WEBVTT 00:00:00.000 --> 00:00:02.899 Welcome back to the Deep Dive. I want to start 00:00:02.899 --> 00:00:07.240 today with a feeling. It's that little voice 00:00:07.240 --> 00:00:09.119 in the back of your head when an offer lands 00:00:09.119 --> 00:00:11.699 in your lap that sounds just a little too perfect. 00:00:12.039 --> 00:00:14.019 The impossible promise. The impossible promise. 00:00:14.220 --> 00:00:17.019 Exactly. You know the one. It's the can't lose 00:00:17.019 --> 00:00:19.559 investment. The secret formula that a friend 00:00:19.559 --> 00:00:22.059 of a friend has that's getting double digit returns 00:00:22.059 --> 00:00:23.879 while everyone else is, you know, struggling. 00:00:24.199 --> 00:00:26.539 It's the financial equivalent of a perpetual 00:00:26.539 --> 00:00:30.239 motion machine. It defies the laws of physics. 00:00:30.739 --> 00:00:32.880 That's it. And we're talking, of course, about 00:00:32.880 --> 00:00:35.659 Ponzi schemes. Now, before you think, oh, I know 00:00:35.659 --> 00:00:37.420 the story, it's Bernie Madoff or it's that Italian 00:00:37.420 --> 00:00:39.920 guy with the stamps, just hold on a second. Because 00:00:39.920 --> 00:00:42.060 looking at the mountain of research we have in 00:00:42.060 --> 00:00:44.840 front of us today, this goes way beyond a few 00:00:44.840 --> 00:00:47.179 famous con artists. Oh, absolutely. It's not 00:00:47.179 --> 00:00:50.820 just a few bad apples. It's a recurring bug in 00:00:50.820 --> 00:00:53.500 the human operating system, a structural flaw 00:00:53.500 --> 00:00:56.079 in our psychology when it comes to money and 00:00:56.079 --> 00:00:58.890 trust. And that's really our mission for this 00:00:58.890 --> 00:01:00.570 deep dive. We're not just going to skim the surface. 00:01:00.750 --> 00:01:02.770 We're going to get the tools out and dismantle 00:01:02.770 --> 00:01:06.170 the machinery. I really want to understand how 00:01:06.170 --> 00:01:09.010 the engine of this thing actually works. Because 00:01:09.010 --> 00:01:10.689 it's an engine that's been running for a very, 00:01:10.730 --> 00:01:12.950 very long time. It has. And when you strip away 00:01:12.950 --> 00:01:15.569 all the fancy suits and the confusing jargon, 00:01:15.730 --> 00:01:19.709 what you're left with is a gap, a huge gap between 00:01:19.709 --> 00:01:22.409 a story, and it's usually a very, very good story, 00:01:22.510 --> 00:01:25.950 and a reality that is nothing more than, well. 00:01:26.400 --> 00:01:28.920 Shuffling cash. Shuffling is a very polite word 00:01:28.920 --> 00:01:30.819 for it. It's a carefully constructed mechanism 00:01:30.819 --> 00:01:33.260 of illusion. Okay, so let's start with the absolute 00:01:33.260 --> 00:01:35.459 basics, but I want to push on it a little. The 00:01:35.459 --> 00:01:38.120 classic definition is robbing Peter to pay Paul. 00:01:38.280 --> 00:01:40.719 Right. You take money from investor B, you use 00:01:40.719 --> 00:01:44.019 it to pay a profit to investor A, and you skim 00:01:44.019 --> 00:01:45.980 a little off the top for yourself. But as I was 00:01:45.980 --> 00:01:47.640 reading through the prep notes, I just kept thinking, 00:01:47.799 --> 00:01:51.060 is it really that simple? I mean, how does something 00:01:51.060 --> 00:01:54.060 that simple last for decades? Like with Madoff, 00:01:54.099 --> 00:01:56.769 how does no one just... You know, check the bank 00:01:56.769 --> 00:01:58.530 account. It feels like it should fall apart in 00:01:58.530 --> 00:02:01.969 a week. And that's the paradox. It sustains itself 00:02:01.969 --> 00:02:05.370 because it's that simple. The simplicity is the 00:02:05.370 --> 00:02:09.009 key to its resilience. How so? That seems completely 00:02:09.009 --> 00:02:11.050 backwards. Well, think about a real business, 00:02:11.210 --> 00:02:13.590 a legitimate company. It has a thousand moving 00:02:13.590 --> 00:02:16.150 parts, right? You have supply chains, you have 00:02:16.150 --> 00:02:18.669 marketing, product development, HR, customer 00:02:18.669 --> 00:02:21.379 complaints. a million things can go wrong. Sure. 00:02:21.500 --> 00:02:24.139 A bad quarter, a competitor moves in, a key supplier 00:02:24.139 --> 00:02:27.460 goes bust. Exactly. But in a Ponzi scheme, there's 00:02:27.460 --> 00:02:30.039 only one variable that matters. Capital flow. 00:02:30.819 --> 00:02:33.000 That's it. As long as the money coming in the 00:02:33.000 --> 00:02:34.620 front door is greater than the money going out 00:02:34.620 --> 00:02:37.039 the back door, the illusion holds. The engine 00:02:37.039 --> 00:02:40.000 keeps running. So unlike a real business that 00:02:40.000 --> 00:02:42.639 has to actually create value, you know, build 00:02:42.639 --> 00:02:44.379 a car, write a piece of software, sell a cup 00:02:44.379 --> 00:02:48.180 of coffee, the profit in a Ponzi... is entirely 00:02:48.180 --> 00:02:51.620 fictitious. 100%. It's not profit. It's just 00:02:51.620 --> 00:02:53.659 a transfer of principle from a new victim to 00:02:53.659 --> 00:02:56.530 an earlier victim. The operator is just a middleman 00:02:56.530 --> 00:02:58.330 in a chain of theft, and they're taking the biggest 00:02:58.330 --> 00:03:00.509 cut. But to get people to hand over their principal 00:03:00.509 --> 00:03:02.469 in the first place, you need that story. You 00:03:02.469 --> 00:03:04.330 can't just say, give me your money, I'll give 00:03:04.330 --> 00:03:06.729 you someone else's. No, of course not. This is 00:03:06.729 --> 00:03:08.810 where the operator has to be a master psychologist. 00:03:09.229 --> 00:03:12.310 They build what we call a black box around that 00:03:12.310 --> 00:03:14.909 simple, ugly mechanism. Okay, let's unpack the 00:03:14.909 --> 00:03:17.550 black box. This seems like stage one in the anatomy 00:03:17.550 --> 00:03:20.800 of the lie. The disguise. It is. It's the intellectual 00:03:20.800 --> 00:03:24.099 camouflage. You need a plausible sounding story 00:03:24.099 --> 00:03:26.419 that explains why you are making these incredible 00:03:26.419 --> 00:03:29.599 returns when nobody else can. And that story 00:03:29.599 --> 00:03:32.659 almost always relies on complexity and secrecy. 00:03:32.719 --> 00:03:35.099 This is what our sources call verbal masking, 00:03:35.219 --> 00:03:38.219 right? Yes. The operator uses terms that sound 00:03:38.219 --> 00:03:40.460 incredibly impressive, but are intentionally 00:03:40.460 --> 00:03:44.080 vague and impossible to verify. Things like proprietary 00:03:44.080 --> 00:03:47.060 hedge futures trading. or high yield international 00:03:47.060 --> 00:03:51.139 investment programs or offshore foreign currency 00:03:51.139 --> 00:03:53.479 arbitrage. I see this constantly in the crypto 00:03:53.479 --> 00:03:55.639 space, which I know we'll get to. Algorithmic 00:03:55.639 --> 00:03:57.780 stablecoin yield farming on a layer two protocol. 00:03:58.590 --> 00:04:00.110 It sounds like you know what you're talking about. 00:04:00.349 --> 00:04:03.229 But I don't. And I think that's the trap, isn't 00:04:03.229 --> 00:04:06.770 it? If I ask you to explain it and you fire back 00:04:06.770 --> 00:04:09.150 with a sentence like that, I don't want to look 00:04:09.150 --> 00:04:11.590 stupid by saying, I have no idea what you just 00:04:11.590 --> 00:04:14.750 said. That is the single most important psychological 00:04:14.750 --> 00:04:18.610 trigger they exploit. Your social anxiety. Your 00:04:18.610 --> 00:04:22.560 insecurity about finance. If I tell you my strategy 00:04:22.560 --> 00:04:26.579 is a proprietary algorithm or that it's a trade 00:04:26.579 --> 00:04:29.300 secret, I've just done two incredibly powerful 00:04:29.300 --> 00:04:32.160 things. Okay. What are they? First, I've completely 00:04:32.160 --> 00:04:35.040 shielded myself from any real due diligence. 00:04:35.180 --> 00:04:36.959 You can't ask to see my books because they're 00:04:36.959 --> 00:04:39.740 secret. Right. But second, and this is the real 00:04:39.740 --> 00:04:42.339 genius of it, I've made you feel special. You're 00:04:42.339 --> 00:04:44.379 not just an investor. You're being let in on 00:04:44.379 --> 00:04:46.459 a secret. You're getting access to the secret 00:04:46.459 --> 00:04:49.420 sauce. So the total lack of transparency becomes 00:04:49.420 --> 00:04:52.360 a selling point. I can't possibly tell you how 00:04:52.360 --> 00:04:54.500 I make the money because then everyone would 00:04:54.500 --> 00:04:57.000 do it and the opportunity would vanish. Precisely. 00:04:57.000 --> 00:04:58.779 And once you've bought into that black box, the 00:04:58.779 --> 00:05:00.839 second stage kicks in. This is the cascade effect. 