22 Oct 2012

Krugman Sees No Ponzi Scheme Here

Krugman 16 Comments

Wow, Paul Krugman’s recent post on bubbles, fiat money, Ponzi schemes, and goldbug delusions could literally feed a man. It is amazing that Krugman can write:

It’s true that Social Security is mainly a system in which each generation pays for the previous generation’s retirement, in the expectation that it will receive the same treatment from the next generation. But like monetary circulation, this process can go on forever; there’s nothing unsustainable about it (yes, demography, but that’s about the levels of taxes and benefits, not the fundamental nature of the scheme). So there’s nothing Ponziesque at all. [Bold added.]

when he himself wrote in 1996 (or is it 1997? not clear):

I like Freeman’s idea of providing each individual with a trust fund when young rather than retirement benefits when old, but we had better realize that this is a significant change in the character of the social insurance system. Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today’s young may well get less than they put in). [Bold added.]

I mean seriously, this guy should get an award. (And yes, I know Krugman already “explained” the above–more right-wing lies and “gotcha” moments, I know I know.)

16 Responses to “Krugman Sees No Ponzi Scheme Here”

  1. Major_Freedom says:

    This reminds me of the way Sumner says HE can use the word “bubble”, but others cannot.

    Krugman is saying that HE is allowed to use the word Ponzi, because he’s a good guy, who supports social security. Kind of like “Wat up Social Security Ni&&a?” He can say that because he’s cool.

    But when Rick Perry says “Ponzi”, he means it is a vicious way, because he’s an evil republican, so he’s NOT allowed to use that word. When he uses it, he intends to abolish social security.

    Perry’s Ponzi is not Krugman’s Ponzi.

    Krugman justified his use of the word Ponzi on the basis that the cool cat Paul Samuelson also used it, but more in jest, so blame Samuelson all you internet trolls. Now that the damn internet records everything, and never forgets, Krugman now regrets ever having made that Ponzi comment, probably because he doesn’t want to be associated with evil republicans who want to end SS. Social security is, or at least was, a “good” Ponzi scheme.

    Now Krugman is doing what he always does when he puts his foot in his mouth: He tries to rewrite his own history. Now there is no such thing as a good Ponzi. SS is good, therefore not Ponziesque.

    • Bob Murphy says:

      MF wrote:

      Kind of like “Wat up Social Security Ni&&a?”

      I *totally* get what you mean by that. Hilarious.

  2. Dan says:

    He’s such a hack.

  3. Major_Freedom says:

    From Krugman’s latest article:

    “So what is fiat money? It is, as Paul Samuelson put it in his original overlapping-generations model (pdf), a “social contrivance”. It’s a convention, which works as long as the future is like the past. Obviously, such conventions can break down — but then so can things like property rights.”

    It’s almost certainly unintentional, but it’s ironic that Krugman would say property rights can break down, right after saying something about fiat money being a social convention that can break down.

    He doesn’t seem to grasp that fiat money itself is a result of property rights breaking down in the field of money production and usage. The term “social convention” is but a mere euphemism for the naked aggression foisted by the state that coerces people into the dollar exchange system.


    What’s really interesting is page 482 from the Samuelson paper Krugman cited:


    Check out the remaining paragraphs following the opening line “We find this remarkable fact:”

  4. Major_Freedom says:

    Dollars are most certainly a pure bubble, because if the true value of them were allowed to be made, i.e. if the state ceased threatening people with violence in order to coerce them into paying taxes in those dollars, such that people no longer had any legally mandatory reason to accept them, and they were free to value them in free exchanges, then the market value of all US dollars would eventually hit the modest value of the market price of cotton and linen, actually defaced cotton and linen, and electrons.

    Few people would agree to work all week, only to accept cotton and linen over more other commodities such precious metals, if they had the choice on what to accept without fear of systematic intimidation and violence from the state.

    If that doesn’t make dollars a bubble, what WOULD make dollars a bubble? As soon as the next generation of politicians cease demanding taxes in dollars, that’s it for the dollar system. The dollar system rests entirely on future politicians maintaining what previous politicians have enforced. The dollar system is the ultimate Ponzi scheme of all time. Maybe that’s why folks like Krugman and Smith can’t see it. I mean, how many fish know they live in water?

    • Lord Keynes says:

      ” because if the true value of them were allowed to be made, i.e. if the state ceased threatening people with violence in order to coerce them into paying taxes in those dollars”

      This has consequences, if you really believe this:

      (1) the chartalist theroy of money is correct.

