The Biggest Ponzi Scheme on the Planet-The U.S. Government
"American Economic Exceptionalism Explained"                     USAPonzi                                      by John W. White   Mar 29, 2013

March 2013

A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation.  The Ponzi scheme usually entices new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. Perpetuation of the high returns requires an ever increasing flow of money from new investors to keep the scheme going.

Madoff Ponzi

Bernie Madoff created one of the biggest Ponzi schemes in history by enticing investors with promises of consistent and elevated returns on their invested capital.  This scheme operated from sometime in the 1970's (hard to tell when it switched from a legitimate investment model to a Ponzi scheme) to 2008 when the scheme finally imploded.   Madoff himself called this a $50 Billion fraud but it is now suspected that actual losses were on the order of $18 Billion.  The perpetrator of the scheme is now in prison for life and his brother (Peter Madoff) is now serving a 10 year sentence for his part in this Ponzi scheme.   The fate of other co-conspirators is still in limbo.


USAPonzi is more than three orders of magnitude (1000X) larger than the Madoff scheme since it should be sized by the $72 Trillion (and growing by $10 Million per minute) financial burden (see that has been created by the U. S. Government over the last eight decades.  USAPonzi started much as did the Madoff scheme with a legitimate and at the time sustainable program (Social Security) in 1935 to provide assistance to the impoverished elderly.  Over the ensuing 8 decades the Federal Government has added more and more programs (now called entitlements) without adequate consideration for the financial obligations that these programs were creating.  This creeping model of increasing commitments to the citizenry has created a situation that is grossly out of balance and has caused the Federal Government to transition to a Ponzi scheme. 

As with the Madoff Ponzi scheme, many of the recipients of the payouts of these entitlement programs are living their lives assuming that these payments can continue, in many cases, for the rest of their lives but the Government cannot continue to fund these programs as currently projected.   Many people are not saving appropriately for their retirement assuming that they will have Social Security and Medicare at the current levels when they retire but the Government cannot continue to fund these programs as currently projected.   Many of the individuals that participate in delivering Government funded products and services are living their lives assuming that Government funding will continue but the Government cannot continue to fund these programs at the current rate.  USAPonzi will implode at some point just as the Madoff scheme did and the direct and indirect recipients of this Government spending bubble will find themselves in a difficult situation since the input to USAPonzi (tax revenues) can not support the committed outflows.

Let's look at the numbers to demonstrate the imbalance of the U.S. fiscal model starting with these current income statement and balance sheet items.  Currently the Federal Government has:

Annual income                  $2.5T
Annual expenditures         $3.5T
Deficit                               $1.0T
National Debt                 
Annual Burden increase    $5.3T
Burden                            $71.9T

Note: Burden is the total financial liability of the Federal Government (national debt plus the present value of the unfunded liabilities).

The key thing to look at in this analysis is the annual income from tax revenues.   To a large degree the U.S. economy, and in fact the world economy, is dependent on this stream of U.S. Government income to provide personal income, food stamps, unemployment benefits, disability benefits, cell phones, etc to many people in the U. S., to provide health care to many U.S. citizens, and to provide safety, security, and infrastructure for all U.S. citizens.   In delivering these payments and services, the U.S. Government is providing buying power for products and services both in the U.S. and internationally.   But the problem is that the U.S. Government with its spending policy is leveraging up this income stream by telling the citizenry that these entitlement payouts will continue but for which the Government does not have the money and the implying that the Government will continue to fund the defense, healthcare, energy, and other industries at the current pace but the Government does not have the funds to do so.

The U.S. Government is essentially spending 3 times its Income!

The Government's current year outflow is $1.0T more than it's inflow and it is increasing its total financial commitments (Financial Burden) by $5.3T per year.   So the Government's debt is growing by $1.0T per year, i.e. the Government is spending 40% more than it earns AND the Government's Financial Burden is growing $5.3T per year which is more than twice the Government's income!!!!  Yes I meant what I said, the Government is spending and promising to spend 3.1X it's income (($2.5T+$5.3T)/$2.5T=3.12).  Annual Income is $2.5T, actual spending is $3.5T, and promises to spend (increase in present value of unfunded liabilities) are $4.3T per year.  The Government is telling its citizenry that it will be paying for a lot more stuff than it has the financial wherewithal to deliver.

This is not a situation that is unique to the U.S. Government.  It is a common problem for many countries in Europe, for the UK, for Japan, for China, for many state governments, and for many local governments.

TV Pundits say we are not Greece!

I hear the comment on TV repeatedly that "we are not Greece" so what is happening in Greece will not happen here.   Well I agree that we are not Greece but we are highly likely to follow a very similar path.  The U.S. economy is 50 times as large as the Greece economy and therefore what happens to us will have dramatically more impact on the global economy than what happened to Greece.  Greece has a big brother, the European Union, that puts restrictions on its deficit and debt as a condition of getting bailout funds.  We do not have such a big brother and there is nobody to bail us out of our debt crisis.  Greece cannot print euros but we can print dollars.  But we have the same potential to default on a large portion of our debt (as has Greece) and we have the same potential to default on a large portion of our entitlement payouts (as has Greece).   We also have a high probability to experience a deep recession or even a depression (as has Greece) when the financial markets and/or Washington realize that we cannot continue to have expenditures and increases in future financial liabilities that are three times our tax revenues.   My Nov 21, 2011 White Paper "Greece-The Canary in  the Coal Mine" presents a more detailed analysis of why we will likely follow a path similar to that of Greece.

