The Federal Pyramid Scheme
By: Tom Purcell
FrontPageMagazine.com | Tuesday, April 14, 2009
I was just a naive kid at the time. That's how I got snookered.
It happened in the spring of 1978. My best friend Ayresie and I had quit our jobs as cooks at the Ponderosa Steakhouse to start a business rebuilding retaining walls. We put an ad in the community paper and some fool -- attracted by the cheap labor, no doubt -- entrusted his driveway wall to us.
After a week of hard labor we completed the job. After we paid for our supplies and Mitch Morton's dad's truck -- we'd hired Mitch to haul off the excess stones and dirt -- we were each left with a profit of $100.
My father was eager for me to put my very first profits into my college fund, but I had a better notion. I was going to "invest" that money and turn it into thousands.
An interesting scheme had come to our community, you see. To participate, you needed $100. You'd give $50 to the person who brought you into the scheme. Then you'd mail another $50 -- inside a birthday card -- to a name at the top of a list of 10 names.
Your name would then be placed on the bottom of the list and your task was to find two other suckers to cough up $100 each -- each person would give you $50, so you'd get your $100 back -- and then each person would find two other people and so on.
As your two people brought in two people, your name would then be on four lists; as those four people got two people, you'd be on eight lists, then 16, 32, 64, 128, 256, 512 and so on.
So long as the scheme continued to expand -- so long as you were one of the early participants in the scheme -- your name would move up to the top on thousands of lists. Thousands of participants would send you $50 in the mail.
That's exactly what happened to the lucky early participants. They made thousands of dollars off the deal -- though their postal carriers wondered why so many people were so interested in their birthdays.
But of course the scheme was unsustainable for the rest of us. It was a classic pyramid scheme -- a simple shifting of wealth from the many to the few.
You see, in time, there weren't enough suckers to risk their $100. The scheme finally collapsed under its own weight and a lot of people ended up just as I did.
I learned from the experience, though. I learned that every pyramid scheme has three stages. The first was enthusiasm -- the folly that huge returns would come pouring in. The second was realization -- that you've been duped out of your hard-earned dough. The third was embarrassment -- you felt shame and regret for letting your emotions cloud your judgment.
This knowledge has helped me avoid numerous financial schemes over the years.
I was puzzled that tech stocks kept soaring in the '90s, when few tech companies we're earning profits, and I avoided that collapse.
I was puzzled that housing prices were doubling and tripling earlier this decade, when the average income remained the same, and I avoided that collapse, too.
And now I'm puzzled by the latest nutty idea -- that our government can prop up our economy through massive expansion and spending.
President Bush was no stranger to such spending. In 2002, he was the first president to propose a $2 trillion budget. In 2008, he was the first to propose a $3 trillion budget.
But President Obama puts Bush to shame. Despite a severe economic downturn, he's the first president to propose a nearly $4 trillion budget -- and he's enthusiastic about it!
Whereas Bush nearly doubled our debt (from $6 trillion to $11 trillion), Obama wants to nearly double it again (from $11 trillion to $20 trillion) in only 10 years! Such a public debt would be unsustainable.
Even a 16-year-old kid wouldn't be dumb enough to invest in a scheme like that.
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