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Ponzi Austerity: a definition and an example
For a while now I have been arguing that Europe’s policies for reducing the public debts of fiscally stressed member-states can be described as a Ponzi austerity scheme. In this post I attempt precisely to define ‘Ponzi austerity’.
Ponzi growth
Standard Ponzi schemes are based on a sleight of hand that creates the appearance of a fund whose value grows faster than the value that has come into it. In reality the opposite is true, as the scheme’s operator usually helps himself to some of the incoming capital while the scheme is not managing to create new capital with which to replenish these ‘leakages’, let alone pay the returns it promises. The appearances of growth that does not really exist is, of course, the lure that brings into the scheme new participants whose capital is utilised by the Ponzi scheme’s operator to maintain the facade of genuine growth.
Ponzi austerity
Ponzi austerity is the inverse of Ponzi growth. Whereas in standard Ponzi (growth) schemes the lure is the promise of a growing fund, in the case of Ponzi austerity the attraction to bankrupted participants is the promise of reducing their debt, so as to liberate them from insolvency, through a combination of ‘belt tightening’, austerity measures and new loans that provide the bankrupt with necessary funds for repaying maturing debts (e.g. bonds). As it is impossible to escape insolvency in this manner, Ponzi austerity schemes, just like Ponzi growth schemes, necessitate a constant influx of new capital to support the illusion that bankruptcy has been averted. But to attract this capital, the Ponzi austerity’s operators must do their utmost to maintain the façade of genuine debt reduction.
Ponzi austerity’s inventor: The Eurozone’s great and good
Ponzi growth has been around for yonks. But it took the collective wisdom of Europe’s great and good to create the first Ponzi austerity scheme. The Greek, Portuguese, Irish, Spanish and Cypriot loan agreements were the first ever examples of such a scheme. Bankrupted states, in a death embrace with bankrupted banking sectors, were forced to take in ever-increasing capital inflows (from the IMF, from the ECB, from the EFSF-ESM, shortly under the ECB’s OMT threat) on condition of belt-tightening austerity. As the scheme progresses, more capital is coming into it, debt-to-GDP ratios actually grow (just as in Ponzi growth schemes the value of the total fund is depleted) and, therefore, even more outside capital has to be brought in in order to maintain the pretense.