Enter Mr. Conduit …


 

“Only when the tide goes out do you discover who’s been swimming naked”, sez Warren Buffett. As the economy unravels, the rackets and schemes emerge: those that have flourished behind the scrim of ‘growth’ and ‘prosperity’ for the past thirty years. This video — from the National Inflation Association — pitches silver and hyperinflation, it also examines the ‘higher education racket’ that a lot of Occupy Wall Street people are screaming about (NY Times).

 

“What did I spend the last four years doing?” asked Becky De Freitas, a recent graduate of Gordon College in Wenham, Mass. “Fluent in Mandarin and French and no one wants to go for that? And it’s like, now what?”

 

The establishment will not undo what they have created on purpose; the children will subsist on dog food, billie clubs to the head and knees to the groin for ‘Old Glory’. The promised high paying jobs that students took on debt to ‘buy’ simply do not exist. The jobs are now in India and China, the New Promised Land.

The education loan racket is a massive bubble ready to burst:

Figure 1: The only thing that goes up like student loans is silver … hmmm! I guess the kids are going to refuse to pay: old news for those who religiously read my articles:

 

Our grandchildren cannot deny us this loan, just as they did not deny the funding for TARP. They certainly can refuse to pay for it.

 

The credit albatrosses around the neck of yesterday’s grandchildren — today’s college graduates — are the legacy debts of the Reagan years. Loans were extended at the dawn of ‘Unlimited Credit’, during the second or third or fifth wave of Keyenesian militarism. These loans have come due, dead-money loans rolled over into now unserviceable student loans, intended to be rolled into mortgages upon houses with prices that were only supposed to go up.

 

 

Figure 2: Increase in direct student loan funding by the US government to 2010 (click on for big).

Both public and private student loan debt exceeds $800 billion, is greater than revolving credit.

“As soon as you get out of college you are indentured for life,” Guy McPherson, University of Arizona

Perhaps young people can be hired to write on pieces of cardboard! That is the only job they are likely to get.

 

Unknown photographer (Chicago Magazine)

 

Not long ago Bruce Krasting suggested that Social Security was a Ponzi scheme. Ponzis are are named after the indefatigable Italian Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi who literally made his name selling international return postage coupons. Ponzis are difficult to describe but easy to illustrate:

 

 

Figure 4: A Ponzi scheme is the transfer of funds from individuals to a promoter who promises larger than ordinary returns: it’s a non-violent form of robbery.

Ponzi schemes have very simple structures and depend on human greed. The promoter lures speculators with promises of ‘secret investment strategies’ or ‘finance insider knowledge’ or ‘high-tech shortcuts’ to unearned wealth. The promoter is often someone or some entity that is trustworthy such as the head of a bank, a business or a government administrator. Often Ponzi operators are infamous criminals (offering shares of ill-gotten gains). The promoter will spend enough funds to put on a convincing ‘front’ and craft a compelling narrative. Ponzis come in all varieties: some involve salting real estate parcels with gold or silver, others involve some new technological marvel. As speculators line up, the promoter diverts a small percentage of the incoming flow of funds toward shills who loudly advertise their success within the scheme. Once speculators see real money in the hands of other ‘investors’ they cannot be restrained from putting up their own funds, often offering their entire life-savings. Outside of initial expenses and the small payments to shills, the promoter keeps all the speculators’ money: he either leaves town with it or the scheme collapses under its own weight.

This happens when the speculators start asking questions about their lack of returns. Mature schemes end when new contributors cannot be found, when all speculators are ‘fully invested’. In both instances, the promoter has absconded with the funds.

Ponzis take on every shape: most appear to be legitimate. The obvious example is Bernie Madoff’s classic scheme, so to would be the Enron scheme. Many/most accounting control frauds are also Ponzi schemes. State- and national lotteries are simple Ponzi schemes as is casino gambling. Casinos offer a small percentage of the thefts to the state for its benediction or exist within special jurisdictions, such as the American Indian casinos.

Ponzis share certain characteristics:

– There are NEVER any 3d party beneficiaries to Ponzi schemes, only shills who market the scheme. The promoter pays the shills and keeps the rest of the money!

– Ponzis depend upon voluntary payments from speculators to a promoter, never the other way around.

