Ponzi game.” Of course, it’s taken out of context and all nuance is lost. But good luck explaining that to Perry’s audience.

  4. BusSchDean says:

    An elementary school built from a pool of tax money created for the purpose lasts for 40 yrs, benefitting a generation whose parents are not yet born. The taxpayers’ own children or grandchildren may or may not benefit, and of course some taxpayers voted against the tax but had to pay anyway. Is that a Ponzi scheme?
    If not, why not? Is it because the pool of $$ was translated into a building? Is it because the generation benefitting is younger and not older?

    Social Security was created with a vision of America that included a floor below which retired people would not fall — a relatively modest floor. Yes, it is a “social” program and the word “social” is part of the word “socialism,” and also part of the term “ice cream social” as well. Get over it. Social policies at every governmental level have helped business grow (and, yes, sometimes hurt businesses). Markets can swing wildly and at the extreme cast-off negative implications for the entire society (e.g., too much bought on too little margin). Social Security is a modest attempt to mute the extreme negative implication for the least able to cope (i.e., less time to recover, out of the workforce, etc.).

    The author above rightly notes but does not emphasize enough that politicians are the cause of our current situation, not the creation of Social Security itself.

    “As long as each succeeding generation is willing to pay and is large enough, SS can go on. But now we have trillions in unfunded liabilities.” … “Politicians of all stripes have used the Social Security money to pay for other government expenses.”

  5. RW says:

    It takes a lot of ignorance or a lot of cynicism to seriously argue that Social Security is a Ponzi scheme even when that term is more loosely defined as applying to any pyramid system rather than a intentional fraud with no real underlying assets or return but if it is indeed a Ponzi then by that very same logic the state of Texas is also a Ponzi viz

    “…one could make the case that the state of Texas itself has a whiff of pyramid scheme about it. …the combination of proximity to Mexico and (admirable) housing policy has led to rapid population growth in the state far exceeding the national average …when you have rapid population growth, you have rapid jobs growth because the people create demand for services. …today Texas is growing not just faster than the country as a whole, it’s growing much faster than the world’s 1.2 percent population growth rate. How long is Texas going to keep that up? Ten years? Twenty years? …at some point, Texas is destined to converge to the national average at which point certain important elements of its economic model are going to fall apart.”

    It’s a good thing right-wingers are largely immune to logical inconsistencies and irony or all the double-edged swords and petards they insist on throwing would return to slice and dice them into little cognitive dissonant bits.

  6. BusSchDean says:


    1) Wrong – That would make any tax a ponzi scheme by definition, even one to pay for the military to protect us. (plus you logical argument is fatally flawed (all cats have four legs, all dogs have four legs, so all cats are dogs?; just because a ponzi scheme doesn’t let people opt out doesn’t make all things that prevent people from opting out a ponzi scheme)
    2) Correct partially — First, you blur the end of your #1 (“increasing contribution” with your #2 (“take out more than they put in”). There is subsidization of one group of taxpayers by another, just like when people pay for a road you drive on and they don’t. In terms of more $$ out than in, the total out will be driven by demographics. Baby boomers will not be here forever (we will be checking out on a regular basis).
    3) Correct but with the wrong implication – As the author notes, this has more to do with politicians raiding the Social Security system, not the financial integrity of system.
    4) Wrong – it depends on demographics and the per person payout. This is were Social Security is insurance, complete with underlying survival rates, etc.

  7. Senior Programmer says:

    If someone with 7 kids tells me something, it’s hard for me to take it very seriously. Maybe you should have just left that tidbit out.

  8. dougc says:

    About 30% of SS recipients are either underage survivors or people who are disabled and cannot work, sounds like insurance to me.

    If the debt obligations held by the SS trust fund are just paper that isn’t backed by assets, then the same thing can be said about all government debt and logically we do not have a national debt. The fact is that they are all backed by the good faith of the US government. This also includes the money in your wallet

    Conservatives hate SS because it is a success , well managed , low overhead cost and little fraud. Isn’t it ironic that they never criticise the Defense department which has spent hundreds of billions and can’t tell who recieved it, who authorized the expenditures.

  9. MayorQuimby says:


    1. Wrong yourself. Taxation is the taking of a percentage of wages which gets spent on goods and services immediately. Lower taxes means fewer goods and services. SOCIAL SECURITY IS A PONZI BY WHICH *****EVERYONE***** gets to TAKE OUT *****MORE***** than they ever contributed…FOREVER.

    Got it? It is a SCAM. It is a FRAUD. Taxes don’t give you MORE $$$$ than you contributed. The reason Social Security seems to work is because we have lived in a growing economy with a growing population. A long as we have more people contributing, everyone can take out more than they contributed theoretically. PONZI.

    THIS IS NOT EVEN IN DOUBT. IT ISN’T EVEN DEBATABLE. If you needed a TEXTBOOK example of a ponzi, social security is the perfect example of one.

    2. A bunch of bs….everyone gets to take out more than they put in. Forever putting the burden for this increasing liability on to the backs of subsequent generations. So…two people expect to be supported by four and those four then expect to be supported by eight and then those eight expect to be supported by twelve etc etc etc.