Near term financial projections for the U.S. Government

If the Government continues with the current taxing, spending, and entitlement policies our deficit, debt, and burden would, over the next few years, follow the trajectory indicated in the following table.

Note: Our Burden is increasing at a rate of $5.3T per year (Comeback America Initiative).

                 Income   Expenditures   Deficit      Debt   Debt/Income     Burden    Burden/Income
2013            $2.5T        $3.5T          $1.0T     $16.7T       6.7              $71.9T            28.8
2014            $2.5T        $3.5T          $1.0T     $17.7T       7.1              $77.2T            30.9
2015            $2.5T        $3.5T          $1.0T     $18.7T       7.5              $82.5T            33.0
2016            $2.5T        $3.5T          $1.0T     $19.7T       7.9              $87.8T            35.1
2017            $2.5T        $3.5T          $1.0T     $20.7T       8.3              $93.1T            37.2
2018            $2.5T        $3.5T          $1.0T     $21.7T       8.7              $98.4T            39.4
Table 1 Debt and Burden Spiral  

Put yourself in the Government's Shoes

How would you feel if you had debt that was 7 times your annual income and that ratio was going up every year?  How would you feel if you had total financial commitments that were 29 times your annual income and that ratio was going up by 2 times your annual income every year?  That is what I call spiralling out of control!!!   And the Republicans say no way we will increase taxes!   And the Democrats say no way we will cut entitlements!  And both the Democrats and the Republicans say we cannot cut spending right now as it would hurt the economic recovery!

What Economic Recovery????

The so called economic recovery is a total illusion that is created by the GAAP-basis Deficit spending  of 5.3 Trillion per year that is a product of the USA Ponzi scheme.  We are on a sugar high and we have borrowed the sugar!

How do we escape this Debt and Burden spiral?

The only way we can contain the National Financial Burden is to dramatically reform the entitlement programs.   And this will have to affect both current AND future participants (i.e default on our current commitments otherwise we will have to print the money to cover these commitments).   The only way to contain our Federal Debt is to make significant increases in taxes or to default on our debt!   In any case, we must balance the GAAP-basis budget and that means increasing taxes, cutting expenditures, and making the afore mentioned dramatic reforms to the entitlement programs (see My Recommendations).

What happens when we reform the entitlement programs?

The obvious benefit to the Federal Government's budget, if we reform these programs to reduce the payout of these entitlements, is an immediate cut in expenditures and these cuts are essential to balancing the GAAP-basis budget.   But there are two bad things that happen 1) the beneficiaries of these progams will see less dollars and/or less services and 2) the economy will see less dollars of expenditures by the beneficiaries and less dollars of payments to the providers of the services.

What happens when we increase taxes and cut expenditures?

Tax increases and expenditure cuts are essential to balancing the burden and the budget.   But there are two bad things that come with these actions: 1) the taxpayer that gets these tax increases will have fewer dollars to spend and therefore to create economic activity, and 2) the expenditure cuts will also mean less economic activity for the overall economy.

Escaping the Debt and Burden spiral means shrinking the economy!

The actions required to contain our debt and our burden will of necessity reduce our economic activity and therefore will likely cause a deep recession or a depression which no one wants but it is unavoidable, in my estimation, to curtail the debt and burden spiral (see U.S. "Real" GDP).   My assessment is that balancing the GAAP-basis budget will reduce GDP by nominally one third to about $10T.   Since tax revenues closely correlate to economic activity (GDP) then tax revenues would likely be reduced by about one third as well.   My recommendation (see My Recommendations) is to set a basic model of tax revenues at 21% of GDP which would mean tax revenues of $2.1T (21% of $10T).   This level of tax revenue is less than our current income ($2.5T) and therefore we will need to make even further expenditure cuts and entitlement reforms.   For Greece their deficit reduction actions have lead to GDP contraction of 6-7% per year for the last four years.  Greece was forced to cut pension payouts, cut social benefits, and default on a portion of their soverign debt (non-ECB creditors basically got 10 cents on the dollar while the ECB still holds their Greek debt at par).  Greece continues to be in depression and their economy continues to contract.

Shrinking the economy makes the Debt and Burden problem more severe!

Shrinking the ecomomy will make the problem even more severe than what is depicted in Table 1 above.   My analysis indicates that it will require a total of 65 more Sequesters (see "Sequester-A Drop in the Bucket") to balance the cash-basis budget, balance the burden (i.e. balance the GAAP-basis budget), and reduce the debt%GDP to 50% which I judge to be a sustainable level of debt for our economy.   Our debt level at the start of President Clinton's first term was approximately 50% of GDP.   However the shrinking of the economy will in all likelihood create the need for even further spending cuts and entitlement reductions since my analysis did not take into account the full impact of the lower tax revenues that come with the shrinking economy.


Yes, we have a massive Ponzi scheme that is propping up the U.S. economy but as with any Ponzi scheme the day of reckoning is coming and when it does it will happen quite suddenly and dramatically.   When it does it could be a

This is not a political problem; this is a math problem!!!

Next page: U.S. "Real" Deficit