– The promised benefit is ‘in kind’: the promoter demands money in order to return more money.

– The promoter has no product or the product has little real value: the product is ‘secret’ or proprietary.

– The promoter has no investment ‘method’, he simply accepts free money, paying out only as little as necessary to ‘shills’ to attract new ‘money for nothing’ speculators.

Shills are absolutely necessary to promote the Ponzi. Somebody has to win the lottery or no one would play: there are no organic beneficiaries to Ponzi schemes outside the promoter. It does not matter whether the promoter has ‘good intentions’ or not: funds always flow in one direction from speculators to the promoter. Shills will sometimes be rewarded for bringing to the promoter set number of speculators able to offer funds. In this way, shills become promoters-in-miniature. If the promoter has actual products to sell to the speculators, these ‘multi-level marketing schemes’ are legal.

The finance markets on Wall Street, in the City of London and elsewhere in the world are Ponzi schemes. The people who work in finance are the shills. Outside of funds spent to market the Ponzi — shills — there are never any distributions. Those clever enough to recognize Ponzis during their formation can often position themselves as successful shills. State lottery winners are shills, the promoters are the states and various contractors. Winners at casino games including poker are also shills: no amount of skill or strategy can earn anything in a casino. The ‘house’ is the promoter who keeps the largest part of the funds contributed by all those gambling within the casino. Games of chance promising cash ‘returns on cash’ are Ponzi schemes. Parimutuel betting and similar schemes — including options trading — where the funds ‘invested’ appear to predict the percentages available to the shills are Ponzi schemes. Winners at these schemes are shills. A characteristic of Ponzi schemes is that they are always something other than what is promoted: transfers from the gullible to the unscrupulous encouraged by shills.

Bruce Krasting on Social Security:

 

Social Security a Ponzi? – I think so

Rick Perry teed this up. I’m amazed at how much traction this has gotten. Clearly both sides of this issue are stirring the pot.

I’ve looked up a few definitions of what a Ponzi scheme is. This one is from an excellent source. The Securities and Exchange Commission defines a Ponzi as:

A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.

Does Social Security constitute a Ponzi based on that definition? I think it does.

There are two ways to look at this:

I) If there are no changes in the current laws regarding Social Security does the projected future financial results support the conclusion that it is a Ponzi?

II) If changes are made to Social Security will the consequence of those changes result in the conclusion that it is still a Ponzi?

(I) is easy to answer. Based on the SEC definition, Social Security is a Ponzi. If you want proof of that go to the Social Security Trust Fund May 2011 report to Congress. [On page 10 (of the report) you find the following chart.] Somewhere around 2036 (I think much sooner) SS benefits will be cut by 25%. That is the law as it is written today.

Conclusion: Anyone under 45 today is paying for something that they should expect to get 75 cent on the dollar. Clearly a Ponzi.

 

Ponzi schemes are hard to describe in a few words: Bruce trips over an inadequate SEC definition which doesn’t mention the role of the shill. If Social is a Ponzi, it is one that works in reverse: not only are there beneficiaries, these outnumber the contributors!

Social is only partly a retirement plan. It is impossible to know exactly what future Social benefits might be because nobody can tell what the future itself is going to be.

Best to look at Social is as a jobs exchange. The government- plus younger workers ‘buy’ job openings by offering modest payments to aged and disabled workers so that they might retire. Social is the jobs-purchase plan that college lending is supposed to be! The ingenious promotion of Social as a pension for the elderly has given it an enduring constituency. One can see in Liberty Square and on the streets of New York what sort of (non)constituency unemployed younger workers represent!

This is what the Social Schematic looks like:

 

 

Figure 5: Social Security is an income transfer, from contributors to beneficiaries. Any difference between what contributors are taxed and what beneficiaries are scheduled to receive is made up with Treasury borrowing. Since the Treasury can borrow dollars in unlimited amounts, the payments to beneficiaries is unrelated to contributions.

Bruce treats Social as a kind of defined benefit pension plan which it’s not. It’s easy to see the difference between Social and a Madoff. The Treasury and government are promoters but have no interest in keeping the funds. The (ostensible) problem is that the Treasury is scheduled to distribute far more funds than it takes in! Social Security is no different from other industrial enterprises that do the same thing. The difference is that the (borrowed) distribution within industrial enterprises is toward the tycoons who own the industries rather than toward the workers.