    4. Wrong yourself. Insurance DOES NOT GUARANTEE EVERYONE GETS *****MORE***** than they contributed in perpetuity until the end of time! With insurance, 90 percent of people get nothing!

    It IS. Ponzi. It IS a pyramid scheme. And you can say you support it as is. Im not arguing the merits of it. But it IS what it is.

  10. Gene-OK says:

    It depends on more people contributing than withdrawing. There’s no SS Trust fund. It has the legitimacy of Roosevelt attached to it, and the age old argument of ‘social insurance’ and ‘safety net’ to sugar coat it. Privatize it.


  11. rjgirving says:

    Wow, you don’t like a differing opinion, so attack the guy, his state and his family status. All this rational thought seems founded on emotion and of course, the usual arrogance of the elite. References to slavery really? SS may have an element of insurance, but the contributions paid by the individiual could not buy an annuity comparable to SS benefits as persons live longer, so we supplement for cost of living, increasing life expectancy and other social reaons. There is no life element to SS either whereas an insurance contract would at least return a portion of the premium in the event of an early death. Supplementation for inflation and longevity and loss of any property rights to your premiums are clealry redistributionist which was Mauldin’s core point. No benefit reserves either, excess premiums funded other Govt programs.

    The latest estimate says 1.75 private sector workers pay for 1 SS beneficiary with Boomers about to retire and workforce participation rates slumping, that ratio is likely to decrease. So, the obvious outcome is likely to means test your insurance away and to increase premiums while reducing benefits of younger participants. With no benefit reserves, those same participants will likely also have to pay more income tax to fund the deficits, once subsidized by SS premiums. Illegal no, a scheme no doubt, mismanaged by government obviously. But don ‘t worry, us ignorant, illogical, states-rights loons with large families living in southern states will just shut up and take it. No so much.

  12. streeteye says:

    The working always have to produce to support the dependent retired (and child) population, if you just look at the real economy and forget the financial legerdomain.

    The greater question is whether the whole economy is a Ponzi scheme, whether we’re eating the seed corn, or building a world with the investment in productive human, physical capital and technology, and a livable environment to support future retirees. And whether public finance is fairly and efficiently raising and allocating resources to get there.

    Also, life expectancy at birth is not necessarily the best proxy for retirement age. But it makes sense to raise the retirement age along with the healthy life expectancy of the working age population, excluding infant mortality, and the years in which invalids are now kept alive by heroic efforts.

  13. DeDude says:

    It’s only a Ponzi scheme if the political class decides to make it such (and yes that is what Perry intend). So when he calls it a Ponzi scheme then he is predicting the future under a President Perry. Under President Obama it will continue to be a very successful program that keep working people out of poverty if they get sick or old.

    If we elect politicians who decide to keep SS as originally intended, a government run insurance program against poverty, then that is what it will continue to be. It is already fully funded for way longer time than anybody ever made reliable predictions into the future. A few minor adjustments and it will be fully funded even for those with a 75 years crystal ball.

    However. if you want to call this particular insurance program a Ponzi scheme you would have to call all other insurance programs a Ponzi scheme. So I guess Perry would have to let all the insurance company CEO and CFO’s join Madoff in the “hospitality suite” at Butner.

    Remaking the definition of a word for political purposes is quite popular and there are always some morons who bite. But quite frankly you have to address a bunch of Foxified teaparties or red neck Texans to get a pass on that kind of crap. The TBP readers are a little too smart to bite on that one.

  14. Greg0658 says:

    MQ may I request a general resume .. please (with brown sugar on top)*
    age: _ / profession: _ / school band or school sports: _ / totally functional or semi-disabled: _ / own or rent: _ / bigcity or town or rural: _ / favorite passtime (besides blogging): _ /

    * and a Herseys kiss

  15. BusSchDean says:

    MQ: Obviously we will never agree. Taxation does not always get spent immediately on goods and service. I know what a Ponzi scheme is. It is not Social Security — unless you want to revert back to your false argument that all cats are dogs. In terms of beneficiaries receiving more than they pay in, there are many public goods where the benefit a person extract is proportionally higher than what they paid in (relative to others). I have gone to few national parks but a friend goes to them all the time. If we both pay the same tax that supports national parks he gains more but we pay the same. In my elementary school example above, I would bet that the cost per sq foot of elementary school has consistently increased, along with the amenities. Thus anyone paying for a future elementary school likely got less when they were in elementary school

    Oh, if you have a textbook look up Ponzi and pyramid scheme. They are not the same either. The distinguishing characteristic of a pyramid scheme is that it pays current members/distributors/associates for recruiting more members/distributors/associates. Ponzi schemes use extremely high payouts to those who join early as motivation for others do join. The beneficiaries of Ponzi scheme do not play a recruiting role while the beneficiaries of a pyramid scheme do.

    I could do this all day but my wife says that if the sun stays out we have lawn work to do. I hoping for clouds.

    Have a good day!