00:05:01.019 --> 00:05:02.759 This is where the money starts moving. This is 00:05:02.759 --> 00:05:05.120 where the illusion becomes reality for the first 00:05:05.120 --> 00:05:08.019 investors. The operator takes your money and 00:05:08.019 --> 00:05:10.920 maybe a month or a quarter later, they do one 00:05:10.920 --> 00:05:13.160 of two things. They either mail you a check for 00:05:13.160 --> 00:05:16.459 your profits or, more likely these days, you 00:05:16.459 --> 00:05:19.399 log into a slick -looking website and see a number 00:05:19.399 --> 00:05:21.759 on a screen. And the number has gone up. My $10 00:05:21.759 --> 00:05:25.620 ,000 is now $11 ,000. And that's the hook. That's 00:05:25.620 --> 00:05:27.779 the moment the scheme goes from a promise to, 00:05:27.920 --> 00:05:30.920 in your mind, a proven fact. The dopamine hits. 00:05:31.560 --> 00:05:34.319 It works. It validates the risk I took. All my 00:05:34.319 --> 00:05:36.720 skepticism just melts away because, hey, look, 00:05:36.800 --> 00:05:38.740 there's the proof. And this is the critical turning 00:05:38.740 --> 00:05:42.560 point. This is where the victims completely unwittingly 00:05:42.560 --> 00:05:44.980 become accomplices. Because what's the very first 00:05:44.980 --> 00:05:46.939 thing you do when you find an investment that's 00:05:46.939 --> 00:05:49.579 actually truly paying out 15 or 20 percent a 00:05:49.579 --> 00:05:52.300 year? I tell people. I tell my brother, I tell 00:05:52.300 --> 00:05:54.600 my best friend from college, I'd feel guilty 00:05:54.600 --> 00:05:57.079 if I kept it to myself. I feel like I was hoarding 00:05:57.079 --> 00:05:59.939 this amazing opportunity. You become the unpaid 00:05:59.939 --> 00:06:02.839 and most trusted recruitment arm of the entire 00:06:02.839 --> 00:06:05.620 fraud. You are now doing the operator's work 00:06:05.620 --> 00:06:08.019 for him, and you're far more effective than he 00:06:08.019 --> 00:06:10.139 could ever be. Because the recommendation is 00:06:10.139 --> 00:06:12.759 coming from a place of trust. My brother trusts 00:06:12.759 --> 00:06:16.129 me. Exactly. This solves the operator's biggest 00:06:16.129 --> 00:06:19.029 problem, which is customer acquisition. But now 00:06:19.029 --> 00:06:22.750 he has another even bigger problem. Cash. Actual 00:06:22.750 --> 00:06:25.730 liquid cash. If everyone tries to take their 00:06:25.730 --> 00:06:28.269 profits out in real money all at once, the whole 00:06:28.269 --> 00:06:31.029 house of cards collapses overnight. So he has 00:06:31.029 --> 00:06:33.329 to deploy a whole suite of retention tactics. 00:06:33.670 --> 00:06:35.769 The sources call this the rollover pressure. 00:06:36.350 --> 00:06:38.389 And I found this part fascinating because it 00:06:38.389 --> 00:06:41.009 plays on greed, but it also uses a legitimate 00:06:41.009 --> 00:06:43.829 financial concept against you. It weaponizes 00:06:43.829 --> 00:06:47.310 the power of compounding. Albert Einstein supposedly 00:06:47.310 --> 00:06:50.089 called compounding the most powerful force in 00:06:50.089 --> 00:06:52.290 the universe. And the scammers know it. They 00:06:52.290 --> 00:06:53.970 absolutely know it. They'll call you up and say, 00:06:54.029 --> 00:06:56.810 look, your account generated $2 ,000 profit this 00:06:56.810 --> 00:06:59.339 quarter. I can cut you a check right now. But 00:06:59.339 --> 00:07:01.660 if you just leave it in the fund, roll it over. 00:07:01.879 --> 00:07:04.319 Next quarter, you'll be earning a return on your 00:07:04.319 --> 00:07:06.540 principal and on that profit. And since I believe 00:07:06.540 --> 00:07:09.220 the black box is a magic money machine, of course 00:07:09.220 --> 00:07:11.740 I leave it in. Why would I take out $2 ,000 when 00:07:11.740 --> 00:07:14.339 I can turn it into four? And in that moment, 00:07:14.519 --> 00:07:17.779 you've just traded real spendable cash for a 00:07:17.779 --> 00:07:20.100 few extra pixels on a computer screen. And that 00:07:20.100 --> 00:07:22.240 costs the operator absolutely nothing. He can 00:07:22.240 --> 00:07:23.920 just type a new number into the database for 00:07:23.920 --> 00:07:25.699 my account. You have a million dollars, you have 00:07:25.699 --> 00:07:27.540 five million. As long as you don't ask for the 00:07:27.540 --> 00:07:30.860 actual check. He's perfectly safe. Yeah. And 00:07:30.860 --> 00:07:33.339 to make sure you don't ask, they'll often build 00:07:33.339 --> 00:07:37.100 in incentives. Lock -in periods. If you commit 00:07:37.100 --> 00:07:38.899 to keeping your money with us for three years, 00:07:39.079 --> 00:07:42.019 we'll bump your guaranteed rate from 10 % to 00:07:42.019 --> 00:07:45.259 12%. It's all about buying time, kicking the 00:07:45.259 --> 00:07:48.379 can down the road, but... What if I really do 00:07:48.379 --> 00:07:50.459 need the money? You know, my kid's tuition is 00:07:50.459 --> 00:07:52.560 due or I have a medical emergency. I have to 00:07:52.560 --> 00:07:55.220 cash out. This is where the operator has to be 00:07:55.220 --> 00:07:57.680 very, very clever. This is the illusion of liquidity. 00:07:58.420 --> 00:08:01.000 If you're a relatively small investor and you 00:08:01.000 --> 00:08:03.199 ask for your money back, they will almost always 00:08:03.199 --> 00:08:05.819 pay you. Immediately. Immediately. And with a 00:08:05.819 --> 00:08:07.980 smile. They'll wire it to you the same day. But 00:08:07.980 --> 00:08:10.120 why? Wouldn't they want to hold on to every last 00:08:10.120 --> 00:08:12.620 penny? That seems counterintuitive. Because they're 00:08:12.620 --> 00:08:15.740 not just losing your $20 ,000. They're making 00:08:15.740 --> 00:08:18.660 a strategic investment. They're buying your testimony. 00:08:18.720 --> 00:08:21.699 Oh, I see. Because what do you do? You go back 00:08:21.699 --> 00:08:23.459 to that same circle of friends you recruited 00:08:23.459 --> 00:08:25.379 and you say, hey, I was a little worried, but 00:08:25.379 --> 00:08:27.180 I had to take some money out and there was no 00:08:27.180 --> 00:08:29.279 problem at all. The funds were in my account 00:08:29.279 --> 00:08:32.240 the next day. This thing is legit. You calm the 00:08:32.240 --> 00:08:35.690 herd. You prevent a panic. You prevent the run 00:08:35.690 --> 00:08:37.809 on the bank. Yeah. They will happily sacrifice 00:08:37.809 --> 00:08:40.490 a little bit of cash to protect the main pot. 00:08:40.690 --> 00:08:44.450 It's a calculated loss. Wow. Now, before we get 00:08:44.450 --> 00:08:46.490 into the history, there's one specific type of 00:08:46.490 --> 00:08:49.070 Ponzi that I found really, well, really disturbing 00:08:49.070 --> 00:08:53.330 in the research. The accidental Ponzi. This is 00:08:53.330 --> 00:08:55.029 a frightening one. Because we have this image 00:08:55.029 --> 00:08:57.970 of the con artist as, you know, a predator, someone 00:08:57.970 --> 00:09:00.049 who plots this out in a dark room from day one. 00:09:00.990 --> 00:09:03.070 But that's not always how it starts, is it? No. 00:09:03.210 --> 00:09:05.750 And this is what's so scary. It can happen to 00:09:05.750 --> 00:09:08.370 people who start out with good intentions. Imagine 00:09:08.370 --> 00:09:10.950 a hedge fund manager. He's running a perfectly 00:09:10.950 --> 00:09:14.169 legitimate fund. He has real clients. He's making 00:09:14.169 --> 00:09:16.730 real trades. But he's under enormous pressure 00:09:16.730 --> 00:09:20.429 to perform. And then one month, he makes a huge, 00:09:20.470 --> 00:09:23.429 catastrophic bad bet. The market turns against 00:09:23.429 --> 00:09:26.269 him. He loses 30 % of the entire fund's value 00:09:26.269 --> 00:09:29.659 in a week. So he's staring at his screen. And 00:09:29.659 --> 00:09:32.139 he knows that in two weeks he has to send out 00:09:32.139 --> 00:09:34.000 the quarterly statements to all his investors. 00:09:34.299 --> 00:09:36.480 Telling them he just vaporized a third of their 00:09:36.480 --> 00:09:39.059 retirement savings. And his ego can't handle 00:09:39.059 --> 00:09:41.720 it. Or he's just terrified they'll all pull their 00:09:41.720 --> 00:09:44.840 money out and his firm, his career, will be over. 00:09:45.000 --> 00:09:48.240 The shame must be immense. So he makes a choice. 00:09:48.659 --> 00:09:51.879 A fateful choice. He says to himself, you know 00:09:51.879 --> 00:09:53.820 what, I'll just... I'll just fudge the numbers. 00:09:53.879 --> 00:09:55.659 Just this one quarter, I'll send out statements 00:09:55.659 --> 00:09:58.799 saying we were flat, no gain, no loss. And then 00:09:58.799 --> 00:10:00.820 over the next three months, I'll take a really 00:10:00.820 --> 00:10:03.139 risky, high leverage bet. I'll make it all back 00:10:03.139 --> 00:10:04.960 and I can fix the books before the next audit. 00:10:05.179 --> 00:10:07.919 No one will ever know. That's the make good theory. 00:10:08.080 --> 00:10:10.919 He's not trying to steal. He's trying to fix 00:10:10.919 --> 00:10:13.600 his mistake without admitting failure. He's borrowing 00:10:13.600 --> 00:10:17.740 from the truth. Exactly. But what happens? That 00:10:17.740 --> 00:10:21.299 high risk, desperate bet fails too. Now the hole 00:10:21.299 --> 00:10:25.519 isn't 30 % deep. It's 60 % deep. Now he has to 00:10:25.519 --> 00:10:27.240 lie on the next statement. He has no choice. 00:10:27.600 --> 00:10:30.200 And suddenly, without even realizing the moment 00:10:30.200 --> 00:10:32.200 it happened, he's not a hedge fund manager who 00:10:32.200 --> 00:10:34.220 made a mistake anymore. He's running a Ponzi 00:10:34.220 --> 00:10:36.639 scheme. He's running a Ponzi scheme. Because 00:10:36.639 --> 00:10:39.720 now, when an old investor wants to withdraw money, 00:10:40.039 --> 00:10:43.460 the real money isn't there. He has to use capital 00:10:43.460 --> 00:10:46.519 from a new investor to pay them out. It's a terrifyingly 00:10:46.519 --> 00:10:49.879 slippery slope from professional pride and incompetence 00:10:49.879 --> 00:10:52.580 into outright criminality. That's a chilling 00:10:52.580 --> 00:10:54.240 thought. It means you're not just looking for 00:10:54.240 --> 00:10:56.080 the obvious predators. You could be investing 00:10:56.080 --> 00:10:58.200 with someone who's just desperate and in way 00:10:58.200 --> 00:11:00.100 over their head. And who thinks they can outsmart 00:11:00.100 --> 00:11:01.960 the market just one more time. All right, let's 00:11:01.960 --> 00:11:04.159 step back in time. Because for all his fame, 00:11:04.360 --> 00:11:06.580 Charles Ponzi was basically a latecomer to his 00:11:06.580 --> 00:11:08.840 own party. He didn't invent this. He just had 00:11:08.840 --> 00:11:11.700 better PR. He had incredible branding. If we're 00:11:11.700 --> 00:11:13.779 being historically accurate, we should probably 00:11:13.779 --> 00:11:16.720 be calling these Bissiter schemes. Adele Spitziter. 