Ponzi | Founders' Review Editorial

Ponzi Schemes. This concept is not new. It appeared in many forms during the years. It is so basic, that it should be taught in elementary schools.

So, what are Ponzi schemes or Pyramid games? They are a form of game where you need to pay to get into. You then have to take the role of the seller. You try to get your money back by luring in people like yourself.

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There are many forms from benign child's play to serious investment frauds. The rule reduces the percentage of potential customer base making keeping growth and price promises difficult. Eventually the system collapses. It has a term.

School kids used to play by forwarding and mailing letters based on instructions they receive in mail. Those cost just a few stamps.

Sometimes people expect cash to enter the game in order to push participants to get the money back from their friends by joining.

What makes them fraudalent is a promise that the money comes back. This kind of system is usually reserved for the financial industry, and it is heavily regulated.

Why? First of all, securities usually have real economic value behind them. This is how dividends, interest and capital gains are paid reliably. The use of information is the product of the financial system.

Ponzi schemes on the other hand are just mere accounting. Sometimes there is not even accounting behind them.

Such schemes were famous before the great recession, and in post-communist countries, where financial literacy was still behind in the 1990s.

Some crypto schemes may have a very similar concept. Memes are synonym to Ponzi sometimes, since there is no real asset behind such securities. Only the growth what is luctrative to investors.

How do you identify, whether the promise behind something you buy is real or not?

First of all, ask a licensed financial advisor. The system is made in a way that they lose their license, if they do not give you a proven answer. Licensed industries usually give some level of assurance as a result.

Second, verify yourself first, before you decide to pay the fees of the advisor.

Check if the company is registered. Check, if there are any investor reports of past years. Sometimes basic revenue and balance sheet numbers tell a lot. Verify the physical location.

Verify the form of the offer. If you intend to buy something because all your friends buy it, it is a red flag.

Do you get any extra value by buying something? Some people buy NFTs for the feeling of owning artwork. Rich people buy famous paintings even if they eventually lose money on selling them.

If you rely on nothing else, but the price increase, it might be a red flag as well. A bubble is defined by the chart being unrealistic compared to the real economic activity. The price is driven by the price itself not what is behind.

The press is powerful. Oftentimes people buy things because they read about it everywhere. Think about what happens, if your favorite publication stops promoting a crypto asset.

The basic rule is that you buy an apparel, a burger, or a car because they provide value to you. If something gives you happiness proportional to the price, it is good. If you feel pressured, it is a red flag.

Let's look at the other side. Let's say you want to do the business, but you do not want to make a Ponzi scheme.

You need to do the same and ask a financial advisor or a lawyer first. If not, try to find a company that offers such services, like a corporate card or coupon solution provider.

If you do not want to invest the money first, you may want to find your red flags again.

The economy works by setting reasonable standards. This is why licensing exists. However, the cost of licensing is what may push you out of your business.

You ask. Why I cannot do business with my neighbor before begging for funding from a remote city with licensing? Well, it is still better than random people keep knocking on your door selling junk bonds like in the 1930s.

The system is built on a learning curve, some inequality is built into it. The value of lecturing others not being diligent or hardworking enough is also value to some. It is called title, and people pay serious amount of money, time to get the education for it. Hardworking is sometimes a synonym to insider in the vocabulary of the author.

Ask, if it is reasonable. Can you move to a different state that has better regulation? Can you spend the effort obtaining the license? How do you prevent fraudsters tricking you into losing a hard-earned license? Is your legal system transparent enough?

The usual answer will be the GDP. If your employees earn below the per-person GDP, you are an outsider. If you earn above the per-person GDP, you are an insider, especially if you have a license.

If you are an outsider, make sure that you know your rights. Rules may allow insiders to prevent you doing business. Insiders on the other hand are limited by the crowding factor. They are too satisfied with their existing income to accept more offers.

Still, local legislation may help you to prevent being blacklisted for jobs to do only certain things not requiring a license. Remember, it is not just making databases with personal information unlawful in many jurisdictions. Using the bank balance information, racial, ethnic or random blacklisting data by staffing or lending may be unlawful. There are many state level crowdfunding laws across the US that help to raise funds.

Most human resources motivational practices are built on you being here now, and better in the future. It is cheaper to pay with titles or rewards, than with equity. The Basel standards of requiring equity to raise leverage with debt also favors pumping up existing financial institutions instead of diversification. Many banks relying on the standards went bankrupt in 2023. The system is designed to get the positive feedback by learning from mistakes and ever improving your risk management systems.

So what is the opposite? Quantitative easing was the option in the early 2020s to resolve the issues of banks relying on momentum instead of diversification. Almost infinite amounts of money was lent to the government ending up with people. Many manufacturing countries collected the monetary assets. Money itself is not an obligation. Owners will intend to invest in the US to get something for it.

The quantitative easing system gets into trouble if the money comes back as government or private debt obligations. Securities will eventually force people to pay more taxes eliminating the gains in the economy. Pure money just ensures that nobody prints something else like a digital coin. Exporters can buy something for it in the short term. Money is primarily for trade, not for savings. Pouring money into non-investment grade startups is one way the money disappears making a pipe. Unfortunately, wars are the other way how money disappears breaking the quantitative easing pipe. It is like a Ponzi scheme that bursts.

The ability to pile up money not used is actually very important. Imagine a group of wealthy people piling up 100 trillion dollars. Any entrepreneur has then the opportunity to make potential investors compete with government grants, new central bank issuance, overseas assets, wealthy people, pension funds, savings, public corporations, etc. It sets the right rates making the economy work. The amount of money saved proves that such people will be frugal investing wisely not causing inflation.

Long term interest rates tend to be higher meaning that the value of pure money degrades over time. Completely different people will sell something for that money decades later than those who paid with it. Your older self will require different products and services than your current one. Only companies with strong recurring revenues can survive so long. Setting the balance is the role of the banking system and interest rates.

In any case remember. If you earn less than the average, you probably see a systemic issue. Inequality is built into the system. You will probably find reasonable people, politicians, especially businesses that can solve your situation. Growth is their business. That is how they earn their income.