  16. Neildsmith says:

    Rather than wade through all this dense analysis to explain why you don’t give a care about old people, why don’t you just admit you don’t care about old people. That’s what we all think anyway.

  17. wd78 says:

    If Ponzi executed his scheme on a Pacific island where nobody knew about Webster’s definition, the SEC, etc. it would still be a Ponzi scheme. The legality of a Ponzi scheme depends on who is looking at it. In our case, when the SEC looks at a Ponzi scheme they say that it is illegal. However, when Congress looks at a Ponzi scheme such as Social Security they say it is legal. Social Security is also placed in the Ponzi scheme category by the likes of Nobel economists Milton Friedman, Paul Samuelson, and Paul Krugman, as well as numerous other voices from across the political spectrum.

    Irrespective of voices for and against the notion that Social Security is a Ponzi scheme the simple fact is that like Medicare, etc. our entitlement programs will implode at some point if they are not fixed.

  18. MayorQuimby says:


    “BR: A Ponzi scheme is fraudulent and illegal.
    “It misrepresents what it does”

    Correct. It isn’t insurance at all. It is a ponzi. A pyramid scheme. A chain letter.

    “the people who are duped by the scam believe money coming tot hem is investment profits, not the cash from new investors.”

    Ponzi investors do not care where the money comes from. They don’t question any of it. They sign up for a SCAM or pyramid scheme by which they get many times what they contributed.

    Chain letter. Pyramid scheme. Ponzi. It is the same crap. Don’t let the semantics delude you into thinking this is what it is not.

    “There is also an enticement to new investors of high returns real investments cannot guarantee.”

    As in – everyone can get ***more*** than they contributed in perpetuity forever?

    FAIL yourself!

  19. machinehead says:

    ‘A Ponzi scheme is an illegal and deliberate attempt at scamming people out of their money.’ — BR

    ‘The classic Ponzi is where you get money from one group and then find another group to pay the “returns” to the first, and so on, until you run out of people and the game is up.’ — John Mauldin

    BR concentrates on the ‘legal’ aspect; Mauldin on the functional. I prefer the latter, because the ‘legal’ distinction is specious — can anyone deny that John Law’s legally-authorized assignats were a Ponzi scheme?

    ‘Social Security is a national insurance plan.’ — BR

    If its creators had been honest, SS would be a contractual insurance plan, just like an annuity. That’s what ‘security’ means — stable, enforceable contractual terms. But unfortunately, the ‘insurance’ terminology was a brazen (though still widely believed) lie by the creators of Social Security.

    Don’t take my word for it — read it from the SSA’s own website:

    In its [Flemming v. Nestor] ruling, the [Supreme] Court rejected this argument and established the principle that entitlement to Social Security benefits is not a contractual right.

    Setting aside the semantic issues of ‘Ponzi scheme’ and ‘insurance,’ Social Security is a mutable, unenforceable benefit concocted by politicians who refuse to be held accountable, except through the flimsy sanction of the ballot box. They also refuse to follow their own ERISA requirements for private pension plans, requiring adequate reserves, trustees with a fiduciary obligation to beneficiaries, etc.

    Social Security is a squirrelly, second-rate plan from top to bottom, designed by artful dodgers and political flimflam artists, who wave their magic wand to make their machinations ‘all legal.’ A prudent person does not put his future economic security into the hands of politicians, or shut down her critical faculties simply because a legislature has exempted their own unsound pension scheme from the prudential laws of the land.

  20. MayorQuimby says:


    Oh come on now. You know your tax argument is silly.

    Look….100 million people support 50 million retirees. Then…

    200 million people support the 100 million retirees. Then…

    400 million people support 200 million retirees. etc

    It is a chain letter pyramid scheme ponzi. Just get over it already.

    I’m not even suggesting we get rid of it and everyone’s all upset over this.

    But we need to acknowledge what it IS.

  21. MayorQuimby says:

    machinehead- If Social Security is an insurance plan than it is one in which EVERY SINGLE CONTRIBUTER lays a claim at a certain point in time necessitating FORCED CONTRIBUTIONS from EVERY SINGLE TAXPAYER IN THE COUNTRY to support this PERPETUALLY INCREASING LIABILITY which perpetually pays out more money every year…


    Come on people…

  22. InterestedObserver says:

    Seems everything is becoming tangled in politics and rhetoric. Ignore the rhetoric on both sides of the issue. The actions to take to address the reality on the ground (means testing, a retirement age increase, and a removal or move of the cap on SS earnings) seems to have broad agreement on both sides….., until the rhetoric overheats into cries of Ponzi come to the fore.

    The problem with cries of a Ponzi scheme is that there is no structural way to fix a genuine Ponzi scheme. As designed, SS was not in any fashion a Ponzi scheme, it’s a pay as you go program. However, conditions on the ground changed over time, policy did not keep up with those changes, and pay as you go morphed into not quite paying as you go. Obviously, if this continues, it’s a structural problem. However, this future problem is readily addressed by modest changes. You simply can’t structurally fix a real Ponzi scheme, that’s why use of that type of rhetoric on either side is so corrosive.