00:11:16.860 --> 00:11:18.879 I had never heard of her before this deep dive. 00:11:19.000 --> 00:11:22.720 And her story is just, it's wild. We're in Germany, 00:11:22.779 --> 00:11:25.980 right? Late 1860s. Munich, to be precise. The 00:11:25.980 --> 00:11:28.720 kingdom of Bavaria. And Adele Spitziter was not 00:11:28.720 --> 00:11:31.440 a financier. She's an aspiring actress and apparently 00:11:31.440 --> 00:11:34.200 not a very good one. She was in debt, struggling 00:11:34.200 --> 00:11:36.559 to make ends meet. So how does a struggling actress 00:11:36.559 --> 00:11:39.350 start a bank? She realized that borrowing from 00:11:39.350 --> 00:11:42.590 established banks was difficult, but maybe. Borrowing 00:11:42.590 --> 00:11:45.029 from ordinary people would be easier, especially 00:11:45.029 --> 00:11:46.570 if she promised them something the banks would 00:11:46.570 --> 00:11:49.169 never dream of offering. She started what became 00:11:49.169 --> 00:11:52.470 known as the Dachauer Bank in 1869. And her hook 00:11:52.470 --> 00:11:54.990 wasn't some complex arbitrage scheme. It was 00:11:54.990 --> 00:11:57.690 just an insane interest rate. An impossible interest 00:11:57.690 --> 00:12:00.049 rate. She offered 10 % interest per month. Per 00:12:00.049 --> 00:12:02.509 month. That's what, 120 % a year? Simple interest? 00:12:03.080 --> 00:12:04.879 You're more than doubling your money in a year. 00:12:04.960 --> 00:12:07.919 It's economic fantasy. But for the first investors, 00:12:08.080 --> 00:12:10.679 she made it real. She'd pay them out in cash, 00:12:10.820 --> 00:12:14.220 often very publicly. There are contemporary accounts 00:12:14.220 --> 00:12:16.379 of her holding court in her lavish apartment 00:12:16.379 --> 00:12:19.720 with sacks of coins and banknotes visibly piled 00:12:19.720 --> 00:12:22.039 up as she handed out payments to a line of happy 00:12:22.039 --> 00:12:24.700 customers. And who are these customers? Not the 00:12:24.700 --> 00:12:27.480 aristocracy, I take it. No, and that was her 00:12:27.480 --> 00:12:29.700 genius and what made the collapse so tragic. 00:12:29.860 --> 00:12:32.419 She targeted the working class. Farmers from 00:12:32.419 --> 00:12:35.080 the countryside, maids, servants, small shopkeepers, 00:12:35.240 --> 00:12:37.740 people who were ignored by the traditional banking 00:12:37.740 --> 00:12:40.580 system. She positioned herself as their champion. 00:12:40.759 --> 00:12:43.059 A woman of the people. Exactly. She became a 00:12:43.059 --> 00:12:45.100 beloved folk hero. They called her the angel 00:12:45.100 --> 00:12:47.509 of the poor. And she played the part. She opened 00:12:47.509 --> 00:12:50.350 soup kitchens. She donated lavishly to churches 00:12:50.350 --> 00:12:52.769 and charities. She was buying legitimacy with 00:12:52.769 --> 00:12:55.549 stolen money, creating this public persona of 00:12:55.549 --> 00:12:58.129 a benevolent matriarch who was fighting the greedy 00:12:58.129 --> 00:13:00.429 established banks on behalf of the little guy. 00:13:00.570 --> 00:13:02.470 It was a masterclass in public relations and 00:13:02.470 --> 00:13:05.690 psychological manipulation. People trusted her 00:13:05.690 --> 00:13:07.690 not because of her financial acumen, but because 00:13:07.690 --> 00:13:09.850 she seemed to care about them. And the fall was 00:13:09.850 --> 00:13:12.850 just as spectacular as the rise. As it always 00:13:12.850 --> 00:13:15.480 is. The financial press and the legitimate banks 00:13:15.480 --> 00:13:17.879 started asking very pointed questions. The math 00:13:17.879 --> 00:13:20.960 simply didn't work. As scrutiny grew, the flow 00:13:20.960 --> 00:13:23.519 of new money started to dry up. She couldn't 00:13:23.519 --> 00:13:26.000 make the interest payments. A panic started and 00:13:26.000 --> 00:13:28.820 she was arrested in 1872. And the aftermath. 00:13:29.000 --> 00:13:31.759 It was devastating. The collapse was so profound, 00:13:31.899 --> 00:13:34.799 it reportedly triggered a wave of suicides in 00:13:34.799 --> 00:13:37.620 Bavaria. It wiped out the life savings of thousands 00:13:37.620 --> 00:13:39.840 of working class families. It's just it's the 00:13:39.840 --> 00:13:41.840 exact same pattern we see over and over. But 00:13:41.840 --> 00:13:44.139 let's jump across the Atlantic. A decade later 00:13:44.139 --> 00:13:47.379 in the U .S., Sarah Howe and the ladies deposit. 00:13:47.919 --> 00:13:50.799 This one is just it. Feels particularly cruel. 00:13:51.120 --> 00:13:53.940 It's a very targeted, very cynical case of affinity 00:13:53.940 --> 00:13:56.659 fraud. This is Boston in the 1880s. And Sarah 00:13:56.659 --> 00:13:58.840 Howe's background was not in acting, but in fortune 00:13:58.840 --> 00:14:00.980 telling. So she was already in the business of 00:14:00.980 --> 00:14:03.179 selling illusions. You could say that. Right. 00:14:03.259 --> 00:14:05.019 And she devised a scheme that was exclusively 00:14:05.019 --> 00:14:07.899 for women and not just any women, but specifically 00:14:07.899 --> 00:14:11.340 unmarried women, spinsters and widows. We have 00:14:11.340 --> 00:14:14.350 to remember the context here. In the 1880s, a 00:14:14.350 --> 00:14:16.549 woman's financial life was incredibly restricted. 00:14:17.029 --> 00:14:19.330 They often couldn't open their own bank accounts. 00:14:19.490 --> 00:14:21.490 They couldn't own property in the same way. They 00:14:21.490 --> 00:14:23.289 were completely shut out of the investment world. 00:14:23.470 --> 00:14:25.889 They were a financially vulnerable and underserved 00:14:25.889 --> 00:14:28.870 population. House saw that vulnerability and 00:14:28.870 --> 00:14:31.870 exploited it perfectly. She opened the lady's 00:14:31.870 --> 00:14:35.509 deposit, and her promise was 8 % monthly interest. 00:14:35.769 --> 00:14:38.570 Still an impossible number. Of course. But the 00:14:38.570 --> 00:14:41.809 real hook, the real genius of her scam, was the 00:14:41.809 --> 00:14:44.370 exclusivity. It was a financial sanctuary for 00:14:44.370 --> 00:14:47.210 women run by a woman. It felt safe. It felt like 00:14:47.210 --> 00:14:49.289 a club that was finally looking out for their 00:14:49.289 --> 00:14:51.730 interests. And the research notes say she cultivated 00:14:51.730 --> 00:14:54.610 a specific image, too. Yes. She didn't present 00:14:54.610 --> 00:14:57.649 herself as a flashy, wealthy financier. She dressed 00:14:57.649 --> 00:15:00.750 very plainly, almost in a Quaker style. She projected 00:15:00.750 --> 00:15:04.149 an image of piety, humility, and trustworthiness. 00:15:04.350 --> 00:15:06.350 She wasn't selling glamour. She was selling stability. 00:15:06.750 --> 00:15:09.110 So what was her black box? What was the lie that 00:15:09.110 --> 00:15:11.389 explained the 8 % a month? It was a clever one. 00:15:11.769 --> 00:15:13.870 She claimed the entire enterprise was backed 00:15:13.870 --> 00:15:17.509 by a silent, benevolent Quaker charity. Ah, there's 00:15:17.509 --> 00:15:20.129 the Quaker connection. Right. She told her clients 00:15:20.129 --> 00:15:24.269 that a group of wealthy, charitable Quakers wanted 00:15:24.269 --> 00:15:26.470 to help these unfortunate women, so they were 00:15:26.470 --> 00:15:29.090 subsidizing the high interest rates. It was a 00:15:29.090 --> 00:15:30.669 complete fabrication, of course. There was no 00:15:30.669 --> 00:15:33.090 charity. The only money coming in was from new 00:15:33.090 --> 00:15:35.639 depositors. And it was the press that eventually 00:15:35.639 --> 00:15:38.899 brought her down. It was. The Boston Daily Advertiser 00:15:38.899 --> 00:15:41.259 did some real investigative journalism. They 00:15:41.259 --> 00:15:43.700 looked into her past and found a history of fraud. 00:15:44.139 --> 00:15:46.559 They searched for this mysterious Quaker charity 00:15:46.559 --> 00:15:48.899 and, of course, found nothing. When their expose 00:15:48.899 --> 00:15:52.019 was published, the run on the bank began. How 00:15:52.019 --> 00:15:54.159 much did she get away with? She'd taken in around 00:15:54.159 --> 00:15:56.840 half a million dollars, which in 1880 was an 00:15:56.840 --> 00:15:59.480 astronomical sum of money. She ended up serving 00:15:59.480 --> 00:16:01.889 three years in prison. But she really wrote the 00:16:01.889 --> 00:16:04.570 playbook for what we now call affinity fraud. 00:16:04.750 --> 00:16:07.029 It's just amazing. Scammers are like viruses. 00:16:07.190 --> 00:16:09.029 They just adapt to the host environment. They 00:16:09.029 --> 00:16:11.330 find the cultural weakness, struggling farmers, 00:16:11.590 --> 00:16:13.990 marginalized women, and they design the attack 00:16:13.990 --> 00:16:16.649 specifically for that target. And that finally 00:16:16.649 --> 00:16:18.529 brings us to the man whose name is on the tin. 00:16:19.210 --> 00:16:24.429 Charles Ponzi, Boston, 1920. So why him? Spitziter's 00:16:24.429 --> 00:16:28.759 scam was huge. Howes was devious. Why do we all 00:16:28.759 --> 00:16:31.419 say Ponzi scheme was his just that much bigger? 