Most of the largest-scale frauds today aren’t Ponzi schemes at all. Ponzis depend on gullible contributors encouraged by false promises. ‘Conduit Schemes’ are sophisticated, large scale frauds named after Carlo Pietro Giovanni Guglielmo Tebaldo Conduit, who happened to live next door to Ponzi. The contributors and the promoters/final recipients work together to take advantage of the conduits — the persons in the middle who are the promoters’ unwitting victims.

Where Ponzis involve the transfer of savings, Conduits are debt transfer machines. Repayment obligations are assigned to the conduit with the benefits directed from the lender to third-party recipients. The conduit is responsible for servicing and retiring the debt: it’s his debt, someone else’s benefit.

Here is the student landing scam:

 

 

Figure 6: Unlike with the Social, the college graduate can’t even take Grandma’s needlework factory job: no more needlework factories! The graduate is offered instead an abstraction with negligible value — a college ‘degree’. The student is the conduit by which vast sums are transferred from one group to the other. What is different between this scam and similar versions run by New York’s Tammany Hall and William Magear ‘Boss’ Tweed is the conduits in Tweed’s rackets were always in on the take.

Conduit schemes have certain characteristics:

– The payments from a contributor to a final recipient are loans directed through a conduit, who is labeled as a ‘beneficiary’. Unlike Ponzis which require voluntary participation, conduits are coercive, gate-keeping regimes. Whether the participant borrows from the contributor or not, the costs to access the scheme’s services are set by the scheme, the conduit has no ‘bargaining power’.

– The benefit promised to the conduit is an abstraction: a ‘common good’ such as ‘education’ or ‘medical insurance’ which is unrelated to the actual funds-transfer.

– The transfer from the contributor to the recipient is always money, often in staggeringly large amounts.

– The contributors are always entities with large capacity to generate funds such as banks/finance sector(s) and/or governments.

– Both lender-contributors and final recipients are aware of the scheme at hand and both actively promote it: falsely to the conduit (and the public), accurately to each other.

– The final recipients who are part of the scam have no investment ‘method’, they simply accept the free money offered in the conduit’s name.

The conduit is necessary but is incapable of acting in any interest other than those of the contributor/recipient. Taking on loans and accompanying repayment obligations are conditions of using the system in question! The process is self-limiting: those unwilling or unable to act in the scam promoter’s interest exclude themselves. The recipients gain enormous amounts of money, what the conduits receive has no worth outside of what they brought to the scam in the first place. Like the rest of the economy, the product of the education factories is waste.

 

 

Figure 7: The same scam can be altered to fit any number of different players or contingencies. Here is a conduit scam on a continental scale. The amount of funds to be transferred from one group of banks to others to the ‘benefit’ of euro-users is over € 2 trillion! The college racket is almost $1 trillion. Mr. Conduit would be proud!

You can see the EU schematic is identical to student lending schematic. In the case of Greece (and Portugal, Spain, Italy, Ireland, Belgium, etc.) the contributors and recipients are the very same banking entities. The conduits are the taxpayers and ordinary citizens who have been offered abstractions with negative values; a “European Union” and a “euro”. The same conduits are on the hook for the cost of the funds shuffled from one bank to another!

 

 

Figure 8: Enter the unspeakable: the US healthcare racket offers the baleful abstractions of better ripoff ‘insurance’ and cruel ‘care’. The promoters of this racket should be tried for crimes against humanity. The strategy is to keep alive elderly conduits suffering from Alzheimer’s or some other degenerative disease a few days- or months longer to enable racketeers to gain funds from contributors. Right now, the current overpayment for health ‘services’ in the United States is estimated to be 10% or GDP or over $1.5 trillion.

Always on the hunt for more funds, the healthcare racketeers levered the eager-to-comply government into putting America’s unemployed graduates to the Conduit’s work, like slaves.

Sticking with the current system is a bit like sticking with the Titanic because it has a nice piano bar. Best thing to do is walk away from the system and its false promises en mass and start thinking and acting independently. If enough people step aside the Conduit rackets will unravel. Schemes and bubbles require a constant flow of new funds/credit; conduit schemes require willing recruits. The education racket insists its product has value, how much value can it have when police are breaking heads in its defense?