    Look, too many folks seem to believe that they exist in some utopia in which they’re completely self-reliant. A world similar to that portrayed in our classical cinematic John Wayne westerns. That transient reality evaporated decades ago with the industrial revolution and the skill specialization needed to exist in a modern society.

    A veneer of pure self-reliance only emerges after the fact, only if you’re luck enough to become independently wealthy, but even then it’s really an illusion. To exist in a modern society, you need the public roads/educational system/other infrastructure and all the other aspects modern governmental systems to productively function and a part of that are the various programs which comprise a social safety net such as SS. That may be at odds with some political ideals, which only underscores that some political ideals are at odds with structural social reality.

    Depending on the subject being discussed, that comment actually applies to fringe elements on both ends of the political spectrum. Unfortunately, in discussing social safety nets in a broader sense, it applies to both sides on different portions of the whole.


  23. mwbugg says:

    It’s a very bad analogy to compare life expectancy at birth when SS was started to life expectancy today. You need to compare life expectancy at age 65. There has been much less improvement there. Much of the improvement in total life expectancy over the last 70 years is due to reductions in infant mortality. In addition, people with higher incomes with less need for SS have higher life expectancy at age 65 than folks with lower incomes. You can do better than this.

  24. Orange14 says:

    Well it sure is easy to sort out the Tea Party comments here. The other thing that you all should keep in mind is that by these loose definitions almost all defined benefit pension plans are in a sense Ponzi schemes as well since the rate of return on the pension pool of money needed to fund the future retirees is negligible and has been for the past ten years. Why do you think all the companies are trying to get away from them and move to 401(k) plans where they can lay off the blame on the employee if he/she selected the wrong investment vehicles. Anyone who can run an Excel spread sheet knows full well that even if you max out 401(k) contributions every single year, you are still relying on the the last five years of the program to make the amount of money needed to retire (principle of compound interest). If the market has a down turn followed by a leveling off and you make the wrong investment, guess what? Yup, schools over and you can work until you are 80 or dead whichever comes first.

    Social Security is a pittance for a society that claims to be “exceptional.”

  25. DeDude says:

    The whole idea of debating whether social security should be labeled with a specific word (like: Pinconstible, Plagurable, Pissarios, or Ponzi) is in itself off target. The real debate about Social Security is whether it should continue to serve a particular purpose and if so how should we ensure that it has sufficient funding to serve that purpose. Just like with public pensions, wars, bridges and any other kind of spending or promises of spending, politicians love to hand them out but are much more reluctant to collect sufficient taxes to fund them. In large part because we as voters tend to reward politicians that hand things out and punish those who collect taxes to fund it.

  26. MayorQuimby says:


    Thank you for pointing out that when it comes to $$$$ I am a PROUD Tea Party supporter. Of course I have nothing to do with almost anything else the right supports…

    “The other thing that you all should keep in mind is that by these loose definitions almost all defined benefit pension plans are in a sense Ponzi schemes as well since the rate of return on the pension pool of money needed to fund the future retirees is negligible and has been for the past ten years. Why do you think all the companies are trying to get away from them and move to 401(k) plans where they can lay off the blame on the employee if he/she selected the wrong investment vehicles. ”

    And? They ARE pyramid schemes which is why conversions to 401K are coming and occurring. So you admit this is occurring with Social Security or not?!


    Well stated. The Dude wins the thread:

    “The real debate about Social Security is whether it should continue to serve a particular purpose and if so how should we ensure that it has sufficient funding to serve that purpose. Just like with public pensions, wars, bridges and any other kind of spending or promises of spending, politicians love to hand them out but are much more reluctant to collect sufficient taxes to fund them. In large part because we as voters tend to reward politicians that hand things out and punish those who collect taxes to fund it.”

  27. wunsacon says:

    Transor Z, dougc, very good points.

  28. riodogg says:

    Mauldin like almost all Republican pukes is either very ignorant or dishonest* (my bet is both). One must wonder if he is on the Koch brother’s payroll for providing and disseminating misinformation and disinformation.

    *calling a Republican puke “dishonest” is not ad hominem, it is just pointing out a fact.

  29. wunsacon says:

    When AI becomes a reality in 20 years (maybe less), no one will have to work to support seniors. If we choose to (and if we don’t lose control of the machines or use them to destroy ourselves), everyone can get everything they ever wanted.

    I favor Friedman’s reverse income tax. Everybody gets some credits they can either save for later or spend on anything they want from the Matrix candy store.

  30. Orange14 says:

    +1 to DeDude for hitting it out of the park. The bottom line has always been whether folks are satisfied with a return on investment whether it is personal or governmental. I pay high taxes where I live but have exceptional schools, great parks, a sound library system, and good garbage collection and snow removal. I don’t mind paying for these services which benefit not only myself but others in the community. I probably will never need Social Security (probably like 90% of the others who visit BR’s site) but the thought that it is going to help the disadvantaged among us is something that I can support.