00:16:31.580 --> 00:16:34.259 It was bigger and it was much, much faster. But 00:16:34.259 --> 00:16:36.899 the real reason his name stuck was that Charles 00:16:36.899 --> 00:16:39.320 Ponzi was a natural born master of the media. 00:16:39.460 --> 00:16:42.340 He operated in the roaring 20s right after World 00:16:42.340 --> 00:16:45.480 War I. Yeah. It was a time of huge economic change 00:16:45.480 --> 00:16:49.279 and speculation. And his black box. It was a 00:16:49.279 --> 00:16:50.860 work of art because it was technically grounded 00:16:50.860 --> 00:16:53.399 in a real verifiable thing. The International 00:16:53.399 --> 00:16:56.580 Reply Coupon. The Humble IRC. Let's explain this 00:16:56.580 --> 00:16:58.559 because it sounds incredibly boring, but it's 00:16:58.559 --> 00:17:00.259 the heart of the story. Please do. Okay, back 00:17:00.259 --> 00:17:02.580 then, if you wanted to send a letter to someone 00:17:02.580 --> 00:17:06.119 in, say, Italy and include the postage for them 00:17:06.119 --> 00:17:08.279 to write you back, you couldn't just put a U 00:17:08.279 --> 00:17:10.559 .S. stamp in the envelope. You buy an international 00:17:10.559 --> 00:17:13.220 reply coupon at your post office. You send it 00:17:13.220 --> 00:17:14.980 to Italy, and your friend there can exchange 00:17:14.980 --> 00:17:17.180 it for an Italian stamp. It's a voucher, basically. 00:17:17.400 --> 00:17:19.920 It's a voucher for postage. And Ponzi's grand 00:17:19.920 --> 00:17:22.819 idea was arbitrage, buying something low in one 00:17:22.819 --> 00:17:24.960 market and selling it high in another. Because 00:17:24.960 --> 00:17:27.099 of the hyperinflation in Europe after the war, 00:17:27.480 --> 00:17:29.880 the Italian lira was incredibly weak against 00:17:29.880 --> 00:17:33.180 the U .S. dollar. So in theory, you could buy 00:17:33.180 --> 00:17:36.490 an IRC in Italy. for the equivalent of one U 00:17:36.490 --> 00:17:39.190 .S. cent, and then redeem it in Boston for a 00:17:39.190 --> 00:17:42.910 five -cent U .S. stamp, a 400 % profit. Okay, 00:17:42.950 --> 00:17:44.849 that actually sounds plausible. So what was the 00:17:44.849 --> 00:17:47.589 problem? If the arbitrage was real, why was it 00:17:47.589 --> 00:17:50.430 a scam? This is the critical point. The math 00:17:50.430 --> 00:17:53.490 worked on a small scale, but it was logistically 00:17:53.490 --> 00:17:56.170 impossible to scale up. Think of it this way. 00:17:56.250 --> 00:17:58.950 To generate a meaningful profit, you need to 00:17:58.950 --> 00:18:01.920 deal in huge volumes. Thousands, millions of 00:18:01.920 --> 00:18:04.519 these little paper coupons. Exactly. To pay the 00:18:04.519 --> 00:18:07.119 returns he was promising, which was 50 % in 45 00:18:07.119 --> 00:18:09.539 days, on the millions of dollars that were pouring 00:18:09.539 --> 00:18:12.059 in, he would have needed to purchase and ship 00:18:12.059 --> 00:18:14.299 more coupons than actually existed in the entire 00:18:14.299 --> 00:18:16.680 world. The number of ships required would have 00:18:16.680 --> 00:18:18.440 been a fleet. It was a physical impossibility. 00:18:18.640 --> 00:18:20.539 Did he know that from the start? The evidence 00:18:20.539 --> 00:18:22.740 suggests he figured it out very, very quickly. 00:18:23.099 --> 00:18:25.059 He might have started with a legitimate, if naive, 00:18:25.220 --> 00:18:28.119 idea. But within a week or two, he realized the 00:18:28.119 --> 00:18:30.200 logistics were a nightmare. So he just stopped 00:18:30.200 --> 00:18:32.319 buying the coupons. But he didn't start taking 00:18:32.319 --> 00:18:34.240 the money. He did not stop taking the money. 00:18:34.339 --> 00:18:37.240 He just started using the fire hose of cash from 00:18:37.240 --> 00:18:39.900 new investors to pay off the early ones with 00:18:39.900 --> 00:18:42.279 a handsome profit. And because he paid them, 00:18:42.420 --> 00:18:44.859 Boston went absolutely insane for him. It was 00:18:44.859 --> 00:18:47.980 a frenzy. A full -blown mania. There were pictures 00:18:47.980 --> 00:18:50.259 in the papers of lines stretching for blocks 00:18:50.259 --> 00:18:53.740 outside his office. Cops, factory workers, rich 00:18:53.740 --> 00:18:57.539 socialites. Everyone was investing. He was hailed 00:18:57.539 --> 00:19:00.319 as a financial wizard. A hero of the common man. 00:19:00.500 --> 00:19:02.700 He bought a mansion, a bank. He was living the 00:19:02.700 --> 00:19:05.240 high life. He was the toast of the town. Until, 00:19:05.400 --> 00:19:08.049 just like with Sarah Howe, a newspaper. This 00:19:08.049 --> 00:19:10.069 time, the Boston Post started to do the math. 00:19:10.170 --> 00:19:12.450 The math always wins. The math is undefeated. 00:19:12.549 --> 00:19:14.950 An analyst for the Post calculated that to cover 00:19:14.950 --> 00:19:17.369 the investments Ponzi had taken in, there would 00:19:17.369 --> 00:19:20.130 need to be something like 160 million postal 00:19:20.130 --> 00:19:22.890 coupons in circulation. They called the Postal 00:19:22.890 --> 00:19:25.349 Service. The actual number in the entire world 00:19:25.349 --> 00:19:28.309 was about 27 ,000. That is a smoking gun. You 00:19:28.309 --> 00:19:31.619 can't argue with that. You cannot. The story 00:19:31.619 --> 00:19:33.859 broke, the panic started, and the whole thing 00:19:33.859 --> 00:19:36.279 collapsed in a matter of days. He was ruined, 00:19:36.460 --> 00:19:39.500 went to prison, was eventually deported, and 00:19:39.500 --> 00:19:42.420 died broke. But he left behind a powerful legacy. 00:19:42.779 --> 00:19:45.980 His name became synonymous with the lie that 00:19:45.980 --> 00:19:48.700 if the returns are high enough, people will desperately 00:19:48.700 --> 00:19:51.740 want to believe. Which is a perfect segue. Because 00:19:51.740 --> 00:19:53.819 this isn't just about history. I want our listeners 00:19:53.819 --> 00:19:57.619 to be armed. If a modern -day Charles Ponzi slid 00:19:57.619 --> 00:20:00.200 into your DMs or called you up, What are the 00:20:00.200 --> 00:20:02.500 red flags? We've got a great checklist here from 00:20:02.500 --> 00:20:05.140 the SEC. Let's run through them. OK. The first 00:20:05.140 --> 00:20:07.559 one is the most obvious, but it's also the one 00:20:07.559 --> 00:20:10.000 people are most willing to overlook. It's high 00:20:10.000 --> 00:20:12.579 returns with little or no risk. The word guaranteed 00:20:12.579 --> 00:20:15.079 should set off alarm bells. It should be a fire 00:20:15.079 --> 00:20:17.259 alarm with sprinklers. In the real financial 00:20:17.259 --> 00:20:19.859 world, risk and return are inextricably linked. 00:20:20.160 --> 00:20:22.539 They're two sides of the same coin. If you want 00:20:22.539 --> 00:20:24.380 a perfectly safe investment, you buy a government 00:20:24.380 --> 00:20:27.339 bond and you get, you know, 4 % or 5%. If you 00:20:27.339 --> 00:20:29.740 want a chance at a 20 % return, you have to accept 00:20:29.740 --> 00:20:31.400 the risk that you could lose all your money in 00:20:31.400 --> 00:20:34.460 a startup or a volatile stock. So anyone offering 00:20:34.460 --> 00:20:37.420 you high guaranteed returns is breaking the fundamental 00:20:37.420 --> 00:20:41.119 laws of finance. They are lying. Full stop. It 00:20:41.119 --> 00:20:43.539 is an economic impossibility. Okay. Red flag 00:20:43.539 --> 00:20:46.759 number two. Overly consistent returns. This one 00:20:46.759 --> 00:20:50.250 is the Madoff signature. This is a bit more subtle, 00:20:50.289 --> 00:20:52.849 but it's a huge tell. If you look at a chart 00:20:52.849 --> 00:20:56.049 of any real market index, like the S &P 500, 00:20:56.329 --> 00:20:59.549 it looks like a mountain range. It's jagged. 00:20:59.549 --> 00:21:01.690 It goes up. It goes down. There are good months 00:21:01.690 --> 00:21:04.170 and bad months. Right. It's volatile. If you 00:21:04.170 --> 00:21:06.329 look at the performance chart for Bernie Madoff's 00:21:06.329 --> 00:21:09.549 fund, it was a perfectly smooth, straight line, 00:21:09.650 --> 00:21:12.609 angled up at 45 degrees. Month after month, year 00:21:12.609 --> 00:21:15.140 after year, it went up by about 1%. The market 00:21:15.140 --> 00:21:18.539 crashes in 2000. Madoff is up 1%. The market 00:21:18.539 --> 00:21:21.799 booms. Madoff is up 1%. But isn't consistency 00:21:21.799 --> 00:21:24.140 what investors want? Why is that a red flag? 00:21:24.420 --> 00:21:26.559 We want it, but it doesn't exist in nature. No 00:21:26.559 --> 00:21:28.920 real trading strategy works perfectly in all 00:21:28.920 --> 00:21:31.420 market conditions. If an investment fund never 00:21:31.420 --> 00:21:34.019 has a down month, it's almost certain proof that 00:21:34.019 --> 00:21:35.920 the numbers are being fabricated. It means they're 00:21:35.920 --> 00:21:37.500 not actually trading in the market. They're just 00:21:37.500 --> 00:21:39.700 typing numbers into a spreadsheet. Got it. Okay, 00:21:39.720 --> 00:21:42.819 number three, unregistered investments and unlicensed 00:21:42.819 --> 00:21:45.460 sellers. This goes right back to the black box. 00:21:45.900 --> 00:21:49.160 Ponzi schemes thrive in the dark. If you register 00:21:49.160 --> 00:21:51.599 an investment with a regulator like the SEC in 00:21:51.599 --> 00:21:55.160 the U .S. or the FCA in the U .K., you have to 00:21:55.160 --> 00:21:57.559 provide audited financial statements. You have 00:21:57.559 --> 00:22:00.140 to have transparency. And transparency is the 00:22:00.140 --> 00:22:02.480 enemy of the scammer. It's their kryptonite. 