The next step is for the establishment to imprison people so as to ‘insure’ that these same people have adequate (whatever that means) health care! There is something absurd when education and medical care can only be delivered at gunpoint.

24 thoughts on “Enter Mr. Conduit …

  1. steve from virginia Post author

    It’s a very expensive short. A lot of other people have the same idea (are old), remembering AAPL when Sculley ran the company (into the ground).

  2. Mr. Roboto

    Ran Prieur said last year that requiring everybody to buy insurance from private industry (a poll-tax to be paid to private industry, could Francisco Franco himself have cooked up a more right-wing fiscal policy???) and mislabeling it “healthcare reform” is how they’re trying to keep the healthcare bubble inflated. This post does a good job of illustrating how that works. To the extent it can said to work, that is.

  3. p01

    Best thing to do is walk away from the system en mass and its false promises and start thinking and acting independently of the establishment. If enough people must step aside the Conduit rackets will unravel.

    Amen brother Steve! Everybody’s occupying something these days; occupy this, occupy that, occupy these, occupy those… No one seems to like this:
    OCCUPY YOURSELF!

  4. Ross

    There is a new conscious awareness that the “System” is a fraudulent extraction scheme. The capital holders are permanently disenfranchising those without capital. A car costs 10xs to buy than it did 100 years ago but it’s 10xs “easier” to produce? Who keeps the difference? The owners of the capital, claro.

    It’s a house of cards and everything including the kitchen sink, the baby, the bathwater and my generation will be thrown at this system to keep it afloat.

    But it’s too late. The mask has slipped too far. The Empire has plenty of clothes, he’s wearing yours!

  5. dolph

    A country that puts its young people into debt servitude is a country without a future.

    That the most powerful and blessed country on the planet would do this to itself does not bode well for the future of the human race.

    What sort of schemes, for example, will China concoct to try to turn water into wine? The mind shudders.

  6. Reverse Engineer

    That which cannot be paid will not be paid. Therefore, just about the entire portfolio of College Loans anyone holds are worthless toilet paper.

    Besides this, its going to become increasingly difficult to find anybody who will take out a college loan. You would have to be nuts to take on $50K or more these days in debt JUST to get a Sheepskin for which there are few Jobs available no matter what the degree is.

    Colleges are set to CRASH here big time, since the form of education they are providing is not productive in any sense. Its totally extractive. The whole college loan biz is going to implode quite like subprime did. Students should take out just as much loans as anyone will hand out now, because they will never have to pay them back. There will be too many to throw into debtors prison,. so stop worrying about it.

    RE

    1. Ross

      University was supposed to be an exclusive domain of the “landed.” It was finishing school for the young aristocrat and it will go back to being exactly that; a place to be schooled in the Liberal Arts so that one can manage the family wealth in educated estyle.

      1. Reverse Engineer

        You can only manage family wealth if there is wealth remaining to be managed. Sadly there will not be. Its all going up in smoke, in the Greatest Bonfire of Paper Wealth in all or Recorded History.

        RE

    2. Mr. Roboto

      The college town of Madison probably did more than any other place to make me who I am today. I can’t help but wonder how Madison will change when the University of Wisconsin becomes a ghost of its former self in the wake of collapse? I certainly know all those high-rise apartment-buildings with which the developers defaced the landscape like hey-go-mad over the past ten years, will be standing empty pretty much forever when that day comes.

  7. steve from virginia Post author

    So-called ‘ealth-care’ is a bubble waiting to pop as well.

    Need a doc? Pay cash.

    1. Ross

      Don’t forget the shortages of critical medicines. A little birdie told me they are short sodium bicarbonate for the crash cart at my local hospicetal. Shhhh….

      1. Mr. Roboto

        As somebody with high blood-pressure and kidney issues (diabetes), I’m not looking forward to having to rely on baking soda to deal with my very severe GERD. All that sodium will *not* be good for me. I really should have taken better care of myself as a young’un.

        Shoulda, woulda, coulda….

    2. Mr. Roboto

      What do you suppose the fate will be of that mislabeled “healthcare reform” that requires everybody to buy insurance from private industry at prices largely determined by that industry?

