Who is the ‘Greater
Fool’ Now?
Lorimer Wilson
Apr 16, 2009
Many Americans, and indeed
many people the world over, have lived in a Ponzi bubble economy
for more than a decade. They have applied the Greater Fool Theory
in the false belief that they would always be able to sell their
house or their stocks or bonds or other highly leveraged assets
to “bigger fools” than they were for buying them
in the first place. With the collapse of the housing bubble and
the stock market it begs the question “Who is the ‘greater
fool’ now?”
A Ponzi bubble? Yes, after
Charles Ponzi, a Bostonian with an eye for get-rich quick schemes
who, back in 1918, identified an arbitrage situation which he
promoted as being able to generate sizeable returns for those
who invested with him. He delivered on his promise by making
his close friends and a small circle of investors very rich,
very quickly, and, as word spread among the wealthier citizens
of Boston, they began lining up to invest. Regretfully, when
anything looks too good to be true, it probably is and it was.
As a result of his infamy his name has been immortalized to describe
any fraudulent investment scheme where the money from later investors
is used to pay the early investors and so on right up until the
moment the whole thing collapses on itself. Sound familiar? Yes,
90 years later the 50 billion dollar Madoff pyramid collapsed
– a Ponzi scheme if ever there was one! Now may well be
the time to lay the Ponzi name to rest and replace it with the
infamous word ‘Madoff.’ Time will tell.
But Ponzi and Madoff were not
the only ‘investors’ who were conning those around
them. We must not forget the tens of millions of Americans and
others worldwide who were deploying their own ‘greater
fool theory” that there was really nothing to worry about
because there always would be a ‘greater fool’ than
them out there somewhere who would still lend them money, buy
their over-priced house, over-valued stocks, etc. to keep their
financial house of cards from collapsing. Below is my edited,
paraphrased and enhanced version of how Nouriel Roubini once
described it:
When you put zero down
on the ‘purchase’ of your house and thus had no equity
in your house (and re-financed your mortgage each and every time
it went up in value) your leverage was literally infinite and
you were playing a Ponzi game hoping a ‘greater
fool’ than you would be there to buy your house when the
time came for you to buy yet another house that you could not
afford.
When the bank sold you
a mortgage for zero down on the basis of a NINJA (no income,
no job or assets) liar loan, with interest only for a while,
with negative amortization, and an initial teaser rate, the bank
was playing a Ponzi game. They were hoping that you would stay
employed; that you would be able to afford the eventual increased
mortgage payment; that you would be able to sell the house for
more than its original value; that you would always honor the
terms of the mortgage. They were even ‘greater fools’
than you were.
When private equity firms
engaged in leveraged buy outs with excessive debt-to- earnings
ratios they were Ponzi firms playing Ponzi games – all
“greater fools” hoping that future earnings would
just grow and grow in future years with no likelihood of declining.
When our government
issues trillions of dollars of new debt to pay for a severe recession
and to socialize private losses it becomes a Ponzi government
hoping that the Chinese and other foreign purchases of their
debt will continue doing so regardless of the value of the U.S.
dollar vis-à-vis their respective currencies and the level
of interest paid. How foolish to expect foreign governments to
be ‘greater fools’ than ours.
When our country spends
more than it raises in taxes and thus runs an endless string
of current account deficits and becomes the largest net foreign
debtor in the world it becomes a Ponzi country hoping that foreigners
will be even ‘greater fools’ and continue to finance
their conspicuous consumption.
When consumers consume
more than their income year after year (i.e. a household with
negative savings; a government with a budget deficit; a firm
or financial institution with persistent losses; a country with
a current account deficit) they are all playing the ultimate
Ponzi game hoping that some ‘greater fool’ will come
along and bail them out.
These households, firms and
banks and the government itself can be characterized as ‘Ponzi
borrowers’ who need to borrow more to repay both principal
and interest on their previous debt and, such being the case,
need ever-increasing prices of the assets they have invested
in to keep on refinancing their debt obligations. What fools
they all are to expect that some ‘greater fool’ knight
in shining armor will come along and wave a magic wand and make
it all go away. Instead they all must realize they will be forever
poorer but, hopefully, more fiscally responsible in the future.
With the average house price
having fallen 20% to date and, as such, it no longer being feasible
to use one’s house as an ATM to borrow against to finance
Ponzi consumption, with equity prices having fallen over 40%
in the last year, and with credit having dried up recently, the
party is over for households, banks and non-bank highly leveraged
corporations. Most of the ‘wealth’ that supported
the massive leveraging and overspending in the economy was nothing
more than fake bubble–driven wealth perpetuated by society’s
belief in the Greater Fool Theory. Thank goodness for hard assets
such as gold bullion and other precious metals which have stood
up remarkably well during these tumultuous times.
Now that the bubbles have burst
it is clear that the emperor had no clothes and that we are the
naked emperor. A rising bubble tide was hiding the fact that
most Americans and their banks were swimming naked and the bursting
of the bubble is the low tide that shows just who has been caught
with their ‘pants down’ i.e. just who really is the
‘greater fool’.
The U.S. household, financial
and non-financial firms and government may well spend the next
generation in debtor’s prison having to tighten their belts
to pay for the losses inflicted by a decade or more of reckless
leverage, over-consumption and risk taking. What great fools
we have been for living beyond our means all these years and
taking no fiscal responsibility for our future well-being in
the false hope that there always would be a ‘greater fool’
out there than us.
Indeed, the American dream
of Life, Liberty and the Pursuit of Happiness (and let’s
not forget Wealth) has been nothing more than a glorified Ponzi
scheme. Let us all look at ourselves in the mirror. We really
are the greatest fools imaginable!
Lorimer Wilson
Lorimer Wilson is Director of Marketing and Contributing
Editor of www.preciousmetalswarrants.com . Precious Metals Warrants
provides an online subscription database for all warrants trading
on junior mining and natural resource companies in the United
States and Canada and a free weekly newsletter. Lorimer can be
contacted at:
lorimer.wilson@live.com
321gold Ltd
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