  31. James says:


    Well stated. The Dude wins the thread

    Indeed. The point is, the current system is inadequate, and the problems are being exacerbated by a significant increase in un/der employment and low wage jobs, especially among the young who will have to support the system in the years ahead and people taking retirement early because of the job market. And SS cannot be treated in isolation . . . there will be significantly more competition for our tax dollars from Medicare unless we get our health care costs under control, and this is a much bigger problem.

  32. BusSchDean says:

    DeDude: Strongly Agree

    I started by describing SS as consistent with a certain vision of America. You are of course right that like war and many, many other things politicians are great at giving something people want and poor at paying the piper.

    MQ: We will not agree and I could give more examples but I won’t. As DeDude suggests, it isn’t the name that matters; it is the purpose and the social will. While I would not side with the Tea Party on many issues — and I think they can be fairly criticized for loving simplistic labels — the anger they express taps into a great deal of genuine public frustration.

  33. DeDude says:

    Thanks, I am glad to see that people at TBP with very divergent political view can agree what should be debated. Unfortunately I am not that optimistic that the debate in Washington would have much of a chance of similar convergence to the real issue. There are some very hardcore obstructionists who don’t even want to begin talking unless “increasing taxes” or “lowering benefits” is taken off the table first. It’s going to be harder than getting peace between the Israelis and Palestine.

  34. wunsacon says:

    >> I am glad to see that people at TBP with very divergent political view

    Well, DeDude, “crazy” has been underrepresented here at TBP. (Not sure whether it’s a political view. But, some publishing empires seem to think so.)

  35. yuan says:

    I have now learned that my half dozen annuities with large insurers are ponzi schemes.
    Even my life insurance is a PONZI scheme!

    What should I do, John!!!!1!!!!!!!

  36. RW says:

    In informal argument generally and certainly in political debate the way an issue or question is framed is often essential to one side of the argument; in fact, among the bumper-sticker logic crowd, it is all the argument necessary.

    Claiming that social security is Ponzi clearly frames it as something illicit or undesirable so accepting any part of that framing, even in an attempt to make peace or reduce ALL CAPS and !!!! pollution, is tantamount to conceding an important point on at least two levels: One, if SS is Ponzi then there is something unsustainable and probably illicit about the program and, two, those who support it are, eo ipso, Ponzi supporters and therefore may have dubious or even nefarious intent.

    Conversely, claiming any neutrality on a subject while fighting vociferously and tendentiously for its framing is clearly disingenuous at best: the subject obviously has strong emotional significance to which the frame is critical and the argument relies upon the negative frame itself so the desired conclusion follows from the language used (who would want to support a nefarious scheme, eh?).

    As George Lakoff points out in Framing 101, a basic principle of framing is not to accept the language of an opponent; their language picks out a frame and it not only won’t be the frame you want you will actually wind up reinforcing it by arguing against it in terms of that language. Conservatives intuitively understand this which is why they strenuously and continuously fight for control of frame.

    Social security is not Ponzi, period, but it’s a free country and anyone can pursue any damn-fool argument they like if, in this case, they are also prepared to defend the state of Texas, Wall Street (the entire financial sector and all its instruments), charities, and even money itself from the accusation of Ponzi under the same definition and the same terms they deploy against SS.

  37. wunsacon says:

    So true, yuan. The way some people throw around the word “Ponzi”, I suspect most insurance products would fit their implied definition as well.

    Who knows what derivatives “insurers” carry on their books and when they’ll blow up and leave “insureds” empty-handed? Who knows how many of “insurers” (with their rosy investment ROI projections) could’ve avoided bankruptcy during 2008 or can avoid it in the future, without bailouts (e.g., AIG)?

    If “Ponzi” scheme is defined broadly enough to cover SS, I want to see people use it to refer to the financial system at large.

  38. Joe says:

    No, Social Security is not a Ponzi scheme. It is a word that is designed to elicit an emotion at the cost of understanding.

    So, about 30 years ago, the latest child abuse scandal had the headlines. The local conservationists were doing their riff over the latest issue and one of them stammered on mic, “That’s tree abuse!!”

    Both uses are rotten foundations to start a useful discussion on.

    Words have emotional content and they wander from the original accuracy of what they describe through misuse (originally motorcycle racing accessory foot peg mounts were designed to locate the pegs rearward and called “rearsets” . Now everyone calls all peg mounts “rearsets”. Or sometimes the word actually changes through group think (“steering damper” uses a word not in a typical vocabulary and thus became steering dampener as everybody used a word that WAS in their vocabulary.) I gave up trying to correct everyone on these years ago.

    Rationality is the obvious answer to the misuse of a word. Sometimes it works, sometimes it doesn’t. Occasionally, you have to engage the issue on the same emotional level as it is presented to you to get the other parties attention. “You’re using the word wrong and it makes you sound like an idiot. Here’s where you fail to understand what you are saying and where you can make more sense using the right word”.

    It makes for a lively conversation. But not necessarily a productive one. But then, look where you started from.

    “Ponzi scheme” is as useful to advancing the discussion as a buddy’s labeling any financial operation as “The rich strip mining the economy”. It carries along the zealot and gags the rationalist.