00:22:02.539 --> 00:22:04.660 So they operate outside the system. They sell 00:22:04.660 --> 00:22:07.759 things like private placements or exclusive offshore 00:22:07.759 --> 00:22:10.039 funds. The first thing you should always do is 00:22:10.039 --> 00:22:12.440 check the regulator's public database. If the 00:22:12.440 --> 00:22:14.380 person selling the investment isn't licensed 00:22:14.380 --> 00:22:17.059 or the investment itself isn't registered, walk 00:22:17.059 --> 00:22:19.559 away. What about this idea of affinity fraud? 00:22:19.660 --> 00:22:21.819 We touched on it with Sarah Howe. This is one 00:22:21.819 --> 00:22:23.779 of the most dangerous and effective tactics. 00:22:24.140 --> 00:22:26.160 It's less about the investment itself and more 00:22:26.160 --> 00:22:28.759 about the sales channel. Scammers will deliberately 00:22:28.759 --> 00:22:31.500 target tight knit groups. Churches, for example. 00:22:31.779 --> 00:22:34.960 Churches are a huge one. but also immigrant communities, 00:22:35.119 --> 00:22:37.759 professional associations, country clubs. The 00:22:37.759 --> 00:22:39.759 chronologist Marie Springer, who's an expert 00:22:39.759 --> 00:22:42.440 on this, points out that we instinctively lower 00:22:42.440 --> 00:22:45.299 our intellectual guard when a pitch comes from 00:22:45.299 --> 00:22:48.259 someone inside our own trusted circle. Oh, Dave 00:22:48.259 --> 00:22:50.599 from my church group told me about this. Dave's 00:22:50.599 --> 00:22:53.099 a good guy. He wouldn't steer me wrong. And Dave 00:22:53.099 --> 00:22:55.619 probably isn't trying to steer you wrong. Dave 00:22:55.619 --> 00:22:58.380 is most likely a victim himself. He's that unwitting 00:22:58.380 --> 00:23:00.960 accomplice we talked about. But because you trust 00:23:00.960 --> 00:23:04.960 Dave, you transfer that trust to the scammer 00:23:04.960 --> 00:23:07.420 he introduces you to. You don't ask the hard 00:23:07.420 --> 00:23:09.579 questions. You don't ask to see the audit because 00:23:09.579 --> 00:23:12.759 it feels rude. It feels like you're questioning 00:23:12.759 --> 00:23:15.059 your friend's judgment. Precisely. And that social 00:23:15.059 --> 00:23:17.359 pressure is what the scammer is counting on. 00:23:17.759 --> 00:23:19.779 Springer also mentioned some really specific 00:23:19.779 --> 00:23:22.960 procedural red flags, things like weird payment 00:23:22.960 --> 00:23:25.859 methods. Yes, this is a very practical one. If 00:23:25.859 --> 00:23:28.019 you're investing in a company called, say, Global 00:23:28.019 --> 00:23:31.299 Quantum Fund Inc., the check should be made out 00:23:31.299 --> 00:23:34.470 to Global Quantum Fund Inc. Makes sense. If the 00:23:34.470 --> 00:23:36.609 person tells you, oh, for tax purposes, just 00:23:36.609 --> 00:23:38.609 make the check out to me personally, Bob Smith, 00:23:38.809 --> 00:23:41.609 or wire the money to this personal account in 00:23:41.609 --> 00:23:44.769 another state. Red flag. Huge red flag. Or, very 00:23:44.769 --> 00:23:47.049 common in the crypto world, just send the crypto 00:23:47.049 --> 00:23:51.250 to this anonymous wallet address. No, legitimate 00:23:51.250 --> 00:23:53.509 investment firms use corporate bank accounts 00:23:53.509 --> 00:23:56.789 and official custodians. Any deviation from that 00:23:56.789 --> 00:23:59.190 is a sign that something is wrong. It all sounds 00:23:59.190 --> 00:24:01.269 so obvious when we lay it out like this, but 00:24:01.269 --> 00:24:03.990 I can see how in the moment, with the promise 00:24:03.990 --> 00:24:06.349 of huge returns and the pressure of this opportunity 00:24:06.349 --> 00:24:09.490 won't last, people just rationalize it. They 00:24:09.490 --> 00:24:12.670 do. Greed and the fear of missing out are incredibly 00:24:12.670 --> 00:24:15.269 powerful emotions. They can short circuit the 00:24:15.269 --> 00:24:17.250 rational part of your brain. So let's talk about 00:24:17.250 --> 00:24:19.769 the endgame, because our outline calls this the 00:24:19.769 --> 00:24:22.609 mathematical certainty. A Ponzi scheme isn't 00:24:22.609 --> 00:24:25.069 just likely to fail, it's guaranteed to fail. 00:24:25.190 --> 00:24:27.859 It's a mathematical necessity. It's like a shark. 00:24:27.940 --> 00:24:31.039 It has to keep moving forward or it drowns. The 00:24:31.039 --> 00:24:33.960 scheme creates an exponentially growing liability. 00:24:34.579 --> 00:24:37.299 Every single day, it owes more and more money 00:24:37.299 --> 00:24:40.000 to its existing investors. To cover those promised 00:24:40.000 --> 00:24:42.619 payments needs a constantly growing inflow of 00:24:42.619 --> 00:24:45.299 new victims. But the pool of potential investors 00:24:45.299 --> 00:24:48.079 isn't infinite. The population of the earth is 00:24:48.079 --> 00:24:50.579 finite. You will eventually run out of new money. 00:24:50.799 --> 00:24:54.140 It's not a question of if, but when. So how does 00:24:54.140 --> 00:24:57.119 it typically end? Our notes lay out three common 00:24:57.119 --> 00:25:00.240 collapse scenarios. Scenario one is what you 00:25:00.240 --> 00:25:02.599 could call the vanishing act. This is when the 00:25:02.599 --> 00:25:04.819 operator is smart, or at least not delusional. 00:25:04.920 --> 00:25:07.279 He's watching the numbers. He can see the math 00:25:07.279 --> 00:25:09.940 turning against him. He realizes that next month, 00:25:10.019 --> 00:25:12.160 the payouts he owes are going to be bigger than 00:25:12.160 --> 00:25:14.220 the new investments he expects to come in. The 00:25:14.220 --> 00:25:16.599 tide is about to turn. So before the checks start 00:25:16.599 --> 00:25:19.509 bouncing... He executes his exit plan. He wires 00:25:19.509 --> 00:25:21.329 all the remaining money in the pot to an offshore 00:25:21.329 --> 00:25:23.769 account in a country with no extradition treaty, 00:25:23.930 --> 00:25:26.750 packs a bag, and disappears. The classic take 00:25:26.750 --> 00:25:30.349 the money and run. Exactly. Scenario two is the 00:25:30.349 --> 00:25:33.549 slow death. This is more common. Recruitment 00:25:33.549 --> 00:25:35.809 starts to slow down. Maybe there's a downturn 00:25:35.809 --> 00:25:37.789 in the economy or some negative press starts 00:25:37.789 --> 00:25:40.269 to circulate. The operator can't make the full 00:25:40.269 --> 00:25:42.190 payments anymore, so he starts making excuses. 00:25:42.609 --> 00:25:44.740 Oh, we're having some, uh... Technical difficulties 00:25:44.740 --> 00:25:46.859 with our payment processor. We're upgrading our 00:25:46.859 --> 00:25:50.359 banking systems. All those classic lines. Investors 00:25:50.359 --> 00:25:52.460 get nervous. They start asking not just for their 00:25:52.460 --> 00:25:55.240 profits, but for their principal back. The operator 00:25:55.240 --> 00:25:57.359 might pay off a few of the loudest complainers 00:25:57.359 --> 00:26:00.180 to try and quell the panic, but that just drains 00:26:00.180 --> 00:26:02.779 the remaining funds even faster. It becomes a 00:26:02.779 --> 00:26:05.519 death spiral that ends in a messy, chaotic collapse. 00:26:05.980 --> 00:26:08.380 And then there's scenario three, the sudden shock. 00:26:08.680 --> 00:26:11.279 This is 2008. This is the... Global financial 00:26:11.279 --> 00:26:13.700 crisis. Yeah. And this is what finally brought 00:26:13.700 --> 00:26:15.680 down Bernie Madoff. So his scheme might have 00:26:15.680 --> 00:26:18.099 continued if the wider economy hadn't collapsed. 00:26:18.460 --> 00:26:20.339 It's very likely. He might have been able to 00:26:20.339 --> 00:26:22.859 keep the illusion going for another five, maybe 00:26:22.859 --> 00:26:25.779 even 10 years. But when the entire market crashed, 00:26:26.019 --> 00:26:28.440 his wealthy investors, who thought their money 00:26:28.440 --> 00:26:31.720 with Madoff was their safe, stable anchor, suddenly 00:26:31.720 --> 00:26:34.289 needed cash. They had losses elsewhere. They 00:26:34.289 --> 00:26:36.869 had margin calls. So they started treating Madoff's 00:26:36.869 --> 00:26:40.329 fund like an ATM. But the ATM was empty. The 00:26:40.329 --> 00:26:43.809 ATM was a painted box with nothing inside. A 00:26:43.809 --> 00:26:46.690 massive, unprecedented wave of redemption requests 00:26:46.690 --> 00:26:50.069 hit him all at once. Billions of dollars. And 00:26:50.069 --> 00:26:53.069 he simply couldn't pay. The run of the bank exposed 00:26:53.069 --> 00:26:55.809 the decades -long fraud in a matter of weeks. 00:26:56.029 --> 00:26:57.930 It's like Warren Buffett says. Only when the 00:26:57.930 --> 00:26:59.809 tide goes out do you discover who's been swimming 00:26:59.809 --> 00:27:02.069 naked. And Madoff was caught with no swimsuit. 00:27:02.509 --> 00:27:04.170 Once the collapse happens, no matter which scenario 00:27:04.170 --> 00:27:07.509 plays out, the money is just gone. It's gone. 00:27:07.670 --> 00:27:09.650 It was never invested in any real assets. It 00:27:09.650 --> 00:27:11.730 was either spent on the operator's lavish lifestyle, 00:27:12.069 --> 00:27:14.829 the jets, the yachts, the mansions, or it was 00:27:14.829 --> 00:27:16.910 paid out to earlier investors who cashed out 00:27:16.910 --> 00:27:19.839 along the way. The recovery process for the final 00:27:19.839 --> 00:27:22.559 victims is long, painful, and they typically 00:27:22.559 --> 00:27:24.599 get back only pennies on the dollar, if anything 00:27:24.599 --> 00:27:27.200 at all. We've covered the history. We've dissected 00:27:27.200 --> 00:27:29.779 the classic mechanics. But we have to talk about 00:27:29.779 --> 00:27:32.400 how this scam has evolved for the 21st century. 