The Ponz'd Matrix!

I am sure many of my readers have watched the film called “The Matrix” in which the virtual world is supposed to be controlled by a super-super computer called “Matrix”. Many of you also must have read about Madoff's recent Ponzi scheme that duped people of their billions. I see a great connection in both these concepts in real life like never before.

In the real life, mankind has turned itself into the slaves of a Matrix called “The paper/ credit Dollar based Monetary System”. This matrix is virtually ruling the most vital aspects of life on this planet. Take this as an example - What is the most precious thing on this earth for any average individual? I am certain – few years back – the answer could have been “Human life”, “My family’s life” or “My own life”. Not anymore. Not at least for all the human beings. I have been readings & watching news in recent times that suggest that many individuals are ready to sell themselves as “Human bombs” in exchange of money! That is the ultimate example of slavery to the Matrix!

The making of the Matrix
To understand how this Matrix got in the being, we need to step back a little to level set ourselves with some reality.

Let me start by asking a very simple question. Who is the richest person on this planet? The answers may vary from Bill Gates to Warren Buffet to Mukesh Ambani. Well… you are completely wrong. The world is not so straight forward as it seems. The statistics that you & I see around us may not be entirely true.

Try again. After thinking hard, some may conclude that perhaps due to the un-announced wealth, one of the Sheikhs of the petro rich OPEC nations could be the richest person on earth. Close but not the right answer again! Given up already? The answer is - the faceless creators of the Federal Reserve of USA. Surprised? These are the people who “create” the money supply for virtually the entire world. Technically speaking they could create trillions of dollars in a stroke of one board resolution & the US treasury would normally oblige. The world gave them this power through the current monetary system – normally referred to as Bretton Woods. Since the gold-exchange standard gave way to the paper/ credit dollar standard in 1971, the U.S. economy in general & US Fed in particular has become unique in being able to create credit – and foreign debt – without constraint.

Matrix enslaving the masses
Since the present monetary system does not warrant backing by Gold, the Fed & US Treasury got the freehand to create any amount of money to support their greed & ambition. This greed encouraged concepts like consumerism, living beyond means, debt etc. People are vastly encouraged to borrow & spend. In many cases the prices that we pay for are mere perceptions or interpretations of the real value the things bring to us.

The basic laws of economics indicate that scarcity should normally drive prices/ value. If that were the case, then should the prices of stocks, crude oil and houses all around the world drop like stone in just a few months? These are clear examples that all the buying in past was not attributable to real need. Speculation & greed for windfall was contributing to the bulk of the price rise in recent times. The consequence has been that debts on the economy-wide have grown more rapidly than the ability to pay.

You borrow going beyond your savings thereby discounting the future earnings, that are uncertain day by day & to top it, they (future earnings) do not rise as fast as the inflation does! So what you have at the end is a vicious circle of debt until the end of the borrower’s life. In the past generation, at least the life after retirement was somewhat guaranteed to be peaceful. However, the erosion of Social Security, pension & employee provident fund has converted “peaceful retirement” into a myth. You work until you die just to keep afloat over your debts.

In the process who wins? The Matrix & its creators. They are the suppliers of credit money that you & I borrow.

Matrix destroying the creators
The very greed that prompted the creators of the Matrix to pump more & more money into the system is now coming back & haunting them. In the few decades, The Matrix itself grew so big that it turned into an unstoppable predator. To keep feeding the monster, the creators needed to pump in more & more credit & paper money; lest we all go down under & the creators will not be spared themselves. This spiral created an unprecedented situation that perhaps not even the creators could have envisioned. Now the Matrix is turning to the creators to feed itself! There is a grapevine making rounds – the creators preparing to pump in trillions in the stock markets across the globe in perhaps their last ditch attempt to save themselves. Let’s see if the monster has grown bigger than the imagination of it’s creators!

The ultimate - Matrix in self-destructive act
The size & nature of Madoff scheme made it known to all; however such schemes existed even before. Many chit funds in many countries have duped thousands/ millions of investors in past. However there are examples that are more well-known that have shocking resemblance to such Ponzi schemes – Social Security in US, Employee Pension & Provident Funds in India. Even the global financial system is a big Ponzi scheme where more & more money is created to fund the inflation & debts.

The Ponzi schemes rely solely on the amount of principal inflow being constantly more than or at least equal to the amount of interest outflow at any point of time.

E.g. I launch a Ponzi scheme with a promise of an obscene guaranteed return say 5% per month or 60% p.a. I get $100 as the deposit by an investor. At the end of first month, my interest obligation is $5. So I need to find another investor who is willing to invest at least $5 so that I can pay my interest to investor 1 without doing anything. My total cash in hand still remains at $100 & my total liabilities have gone up to $105. The difference between liability & cash balance is my goodwill ($5). The goodwill is the valuation of the trust shown on me by the general investors. However as the time goes by, the system itself propels out of proportion as you can see from the adjacent table.

Same has happened to the Matrix. The “borrow & buy” system has gone out of bounds even for the system to manage. The trust (goodwill) reached its pinnacle & one fine day as the defaults started to come in, the whole pyramid started collapsing as goodwill started going down. Recently the Fed was compelled to buy trillions worth of toxic assets from the troubled banks in return of US Treasury bills. These bills/ credit money will eventually slowly find its way in circulation. Significantly more money chasing the same or just incrementally more number of goods/ services. A sure-shot recipe of generating exponentially more toxic waste, just to be consumed again by the Matrix. So what happens then? Fed issues yet another exponential quantity of Treasury Bills in exchange of toxic waste? Is the Matrix getting more toxic intake than it can digest? Is the Matrix Ponz’d?