    I don’t like to see this in a Mauldin piece.

    Mark Twain said “”As to the adjective: when in doubt, strike it out.”

    I say, “If it ain’t a stump speech, eschew the word that jacks up the emotion sky high and banishes reason. Your argument will go better for it.

    Regardless, reason versus emotion is an uphill battle. But it is one that has to be fought.

  39. Herb2 says:

    BR: A Ponzi scheme is fraudulent and illegal.
    It misrepresents what it does, and the people who are duped by the scam believe money coming tot hem is investment profits, not the cash from new investors. There is also an enticement to new investors of high returns real investments cannot guarantee.

    Arguing that social security is not a Ponzi scheme because it is not illegal may win in a court of law, but social security was sold as being an insurance policy, not a welfare program, which was fraudulent as it has always been a cash transfer program marginally related to wage income and contributions, not least obvious in the spousal benefit for which no contribution was made and for which expenses will grow if homosexual spouses are recognized, all of which says nothing of using the wage tax revenues during SS surplus years to fund general expenses and to offset non-wage tax reductions while pretending SS was a separate trust fund.

    As for the enticement of high returns, those who only know others whose income generally exceeds the social security tax ceiling might think the returns are very poor, but the rate of return is infinite for the non-contributing spouse and can be exceedingly high for those of very low income. The number of voters in the low income class far exceeds the number of those whose income exceeds the ceiling on “contributions”, every politician has always known that, and that knowledge has enticed politicians to focus on their immediate returns.

    Eons ago in a literary analysis class there was an emphasis upon reading between the lines, on avoiding a fundamentalist belief that the word contained the meaning. Ironically, the Tea Party is associated with a lower common denominator audience where all nuance is lost, but who is arguing a legalistic, fundamentalist definition of “Ponzi”?

    Social welfare programs seek to “ensure” a result, and commercial warranties seek to “insure” against adverse events, but that assumes words have meaning and that there is no value in delusion.


    BR: See this:

  40. DeDude says:

    “Ponzi scheme” is as useful to advancing the discussion as a buddy’s labeling any financial operation as “The rich strip mining the economy”. It carries along the zealot and gags the rationalist.

    Joe you get my vote.

  41. constantnormal says:

    We have basically three camps here — at least.

    We have the tribe that believes that there is a valid purpose to having a government, that some tasks are best done by a government and not performed by for-profit businesses, and that taxes are the best way to pay for those activities.

    Then we have the tribe that believes that corporations can do no evil — regardless of the long history of examples to the contrary, including Enron, and a banking industry devoted to fraud and fleecing of money from the public and into toxic mortgages, which are then securitized, and bet against via default swaps (which may or may not be backed by any real money), and the past history of an S&L industry that fell into cooking the books as a better way to make money, the shady origins of the mutual fund industry, and a long, long list of other examples. Texas in particular seems to be overflowing with members of this tribe. This tribe has as one of its tenets that all regulation is Bad, and that markets are self-policing and need no rules or laws or enforcement of them. Let those folks live under Chinese environmental rules for a while, and we’l ask them (the survivors, anyhow) how they feel about that.

    And then we have the tribe that believes that government can do no wrong, that it is always superior to profit-minded industry, and should never be questioned. I’ll let the past 50 years of wasteful and ineffective political wars and the insane explosion in federal spending make my arguments there.

    The first tribe appears to be, for all practical purposes, extinct. The second tribe is on the brink of gaining complete control (it would appear the Barack Obama is a closet member of this tribe as well, the protestations of the Democrap party and Obama-haters everywhere to the contrary).

    The most disturbing thing about all this is that rational argument, testing of various theories, and acceptance of alternative notions when one’s own have been demonstrated to be wrong are all absent. We are in a society that is ruled completely by emotion and craziness, with no sign of ever coming to our collective senses, no sign of ever engaging with those whom we believe are flat-out wrong, and worst of all, the complete abandonment of compromise. The Best is always the enemy of the Good, despite the fact that the Best is usually dead wrong.

    All kinds of nations occasionally descend into nightmarish lunacy, from time to time, and burn themselves to the ground and are eventually reconstituted, as they say, “under new management”. WWII Germany is a prime example.

    I expect that we will prove to be no different, although mankind may not survive having the most powerful nation with the largest military losing its mind, in a nuclear/biowar-equipped battlefield. If you have a favored safe harbor nation, keep your passport in order and make plans for a vacation retreat that is far away from here. When the lunatics finally put themselves down, there is not likely to be a lot left between our borders, except a magnificent rebuilding opportunity (as if our current infrastructure problems are not opportunity enough!).

    The historical models that I can see for the restoration of civil discourse and rational thought in the Bananamerican nation fall somewhere between the WWII Germany model and the French Revolution model. Neither is anything that any sane person wants to live through.

  42. constantnormal says:

    To those calling for Reason to duke it out with Emotion — you are not wrong, but history says that is a war you will eventually lose. Point me at a prior example where Reason won over Emotion … one without a bloody war to decide the issue.