00:27:33.079 --> 00:27:35.980 Technology hasn't killed the Ponzi scheme. It's 00:27:35.980 --> 00:27:38.900 given it a massive upgrade. It's put it on steroids. 00:27:39.710 --> 00:27:41.990 Welcome to the world of crypto Ponzi's. Now, 00:27:42.009 --> 00:27:44.869 let's be very clear here. We are not saying that 00:27:44.869 --> 00:27:47.390 all of cryptocurrency is a Ponzi scheme. That's 00:27:47.390 --> 00:27:50.170 a huge and a complex debate. But you have to 00:27:50.170 --> 00:27:52.650 admit the crypto space has been a perfect breeding 00:27:52.650 --> 00:27:55.069 ground for this type of fraud. It's the perfect 00:27:55.069 --> 00:27:57.670 petri dish. Yeah. Just think about the key ingredients 00:27:57.670 --> 00:27:59.730 we've been talking about. You need a complex 00:27:59.730 --> 00:28:03.589 black box story. Check. Blockchains, smart contracts, 00:28:03.789 --> 00:28:06.869 decentralized finance, tokenomics. It's the ultimate 00:28:06.869 --> 00:28:09.750 shield of jargon. You need the promise of impossibly 00:28:09.750 --> 00:28:12.009 high returns. Double check. People talking about 00:28:12.009 --> 00:28:14.769 10x, 100x returns is just normal conversation 00:28:14.769 --> 00:28:17.309 in that world. And you need a lack of clear regulation 00:28:17.309 --> 00:28:20.089 and oversight. Triple check. It's the Wild West, 00:28:20.210 --> 00:28:21.990 so you have all three ingredients in states. 00:28:22.329 --> 00:28:25.359 It's a scammer's paradise. If I say I'm doing 00:28:25.359 --> 00:28:28.240 arbitrage on postal coupons, you can eventually 00:28:28.240 --> 00:28:30.819 check the facts. If I say I'm leveraging a cross 00:28:30.819 --> 00:28:33.500 -chain liquidity protocol to generate yield through 00:28:33.500 --> 00:28:36.380 impermanent loss hedging, most people's eyes 00:28:36.380 --> 00:28:38.619 just glaze over and they reach for their wallet. 00:28:38.779 --> 00:28:42.220 Let's talk about a huge real world example. Terry 00:28:42.220 --> 00:28:47.319 OSD in Luna, May of 2022. This was a cataclysmic 00:28:47.319 --> 00:28:50.400 event in the crypto world. And Wired magazine 00:28:50.400 --> 00:28:53.910 flat out called the mechanics. Ponzonomics. It's 00:28:53.910 --> 00:28:56.509 a fascinating and tragic case study. Terra USD 00:28:56.509 --> 00:28:59.369 or USD was what's called a stable coin. Its whole 00:28:59.369 --> 00:29:01.569 purpose was to always be worth exactly one U 00:29:01.569 --> 00:29:03.730 .S. dollar. Right. A safe harbor in the volatile 00:29:03.730 --> 00:29:05.869 crypto markets. But unlike other stable coins 00:29:05.869 --> 00:29:07.910 that are supposedly backed by actual dollars 00:29:07.910 --> 00:29:10.670 in a real bank vault, Terra was an algorithmic 00:29:10.670 --> 00:29:13.109 stable coin. It used a complex relationship with 00:29:13.109 --> 00:29:15.549 a sister token, Luna, to magically maintain its 00:29:15.549 --> 00:29:17.900 one dollar peg. That was the black box. And what 00:29:17.900 --> 00:29:19.759 was the hook? What was the impossible promise? 00:29:20.119 --> 00:29:22.240 The hook was a savings protocol built on Terra 00:29:22.240 --> 00:29:24.799 called Anchor. And Anchor offered a nearly 20 00:29:24.799 --> 00:29:27.279 % annual percentage yield if you deposited your 00:29:27.279 --> 00:29:30.279 Terra stable coins there. 20 %? Yeah. On a stable 00:29:30.279 --> 00:29:33.319 dollar equivalent asset. In a world where your 00:29:33.319 --> 00:29:36.480 bank was paying you 0 .1 % interest. You can 00:29:36.480 --> 00:29:39.119 see the appeal. Billions upon billions of dollars 00:29:39.119 --> 00:29:41.700 poured into this system. But the critical question 00:29:41.700 --> 00:29:45.359 no one wanted to ask was... Where is that 20 00:29:45.359 --> 00:29:47.599 percent yield coming from? Right. What business 00:29:47.599 --> 00:29:49.839 is generating that profit? There is no business. 00:29:50.000 --> 00:29:52.559 The yield was being artificially subsidized by 00:29:52.559 --> 00:29:55.220 the project's founders and by the constant inflow 00:29:55.220 --> 00:29:57.519 of new money from people buying Luna and Terra 00:29:57.519 --> 00:30:00.700 to chase that 20 percent yield. The system required 00:30:00.700 --> 00:30:03.680 exponential growth just to stand still. So it 00:30:03.680 --> 00:30:05.960 was robbing new investors to pay the interest 00:30:05.960 --> 00:30:09.119 to the old ones. Structurally, yes. And when 00:30:09.119 --> 00:30:11.299 the market turned and confidence wavered. The 00:30:11.299 --> 00:30:13.039 growth stopped and the whole thing entered a 00:30:13.039 --> 00:30:15.460 death spiral. The run of the bank happened digitally 00:30:15.460 --> 00:30:18.079 at the speed of light. Both tokens crashed to 00:30:18.079 --> 00:30:20.119 essentially zero within a few days. And something 00:30:20.119 --> 00:30:23.400 like $60 billion of perceived value was just 00:30:23.400 --> 00:30:26.940 erased? Vaporized. It wasn't a classic Ponzi 00:30:26.940 --> 00:30:29.039 in that one guy ran off with the money, but the 00:30:29.039 --> 00:30:31.680 economic structure was that of a Ponzi. It relied 00:30:31.680 --> 00:30:34.579 on new money to pay the promised returns. And 00:30:34.579 --> 00:30:37.480 then you have the much more blatant old school 00:30:37.480 --> 00:30:41.299 Ponzi's that just wear a crypto disguise. BitConnect 00:30:41.299 --> 00:30:44.000 comes to mind. Oh, BitConnect. It's almost a 00:30:44.000 --> 00:30:46.960 caricature now, but it was huge. It was a classic 00:30:46.960 --> 00:30:50.000 high -yield investment program. Memes were incredible. 00:30:50.400 --> 00:30:53.640 They were. The pitch was you give them your Bitcoin, 00:30:53.880 --> 00:30:56.160 and in exchange you get their special BitConnect 00:30:56.160 --> 00:31:00.180 coin. You then lend this coin to their proprietary 00:31:00.180 --> 00:31:04.059 volatility trading bot. The black box. And this 00:31:04.059 --> 00:31:07.259 magical bot would pay you an average of 1 % interest 00:31:07.259 --> 00:31:10.000 per day. Per day. That's... Let me do the math. 00:31:10.819 --> 00:31:13.160 Compounded. That's an insane number. It's thousands 00:31:13.160 --> 00:31:14.980 of percent a year. It would make you the richest 00:31:14.980 --> 00:31:16.579 person in the history of the world in about a 00:31:16.579 --> 00:31:19.319 decade. It was transparently impossible. But 00:31:19.319 --> 00:31:21.480 people threw money at it because the excuse was 00:31:21.480 --> 00:31:24.259 it's crypto. The old rules don't apply. And of 00:31:24.259 --> 00:31:26.079 course, the trading bot didn't exist. Of course 00:31:26.079 --> 00:31:28.259 not. It was a straight up Ponzi. New Bitcoin 00:31:28.259 --> 00:31:30.220 coming in was used to pay the interest to older 00:31:30.220 --> 00:31:33.380 members. It collapsed spectacularly and the founders 00:31:33.380 --> 00:31:35.180 were indicted. What's interesting to me, though, 00:31:35.259 --> 00:31:37.640 is how these schemes can also adapt to the most 00:31:37.640 --> 00:31:40.839 conservative, risk averse investors. It's not 00:31:40.839 --> 00:31:43.440 just for tech bros chasing moonshots. Look at 00:31:43.440 --> 00:31:46.079 Alan Stanford. Stanford is the polar opposite 00:31:46.079 --> 00:31:49.480 of BitConnect. He was the picture of old school 00:31:49.480 --> 00:31:52.900 financial respectability. Sir Alan Stanford, 00:31:53.259 --> 00:31:56.960 a knighted Texan billionaire with a bank based 00:31:56.960 --> 00:32:00.079 in Antigua. And his investment vehicle of choice 00:32:00.079 --> 00:32:03.700 wasn't some newfangled crypto coin. It was the 00:32:03.700 --> 00:32:06.750 certificate of deposit. The CD. The single most 00:32:06.750 --> 00:32:09.750 boring, safe investment on the planet. The thing 00:32:09.750 --> 00:32:12.009 your grandmother buys at her local bank. And 00:32:12.009 --> 00:32:14.430 that was his genius. It was. He wasn't promising 00:32:14.430 --> 00:32:16.730 1 % a day. He was just offering CDs from his 00:32:16.730 --> 00:32:18.910 offshore bank that paid an interest rate that 00:32:18.910 --> 00:32:22.029 was consistently 2%, 3%, maybe 4 % higher than 00:32:22.029 --> 00:32:23.529 what you could get from a U .S. bank. It felt 00:32:23.529 --> 00:32:25.750 safe. It felt plausible. It didn't trigger the 00:32:25.750 --> 00:32:28.450 too -good -to -be -true alarm. Exactly. The pitch 00:32:28.450 --> 00:32:31.069 was, we're an offshore bank. We have lower overhead. 00:32:31.250 --> 00:32:33.369 We're more efficient. So we can pass those savings 00:32:33.369 --> 00:32:34.930 on to you in the form of a... slightly better 00:32:34.930 --> 00:32:38.690 rate. It felt smart, not greedy. And that veneer 00:32:38.690 --> 00:32:41.930 of plausibility and safety allowed him to run 00:32:41.930 --> 00:32:45.410 a multi -billion dollar Ponzi scheme for over 00:32:45.410 --> 00:32:48.390 a decade. He was just taking new CD deposits 00:32:48.390 --> 00:32:50.970 and using them to pay the interest on the old 00:32:50.970 --> 00:32:53.730 ones. But because the promised returns weren't 00:32:53.730 --> 00:32:56.750 astronomically high, the cash burn was much slower. 00:32:57.359 --> 00:33:00.000 He was able to sustain the illusion for a very, 00:33:00.039 --> 00:33:02.279 very long time. It just proves you have to be 00:33:02.279 --> 00:33:04.940 skeptical of everything, the flashy and the boring. 00:33:05.079 --> 00:33:06.839 You have to look under the hood of the vehicle, 00:33:06.960 --> 00:33:08.660 no matter how safe it looks from the outside. 