      (2) you have undermined the Austrian idea that money can never arise except by the barter spot trades theory.

      (3) also, a great way to undermine the regression theorem. If money can acquire value by imposing demand for it through taxation, then the assumption behind the regression theorem – that money can only ever have value indirectly via its purchasing power – is false, and the problem that the regression theorem attempts to solve is a pseudo-problem.

      • John S says:

        “(2) you have undermined the Austrian idea that money can never arise except by the barter spot trades theory.”

        Selgin puts it thus:

        “A new fiat money must at first be linked to an established money through a fixed rate of exchange. Otherwise would-be users of the new money will have no means for assigning any future purchasing power to it–stable or otherwise–and no basis for demanding definite quantities of it. A fixed exchange rate must, in other words, serve as a “launching vehicle” for placing any new fiat money into circulation.

        Once the new money is in circulation, that is, once it is being widely employed as a medium of exchange, the fixed exchange rate used to launch it can be jettisoned without undermining the money’s continued acceptance, just as a rocket can be jettisoned once a satellite is in orbit. The new money, like the satellite, may then continue to circulate”

        • Bob Roddis says:

          And it certainly helps if the new fiat funny money resembles the prior more legitimate form of money. “Federal Reserve Notes” kinda sorta resemble notes that promise specie on demand. Copper quarters look almost exactly like silver quarters. Fiat funny money is a scam but there are sophisticated scams that work and unsophisticated scams that don’t.

      • Anonymous says:

        “f money can acquire value by imposing demand for it through taxation”

        It cannot acquire value through this. But it can force a current medium of exchange to lack competition in other commodities that are not usable to pay taxes, in the same manner as if no one takes silver, then gold would remain the main or sole money.

        This same criticism of your interpretation of what MF is saying refutes your other points as well.

      • Matt Tanous says:

        “If money can acquire value by imposing demand for it through taxation”

        It cannot. MF is pointing out that other money cannot be used to pay taxes, which makes it difficult to compete if one is to follow the tax laws. The fiat currency has value because it regresses back to gold-weight equivalence, and further back to to just units of gold and silver.

  5. Kevin Donoghue says:

    …I know Krugman already “explained” the above – more right-wing lies….

    Kudos to you for providing that link. As Krugman says, it was a mistake to follow Samuelson’s “cute” lead.

  6. Nick says:

    I’ve done the calculations for the UK.

    Contrubutions are paid by what is called national insurance.

    Now if you back test, by working out NI historically for a median wage earner, then they would have a pension of 19K a year. The state pays 5K a year, and the terms are far worse than for the 19K variant. They use a measure of inflation that means its worth 20% less. They pay out 2 years later. They insist on another 2 years of contributions. End result is that you get 20p in the pound back.

    The reasons are quite simple.

    1. No compound interest. That’s the largest chunk, gone.
    2. Redistrubution / tax / charges. What ever label you put on it, the money has gone else where, and its been spent.

    Now its clear that they won’t be able to pay out on the 20p bit.

    It’s not that each generation of retirees takes out more than they put in. They aren’t getting what they could have received if the money had been invested.

  7. gienek says:


    Cue in Daniel Kuehn!

  8. Mike K says:

    So basically Krugman is saying it’s not a Ponzi scheme because we cannot opt out? I mean look, sure it’s a Ponzi scheme, but we can just raise your taxes in perpetuity. It’s sustainable because the government can take your money forever.
    That’s the vibe I’m getting from Krugman.

  9. Tel says:

    Not that I’m defending Krugman, but strictly speaking, in the first case he is somewhat abstract and circumspect saying that the broad concept of a Social Security system could in principle be sustainable. I agree with him on that one.

    In the second case he is saying that the particular implementation as taken by the US government is not sustainable, and I agree on that as well.

    A lot of his readers may not pick up the subtle distinction, and I’d be guessing that is no accident.

  10. Nick says:


    The problem is also that a self sustaining Ponzi is also very bad value for your contributions. The reason is there is no compound interest. If you money comes in, and goes out to someone else, all you can get back is the equivalent of your contributions later, if the demographics stay the same. It’s a bad deal.

    Then factor in the demographics, where you have more contributors now, and in the future more consumers, unless you screw future contributors, the pot is spread thinner, and you get less.

    So currently we have the demographics going against people, plus no compound interest (and the added benefit of money for investment and the growth that produces).

    It’s a bad deal.

Leave a Reply