  43. Joe says:

    To those calling for Reason to duke it out with Emotion — you are not wrong, but history says that is a war you will eventually lose.

    Yeah, but it’s the good fight.

  44. Jojo says:

    “We need to raise the retirement age, and by more than a few years.”
    Actually, I think we need to reduce the retirement age. Say perhaps to 55 or even 50.

    With not enough jobs to go around (3.2 million available, 14-16 million unemployed), we need older people to retire and allow younger workers to take their places. And for those in their 50′s to 60′s who are long-term unemployed and unable to get a job, we need to provide them with a means of income.

  45. Joe says:


    See ya and raise ya. I’m 61 in a coupla months and still working as a journeyman pipefitter. No more tugging chainfalls and hustling skids, instead I work in wafer fabs and on biotech sites because I’m as productive there as anyone.

    I won’t have to work past 65, I’ve been lucky, smart and hardworking. Some people aren’t all three and even if they are, sometimes that ain’t enough. What do you do if you HAVE to work until you are 72 or 75?

    There are city and state desk jobs that some smart, hardworking, old people could do just fine. I’d like to see some job targeting in this regard.

    That’s not discriminatory is it?

  46. Don Levit says:

    Doug c wrote:
    If the debt obligations held by the SS trust fund are just paper that isn’t backed by assets, then the same thing can be said about all government debt.
    That is correct – all government debt is backed by pay-as-you-go revenues.
    John mentioned that the trust fund assets were loaned to the Treasury, spent on current expenses, and lowered our deficits.
    The proof that the SS trust fund is not backed by assets, is the $40 billion cash shortfall in 2010, and a shortfall this year.
    In both years, “interest” was “redeemed” from the trust fund.
    If the trust fund was a real insurance reserve, backed by assets that could be liquidated to cash, it would have done so.
    But the trust fund is not a store of wealth. The principal and interest were loaned to the Treasury and spent.
    How can the money be in the Treasury and spent, and in the trust fund, at the same time?
    When the interest was redeemed, new general revenues were needed AS IF THE TRUST FUND DID NOT EXIST!
    The interest was paid as we pay all expenses, whether in a trust fund or not – with pay-as-you-go, new general revenues.
    The trust fund is merely an accounting mechanism that shows how much money can be paid by general revenues without an appropriation.
    Battleships are paid the same way, although they need an official appropriation.

    In addition, all debts are not created equal.
    There are 4 levels of debt, ranging from the highest obligation, Explicit liabilities, to the lowest obligation to fulfill, Exposures implied by current policies or the public’s expectations about the role of government.
    In the highest obligation is included debt held by the public,
    In the lowest obligation is future SS and Medicare benefits.
    The Paper published by the General Accounting Office with this information is entitled” Federal Debt, Answers to Frequently Asked Questions.”
    Look on pages 65 and 66.
    Don Levit

  47. BusSchDean says:

    Nice thread. When Emotion wins out over Reason watch out (e.g., French Revolution) but when Reason wins (e.g., South Africa’s eventual move away from apartheid — painful but not as painful as it could have been) or when Emotion and Reason line up (e.g., American Revolution) — good things can happen. Now, of course, Reason is clearly under siege by tribes who know little of our own history, ignore factual data, and frame arguments without room for genuine discussion.

    constantnormal: We now have some folks straddling tribes #2 and #3 — because corporations can do no evil government needs to facilitates what is best for corporation and it too will apparently do no evil.

  48. wally says:

    Ah, I see Quimby the Capitalizer is giving his lungs a workout again.

    SS is not a Ponzi; that’s an absurd notion. Further, why do all the the doomsayers stop their scenario with the retirement of the Boomers? … there is life after that era, too. In fact, SS will probably move back toward -excessive – surpluses at some time in the future. Meanwhile, small and reasonable adjustments will keep it solid.

    SS is a good example of a government program that is run far, far more efficiently than any comparable private institution. (Medicare is another). And to suggest that people should roll their own through things like 401ks is an insult to common sense and shows utter ignorance of history both old and recent.

    “Conservative” used to refer to people who wanted to conserve. Now it’s just another word for whacko radicals who want to tear down anything that benefits other human beings. We’ve had great reversals of the meaning of political terms in the past and it looks like another one is in the works.

  49. [...] years since Aristotle wrote those words about Rhetoric and the Art of Persuasion. The debate about whether Social Security is a Ponzi scheme reminded me that the internet has not advanced the art of persuasion very much, and indeed, may be [...]

  50. DeDude says:

    If we want to solve the funding problem by delaying retirement age we will have to guarantee (government?) jobs for those over 60. There simply is not nearly enough jobs to cover the needs for them as it is – and the private sector will never take a 60+ if a younger person can do the work. If we increase the demand for jobs we will just push down wages and continue the downward spiral of our economy. Social security was in part designed to take people who did not stand a chance of getting the job they needed, out of the pool of unemployed and away from living on the streets in deep poverty. The fact that jobs are disappearing as productivity increases is a huge structural challenge for all industrialized countries, SS should be used as a part of the solution to that challenge not to make it worse.