00:33:08.859 --> 00:33:11.420 I want to spend a moment clarifying some terms, 00:33:11.440 --> 00:33:14.119 because we hear pyramid scheme and Ponzi scheme 00:33:14.119 --> 00:33:16.900 thrown around almost interchangeably. But they 00:33:16.900 --> 00:33:18.819 are structurally different, aren't they? They 00:33:18.819 --> 00:33:21.309 are. They're both forms of investment fraud that 00:33:21.309 --> 00:33:23.970 rely on new money. But the mechanics of how the 00:33:23.970 --> 00:33:26.630 money flows and how the victims participate are 00:33:26.630 --> 00:33:28.930 quite different. So what's the core distinction? 00:33:29.309 --> 00:33:31.410 The main difference is the role of the investor. 00:33:31.869 --> 00:33:35.089 In a Ponzi scheme, the operator is the central 00:33:35.089 --> 00:33:38.369 hub. It's a hub and spoke model. I, the operator, 00:33:38.549 --> 00:33:41.490 recruit you. You give me your money. And then 00:33:41.490 --> 00:33:43.569 your role is completely passive. You just sit 00:33:43.569 --> 00:33:45.630 back and wait for me to send you statements and 00:33:45.630 --> 00:33:47.930 checks. I'm an investor. I'm not a participant 00:33:47.930 --> 00:33:50.410 in the business. Right. But in a pyramid scheme, 00:33:50.710 --> 00:33:54.690 you are the business. I recruit you, but you 00:33:54.690 --> 00:33:56.329 don't make any money by just giving me cash. 00:33:57.130 --> 00:33:58.990 You only make money if you go out and recruit 00:33:58.990 --> 00:34:02.390 five more people who pay to join. And they, in 00:34:02.390 --> 00:34:04.930 turn, only make money by recruiting five more 00:34:04.930 --> 00:34:07.410 people each. So it's active. I have to become 00:34:07.410 --> 00:34:10.170 a salesperson. My primary activity is recruitment. 00:34:10.449 --> 00:34:13.570 Correct. Think of a multi -level marketing company, 00:34:13.710 --> 00:34:16.389 MLM, where there's no actual product being sold 00:34:16.389 --> 00:34:19.230 or the product is just a flimsy excuse. In a 00:34:19.230 --> 00:34:21.429 pyramid scheme, the money flows directly up the 00:34:21.429 --> 00:34:23.550 chain from the new recruits at the bottom to 00:34:23.550 --> 00:34:25.469 the people in the layers above them. Okay, so 00:34:25.469 --> 00:34:26.829 that's the structural difference. What about 00:34:26.829 --> 00:34:29.630 the story? The black box. That's the other key 00:34:29.630 --> 00:34:32.050 difference. A Ponzi scheme always has a cover 00:34:32.050 --> 00:34:35.250 story about some kind of brilliant esoteric investment 00:34:35.250 --> 00:34:38.489 strategy. Arbitrage, secret algorithms, hedge 00:34:38.489 --> 00:34:41.230 funds. It claims the profits come from outside 00:34:41.230 --> 00:34:44.269 the system. A pyramid scheme is usually honest 00:34:44.269 --> 00:34:47.309 about its mechanics. It explicitly states that 00:34:47.309 --> 00:34:49.949 your earnings will come from the fees paid by 00:34:49.949 --> 00:34:52.449 the people you recruit. So which one collapses 00:34:52.449 --> 00:34:55.510 faster? Pyramids, almost without exception, collapse 00:34:55.510 --> 00:34:57.719 much faster. The reason is pure mathematics. 00:34:58.179 --> 00:35:00.400 They require exponential growth in the number 00:35:00.400 --> 00:35:03.059 of participants. If every person has to recruit, 00:35:03.119 --> 00:35:05.920 say, six new members, by the time you get to 00:35:05.920 --> 00:35:07.960 the 13th layer of the pyramid, you need more 00:35:07.960 --> 00:35:09.559 participants than there are people on Earth. 00:35:09.739 --> 00:35:11.400 You just run out of humans. You run out of humans 00:35:11.400 --> 00:35:14.519 very quickly. Ponzi's can survive much longer, 00:35:14.579 --> 00:35:16.159 especially if they have a wealthy client base, 00:35:16.300 --> 00:35:18.400 because they can just convince the same group 00:35:18.400 --> 00:35:20.639 of people to roll over their imaginary profits 00:35:20.639 --> 00:35:23.400 for years and years, which minimizes the need 00:35:23.400 --> 00:35:26.420 for a constant, massive influx of new bodies. 00:35:26.739 --> 00:35:28.820 Okay, that makes sense. Now let's get a little 00:35:28.820 --> 00:35:30.760 more philosophical. We've been talking about 00:35:30.760 --> 00:35:33.679 clear -cut fraud. What about economic bubbles? 00:35:33.900 --> 00:35:37.519 The dot -com bubble in the late 90s? The housing 00:35:37.519 --> 00:35:41.059 bubble before 2008? Are those Ponzi's? This is 00:35:41.059 --> 00:35:43.880 a fantastic and very important debate. The Nobel 00:35:43.880 --> 00:35:46.179 Prize winning economist Robert Shiller has a 00:35:46.179 --> 00:35:49.059 great term for them. He calls bubbles naturally 00:35:49.059 --> 00:35:51.619 occurring Ponzi schemes. Naturally occurring. 00:35:51.699 --> 00:35:55.449 So like a tornado or a forest fire. An act of 00:35:55.449 --> 00:35:57.949 nature. Meaning there's no central mastermind. 00:35:58.010 --> 00:36:00.550 There's no single Charles Ponzi orchestrating 00:36:00.550 --> 00:36:02.590 the whole thing. It's a decentralized collective 00:36:02.590 --> 00:36:05.289 delusion. Explain that. In the housing bubble, 00:36:05.429 --> 00:36:07.670 people weren't buying houses for their fundamental 00:36:07.670 --> 00:36:10.190 value as shelter. They were buying them based 00:36:10.190 --> 00:36:12.289 on the belief that prices would keep going up 00:36:12.289 --> 00:36:13.949 forever and that they could sell the house to 00:36:13.949 --> 00:36:16.670 a greater fool down the line for a profit. The 00:36:16.670 --> 00:36:19.170 value wasn't in the asset itself, but in the 00:36:19.170 --> 00:36:22.610 expectation of future price appreciation. Precisely. 00:36:22.920 --> 00:36:25.360 And that psychology is identical to a Ponzi. 00:36:25.440 --> 00:36:27.960 The belief that you can get rich from an asset 00:36:27.960 --> 00:36:30.800 that isn't generating any underlying value simply 00:36:30.800 --> 00:36:32.920 because new money will keep flowing into it. 00:36:33.019 --> 00:36:35.980 So in a bubble, we are collectively scamming 00:36:35.980 --> 00:36:39.780 ourselves. In a way, yes. But there are two crucial 00:36:39.780 --> 00:36:43.380 distinctions. The first is legality. Participating 00:36:43.380 --> 00:36:45.639 in a market bubble, buying an overpriced stock 00:36:45.639 --> 00:36:49.260 or a house isn't a crime. orchestrating a Ponzi 00:36:49.260 --> 00:36:52.159 is. Right. The second and more important distinction 00:36:52.159 --> 00:36:55.280 is what happens after the crash. When a bull 00:36:55.280 --> 00:36:57.980 bursts, the underlying asset usually still has 00:36:57.980 --> 00:37:00.420 some intrinsic value. Your house might be worth 00:37:00.420 --> 00:37:02.179 half of what you paid for it, but it's still 00:37:02.179 --> 00:37:05.099 a house. You can live in it. The dot -com company's 00:37:05.099 --> 00:37:07.920 stock might be down 99%, but the company might 00:37:07.920 --> 00:37:10.980 still exist. In a Ponzi scheme, the underlying 00:37:10.980 --> 00:37:13.800 investment was a complete fabrication. When it 00:37:13.800 --> 00:37:16.639 collapses, there is nothing left. The value is 00:37:16.639 --> 00:37:19.090 zero. OK, that's a very clear line. We're heading 00:37:19.090 --> 00:37:20.789 into our final section here, and I want to touch 00:37:20.789 --> 00:37:23.250 on some deep theory. The term Ponzi finance comes 00:37:23.250 --> 00:37:25.269 up in our notes. This is from the economist Hyman 00:37:25.269 --> 00:37:28.030 Minsky. Yes. Hyman Minsky is one of the most 00:37:28.030 --> 00:37:30.170 important economists for understanding why financial 00:37:30.170 --> 00:37:32.610 crises happen. And he wasn't talking about criminal 00:37:32.610 --> 00:37:35.650 fraud. He was using the term Ponzi as an analogy 00:37:35.650 --> 00:37:38.610 to describe a certain type of very risky borrowing 00:37:38.610 --> 00:37:41.510 within the legitimate economy. OK, so what did 00:37:41.510 --> 00:37:45.110 he mean by it? Minsky categorized borrowers into 00:37:45.110 --> 00:37:47.789 three types. based on their ability to pay back 00:37:47.789 --> 00:37:50.570 their debts. It's a spectrum of financial stability. 00:37:50.849 --> 00:37:53.170 Let's break them down. Okay. The first and safest 00:37:53.170 --> 00:37:56.349 type is the hedge borrower. This is a company 00:37:56.349 --> 00:37:59.349 that borrows money to, say, build a new factory. 00:37:59.769 --> 00:38:02.829 The cash flow from that factory is expected to 00:38:02.829 --> 00:38:05.369 be enough to pay back both the interest on the 00:38:05.369 --> 00:38:08.130 loan and the original principal over time. That's 00:38:08.130 --> 00:38:11.050 healthy. Sustainable. Completely. The second 00:38:11.050 --> 00:38:14.289 type is the speculative borrower. This borrower's 00:38:14.289 --> 00:38:16.389 cash flow is only enough to cover the interest 00:38:16.389 --> 00:38:19.630 payments, but not the principal. They are counting 00:38:19.630 --> 00:38:23.429 on being able to refinance or roll over the jet 00:38:23.429 --> 00:38:25.550 when it comes due. So they're not paying it down. 00:38:25.630 --> 00:38:27.250 They're just treading water. They're treading 00:38:27.250 --> 00:38:30.050 water. It's riskier, but it can be manageable 00:38:30.050 --> 00:38:32.550 in a stable economy where credit is easy to get. 00:38:32.809 --> 00:38:34.610 And then there's a third type. And then there's 00:38:34.610 --> 00:38:37.489 the Ponzi borrower. This is a firm or an individual 00:38:37.489 --> 00:38:40.349 who has taken on so much debt that their income 00:38:40.349 --> 00:38:42.369 can't even cover the interest payments. They 00:38:42.369 --> 00:38:44.730 have to borrow new money just to make the interest 00:38:44.730 --> 00:38:47.230 payments on their old money. They are fundamentally 00:38:47.230 --> 00:38:49.670 insolvent and their debt is growing exponentially. 