  8. Sandor

    Market update. We are right on track for my 1256 S&P futures target. The Euro is stuck at the 1.39 level. It should break through this for a false upside breakout above the 1.40 level. Oil is soft, copper is soft, China is soft, yen is uber-strong, indicating that this equities surge is a short squeeze/risk arbitrage, largely technical in nature. There is strong resistance at the WTI crude 90 level. Even if we take this out to the 92-94 region, I still see this as a false breakout. Same with the S & P. Even if we regain YTD positive territory on the S &P and a barrage of new buyers come in to take us to the 1275 area, I see failure ahead. All of these false breakouts of strong overhead resistance would dovetail quite nicely to produce another waterfall effect when the breakouts fail and the trend followers dump. Just a little more patience to get short Euro or short equities.

  9. christiangustafson

    Don’t forget India, Steve. I’d like to know if you think they are ready to emerge as a World Power, or just go back to being … India.

    1. steve from virginia Post author

      There are a number of key differences between China and India, the biggest are government structure, narrative and the relative absence of an currency-property bubble in India.

      India is famously democratic — and bureaucratic — while China is famously didactic: ‘They get things done!’ The iron Chinese central government control over everything is a holdover from the Mao era. When ‘Peoples Liberation Army Inc.’ decides to build dams and steel mills, the dams and steel mills are built. This command feature of the China economy is something that India and other developing countries lack.

      This in turn is central to the narrative of Chinese omnipotence. China has replaced Japan as the world’s economic bogeyman, ready to jump out of the closet and buy everything with everyone else’s own currency. Unfortunately, the Chinese narrative is the same as all other modernist Ponzi schemes, where the ‘winners’ will be announced tomorrow and the prizes to be collected in a Utopian future that is always just out of reach. The Indians have the same components — manufacturing, capital structures, cheap money/labor policies, resource stripping, etc. — but the Chinese have been able to control and develop the narrative effectively because it comes from ‘one voice’ which tends to be self-reinforcing.

      Ditto the old Soviet Union, or Japan during its bubble phase. The USSR’s message came from the Kremlin, meanwhile it was a menacing version of Mexico without the siestas: “We pretend to work they pretend to pay”. What is an example of Japanese management? TEPCO: who would put these dudes in charge of anything?

      The other component of China’s development has been its embrace of the Las Vegas property development model and tailor it to its own purposes. China development now is at the same stage the US property bubble was in during 2005 or 2006. On paper, the bubble is infinite: as long as China keeps printing money, there will be developers taking it to put up empty concrete towers in order to ‘harvest’ it. As long as there is a nominal interest rate differential between China and the rest of the world, there will be money capital flowing to China allowing for the printing to continue. The issue is who holds the resulting liabilities created along with the currency assets? Nothing lasts forever: the real interest rates will rise even if nominal rates are near zero, the US and the EU are broke and cannot afford to be continually building empty concrete towers, dams and steel mills in China. When that stops — and it will — (makes finger across throat gesture).

      Your’s is a good question. I an important way India is a lot more opaque than China, this is the consequence of the absence of the centrally-promoted narrative. This is changing, as India promotes its own development narrative.

  10. rcg1950

    Interesting distinction between the Ponzi scheme vs. the Conduit scheme that I had never seen pointed out before.

    The Ponzi seems to work on simple greed, but the Conduits give insight into the most deeply held beliefs of the society. Only so long as individuals hold the conviction that institutionalized and commodified education and health care are worth while services that result in better, healthier, and more productive higher wage lives can these conduit schemes survive.

    I think these beliefs still hold sway over most in the US of A but as the YouTube piece above and many OWStreeter’s complaints make clear there are already deep cracks appearing in the education trope. And it doesn’t take a lot of digging to find evidence of loss of faith in the medical industrial complex either (just last week in the NYT
    How Medicare Fails the Elderly ). I like the irony that Obamacare may just be the straw that breaks the back on the cherished and quaint notion that hi tech medicine is good for most people.

    Along with rediscovering how to live on much less energy we’ll have to relearn how to learn and stay healthy outside of institutional settings that at this point tend to make their clients stupid, sick and dependent – just the opposite of what they claim to do.

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