  51. Patrick Neid says:

    While it may not meet Webster’s definition it certainly meets common usage. As Krugman himself stated:

    ….”Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today’s young may well get less than they put in). ”

    And most of you are probably familiar with Nobel prize winner Paul Samuelson comment from 1967:

    …..”The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in — exceed his payments by more than ten times (or five times counting employer payments)!

    How is it possible? It stems from the fact that the national product is growing at a compound interest rate and can be expected to do so for as far ahead as the eye cannot see. Always there are more youths than old folks in a growing population. More important, with real income going up at 3% per year, the taxable base on which benefits rest is always much greater than the taxes paid historically by the generation now retired.

    A growing nation is the greatest Ponzi game ever contrived.”

    So I personally will leave the hair splitting to the partisans as evidenced in the comments. I think Mauldin makes a lot of essential points about what has to be done to repair SS. This despite living in Texas apparently.

  52. nanka says:

    Ponzi Scheme is only fraudulent and illegal if you aren’t the government. They charge people with Ponzi schemes. If they do it, it’s o.k. Basically, it is a Ponzi scheme, because it’s solvency depends on a pyramid structure to support the beneficiaries. You take from the newer investors, to give to the older investors. Well, that pyramid structure is inverting and becoming a game of Musical Chairs on the deck of the Titanic. Also, don’t forget….Social Security suffers from mission creep. Yes, it was for pensioners…Now once you reach breeding age, and start popping out youngins they qualify for social security.

    Sorry Barry… Can’t agree with you on this one.

  53. Jojo says:

    @DeDude said “If we want to solve the funding problem by delaying retirement age we will have to guarantee (government?) jobs for those over 60. There simply is not nearly enough jobs to cover the needs for them as it is – and the private sector will never take a 60+ if a younger person can do the work. If we increase the demand for jobs we will just push down wages and continue the downward spiral of our economy. Social security was in part designed to take people who did not stand a chance of getting the job they needed, out of the pool of unemployed and away from living on the streets in deep poverty. The fact that jobs are disappearing as productivity increases is a huge structural challenge for all industrialized countries, SS should be used as a part of the solution to that challenge not to make it worse.”
    You are so right. What private company is going to hire someone for a “career” if they are 55 or older?

    Just picked up an SF book the other day called “Old Man’s War” by a John Scalzi ( ). In this book, you can’t join the Earth forces waging an interstellar war until you have hit 75 years old!

    Maybe this could work for us? Replace most of the young whippersnappers in Afghanistan with people 50 and older. Doing this, we could employ the people that private industry will not hire AND we could go to war with a whole lot more countries/groups (war is our national avocation, right?). Think how that would benefit the military-industrial sector and make Wall Street happy.

  54. Defining Quality says:

    The Trust of the Ignorant is the Liar’s most Powerful Tool!
    We are living in the age of Unreason. Arguing for one purpose and one purpose only – to win. Governments world wide are only listening to the corporate persons. Spinning observed reality to control the masses. Control fraud permeates all institutions who artfully and fraudulently use the fiction of accounting to steal from the consumer / taxpayers – who blindly and ignorantly “TRUST” a global racketeering scheme to use the people to gain personal wealth and power.
    Social Security is not the problem – the real problem is control fraud – and Joe Six Pack could give a damn – and the fraudsters know that to be a fact.
    The real job creators were the consumers – and their ability to consume has been destroyed by the greed and corruption of the government’s sponsored and unregulated – criminal activity – in the global market place. Stealing from and taxing the poor to gain power and money.
    What’s wrong could be fixed but those with the money and the power are just like Joe Six Pack – they really don’t care. The system of corruption and control fraud is working for them -why would they care?

  55. Defining Quality says:

    Barack Obama VS Those Craaaazy Republicans: Is He the Lesser Evil, or the More Effective Evil?
    By BAR managing editor Bruce A. Dixon
    “The corporate politician’s job is to deliver those voters, those constituencies to their campaign contributors, so they can enact the policies their financiers desire.”

    The corporate moguls who run the US empire and its political processes are not fools. So when the Republican party deliberately pushes forward certifiable clowns like Michelle Bachman, Richard Perry, Herman Cain and Rick Santorum as its presidential contenders, we can be certain that matters are not quite what they seem. These pandering lunatics are only inmates of the asylum, which is run by the corporate entities that fund the careers of Democratic and Republic politicians alike — the energy and insurance industries, corporate media and real estate, military contractors, and of course, Wall Street.

    In the words of economist and financial historian Michael Hudson, the job of corporate American politicians is not to enact the policies their voters want. The corporate politician’s job is to deliver those voters, those constituencies to their campaign contributors, so they can enact the policies their financiers desire. The fact therefore, that Democrats compared to Republicans, and sometimes even Democrats compared to other Democrats appeal to varied groups of voters accounts for why they sound different from each other. But the fact that they all depend on the same class of wealthy corporations and individuals to finance their political careers means that no matter what they tell their voters, the policies they enact once in office are pretty much the same.