00:38:50.070 --> 00:38:52.789 They can only survive as long as someone is willing 00:38:52.789 --> 00:38:54.750 to lend them more and more money. They're just 00:38:54.750 --> 00:38:57.309 digging the hole deeper and deeper. And Minsky's 00:38:57.309 --> 00:38:59.590 great insight was that long periods of economic 00:38:59.590 --> 00:39:03.530 stability and prosperity breed complacency. Lenders 00:39:03.530 --> 00:39:06.809 and borrowers take on more risk. The whole economy 00:39:06.809 --> 00:39:09.329 gradually shifts from being dominated by safe 00:39:09.329 --> 00:39:12.750 hedge financing towards risky speculative and 00:39:12.750 --> 00:39:16.389 even Ponzi financing. Eventually, something spooks 00:39:16.389 --> 00:39:18.849 the market, credit dries up, the Ponzi borrowers 00:39:18.849 --> 00:39:21.190 collapse, and that triggers a domino effect, 00:39:21.250 --> 00:39:24.050 a crisis. He called it a Minsky moment. That 00:39:24.050 --> 00:39:26.409 sounds uncomfortably familiar, and it leads to 00:39:26.409 --> 00:39:28.510 this very provocative idea in our notes about 00:39:28.510 --> 00:39:31.579 the Ponzi game in government. Ah, yes. This is 00:39:31.579 --> 00:39:34.099 very debated economic theory, but the parallel 00:39:34.099 --> 00:39:36.179 is undeniable. If you look at the sovereign debt 00:39:36.179 --> 00:39:39.059 of most major developed nations, the U .S., the 00:39:39.059 --> 00:39:41.480 U .K., Japan, how do they handle their debt? 00:39:41.739 --> 00:39:43.900 Well, when a government bond matures and they 00:39:43.900 --> 00:39:46.239 owe a billion dollars to the barnholder. Do they 00:39:46.239 --> 00:39:48.960 pay it off using a surplus of tax revenue? Almost 00:39:48.960 --> 00:39:51.920 never. They simply issue a new bond and use the 00:39:51.920 --> 00:39:54.539 money from the new bond sale to pay off the holder 00:39:54.539 --> 00:39:56.519 of the old maturing bond. They're rolling over 00:39:56.519 --> 00:39:58.599 the debt. Structurally, that's identical to what 00:39:58.599 --> 00:40:01.579 a Ponzi borrower does. Structurally, yes. But, 00:40:01.599 --> 00:40:04.380 and this is the trillion dollar but, there is 00:40:04.380 --> 00:40:06.920 one fundamental difference. Charles Ponzi was 00:40:06.920 --> 00:40:10.139 just a man. The United States government has 00:40:10.139 --> 00:40:14.199 the power to tax 330 million people. And, crucially, 00:40:14.360 --> 00:40:17.360 it has a printing press. It can create new money. 00:40:17.690 --> 00:40:20.230 So the argument is that a government can sustain 00:40:20.230 --> 00:40:22.809 this game indefinitely as long as the underlying 00:40:22.809 --> 00:40:25.289 economy continues to grow and people continue 00:40:25.289 --> 00:40:27.429 to have faith in the currency. That's the argument. 00:40:27.610 --> 00:40:30.030 That it's not a fraudulent Ponzi, but a system 00:40:30.030 --> 00:40:32.650 built on perpetual growth and above all, confidence. 00:40:33.030 --> 00:40:35.369 If that confidence were to ever break on a global 00:40:35.369 --> 00:40:38.550 scale, well, that would be a Minsky moment for 00:40:38.550 --> 00:40:41.110 the entire world. A deep dive for a much scarier 00:40:41.110 --> 00:40:43.980 day. OK, before we wrap up, there is one last 00:40:43.980 --> 00:40:46.239 crucial point for our listeners. It's a real 00:40:46.239 --> 00:40:48.159 sting in the tail. It's the concept of the innocent 00:40:48.159 --> 00:40:52.280 beneficiary. Hmm. This is so important. We always 00:40:52.280 --> 00:40:54.440 focus on the victims who lose everything at the 00:40:54.440 --> 00:40:57.300 end. But what about the people who got in early 00:40:57.300 --> 00:40:59.699 and got out with a profit? Right. They think 00:40:59.699 --> 00:41:01.960 they're the smart ones. They won. Let's paint 00:41:01.960 --> 00:41:04.619 a picture. You invested with Bernie Madoff in 00:41:04.619 --> 00:41:08.820 1995. For 10 years, you got great returns. In 00:41:08.820 --> 00:41:12.179 2005, you cashed out your entire account, your 00:41:12.179 --> 00:41:14.860 original investment, plus, say, a million dollars 00:41:14.860 --> 00:41:17.360 in profit. You used that money to buy a vacation 00:41:17.360 --> 00:41:19.840 home, put your kids through college. You feel 00:41:19.840 --> 00:41:22.480 like a genius. Then the scheme collapses in 2008, 00:41:22.639 --> 00:41:24.920 but I'm fine, right? My money is out. I'm safe. 00:41:25.139 --> 00:41:27.460 You are not safe. In the eyes of the law and 00:41:27.460 --> 00:41:30.139 the bankruptcy court, that $1 million you took 00:41:30.139 --> 00:41:32.980 out was not legitimate profit. It was other people's 00:41:32.980 --> 00:41:35.360 money. It was stolen funds that rightfully belonged 00:41:35.360 --> 00:41:37.519 to the victims who came in after you. So what 00:41:37.519 --> 00:41:39.679 happens? The court -appointed trustee who is 00:41:39.679 --> 00:41:42.119 trying to recover assets for the victims can 00:41:42.119 --> 00:41:45.019 sue you. It's called a clawback. They can legally 00:41:45.019 --> 00:41:47.679 force you to return any money you withdrew that 00:41:47.679 --> 00:41:50.280 was in excess of your original investment. Wait, 00:41:50.380 --> 00:41:52.940 they can come after me years later, even if I 00:41:52.940 --> 00:41:56.300 had absolutely no idea it was a scam? Yes. Ignorance 00:41:56.300 --> 00:41:59.460 is not a defense. If you were a net winner in 00:41:59.460 --> 00:42:02.170 this scheme. You can be compelled by a court 00:42:02.170 --> 00:42:05.389 to pay back those winnings so they can be redistributed 00:42:05.389 --> 00:42:08.429 to the net losers. So you could be forced to 00:42:08.429 --> 00:42:11.130 sell that vacation home. You could go into debt 00:42:11.130 --> 00:42:13.969 to pay back money you spent a decade ago. It 00:42:13.969 --> 00:42:16.570 happened to hundreds of Madoff investors. People 00:42:16.570 --> 00:42:18.769 who had long since retired, who had given money 00:42:18.769 --> 00:42:20.829 to charity, were suddenly faced with financial 00:42:20.829 --> 00:42:23.269 ruin years after they thought they were safe. 00:42:23.429 --> 00:42:26.369 That is a truly chilling realization. It means 00:42:26.369 --> 00:42:28.409 that if you get involved in one of these schemes, 00:42:28.469 --> 00:42:31.050 even unknowingly, there's no way to win. You 00:42:31.050 --> 00:42:33.389 either lose your shirt when it collapses or you 00:42:33.389 --> 00:42:35.050 win for a while and then lose it all when the 00:42:35.050 --> 00:42:37.269 lawyers come knocking. It proves the old adage. 00:42:37.659 --> 00:42:39.500 There really is no such thing as a free lunch. 00:42:39.679 --> 00:42:42.219 If the profits were an illusion, the wealth was 00:42:42.219 --> 00:42:44.880 an illusion. And eventually, reality always, 00:42:44.940 --> 00:42:47.659 always balances the books. So after this entire 00:42:47.659 --> 00:42:50.619 journey from 19th century Munich to the cryptosphere, 00:42:50.880 --> 00:42:52.820 what's the ultimate takeaway for people listening 00:42:52.820 --> 00:42:55.880 today? For me, it all comes down to abandoning 00:42:55.880 --> 00:42:58.179 magical thinking and embracing critical thinking. 00:42:58.519 --> 00:43:01.539 We live in an incredibly complex world, financially 00:43:01.539 --> 00:43:04.420 and technologically. The black box is everywhere 00:43:04.420 --> 00:43:07.369 now. But the fundamental laws of economics have 00:43:07.369 --> 00:43:10.309 not been repealed. Value must be created from 00:43:10.309 --> 00:43:12.989 something. Risk and reward are always related. 00:43:13.349 --> 00:43:16.110 If anyone, anywhere, ever tells you they have 00:43:16.110 --> 00:43:18.889 a machine that creates high returns with no risk, 00:43:19.030 --> 00:43:22.070 they are selling you an illusion. And I'll leave 00:43:22.070 --> 00:43:23.969 you with this final thought to chew on. We spent 00:43:23.969 --> 00:43:26.010 this whole time talking about how these fraudulent 00:43:26.010 --> 00:43:28.130 schemes are built entirely on a foundation of 00:43:28.130 --> 00:43:31.050 trust and belief. They only work as long as everyone 00:43:31.050 --> 00:43:34.289 believes they work. But if you zoom out far enough... 00:43:34.699 --> 00:43:36.619 How different is that really from our entire 00:43:36.619 --> 00:43:39.019 financial system? A dollar bill is just a piece 00:43:39.019 --> 00:43:41.420 of paper with some ink on it. A stock price is 00:43:41.420 --> 00:43:43.360 just a number everyone collectively agrees on 00:43:43.360 --> 00:43:45.420 for a moment. It all functions on a shared belief 00:43:45.420 --> 00:43:48.199 system. It's a spectrum. On one end, you have 00:43:48.199 --> 00:43:51.139 tangible value and provable truth. On the other 00:43:51.139 --> 00:43:54.340 end, you have outright fraud. The vast murky 00:43:54.340 --> 00:43:56.599 middle ground where confidence and collective 00:43:56.599 --> 00:43:59.500 psychology create reality is where we all have 00:43:59.500 --> 00:44:01.500 to navigate. So the question to ask yourself 00:44:01.500 --> 00:44:04.969 is, when does confidence become a con? Check 00:44:04.969 --> 00:44:07.530 the audits, ask the hard questions, and if it 00:44:07.530 --> 00:44:10.929 sounds too good to be true, it is. Thanks for 00:44:10.929 --> 00:44:12.090 diving deep with us. See you next time.