US National debt is like a Ponzi Scheme

The term “Ponzi scheme,” named after Charles Ponzi, provides an insightful analogy for the U.S. national debt: Both rely on external cash inflows to sustain expenditures without the intention of paying them off. Like Ponzi schemes, the national debt was originally based on sound financial transactions, but it now depends on new loans to pay off old obligations.

In 1919, Ponzi had an idea to buy international reply coupons in Italy and bring them to the US to exchange them for far more valuable stamps. Due to the recent war, inflation was high in Italy, making this exchange a form of arbitrage and, in theory, a sound business idea. He borrowed the money to start the business and paid back the investments with the 100% interest he promised using the coupons to make that money. People saw that he had paid back a lot of money, so they joined as investors. Eventually, he had so many investors that he would have to obtain and ship an impossible number of coupons from Italy to the US, convert them, and find buyers for all of them to make money and be able to pay his investors back. The scheme took off as everybody was investing in him, and he kept paying the old investors with the newer investors’ money instead of paying them off with profits from his business. This money inflow and outflow structure became known as a “Ponzi Scheme” or “Pyramid Scheme.” The business end of Ponzi’s IRC conversion firm was failing, and Ponzi could not keep up with all the investments it was taking, but Ponzi didn’t care. He kept taking investments which they pocketed part of and used the rest to pay older investors off without a real revenue stream and eventually, it collapsed. Similarly, the U.S. national debt involves a complex cycle of borrowing and repayment that may seem unsustainable.

The national debt in the US is a Ponzi Scheme. The US national debt is astronomically high, currently standing at $35.8 trillion (Treasury, 2024), higher than any other country in the world and one of the highest debt-to-GDP ratios. The amount of debt, however, is only one problem. The bigger problem lies in the US’s inability to remedy the national budget and maintain the debt level. The US still borrows trillions a year, and once the budget can turn around and stop borrowing money, it will show the country could pay off the debt and it would lower the interest rates for the maintaining of the previously gained, smoothing and accelerating the process towards a debt-free country. The US spends 13% of the national budget, or $882 Billion (Treasury, 2024), just to maintain our current debt, more than the amount of money spent on education. This figure does not count the $1.8 trillion deficit the U.S. is running in this year alone. The Congressional Budget Office even predicts that the US will be spending $1.7 trillion to maintain its debt in 10 years. To start making a dent in the debt we must balance our budget, then create a budget surplus so that we can pay the debt back. Unfortunately, this is extremely unlikely due to the current political climate as no person or party seems to want or care about reducing the national debt or at least taking steps towards securing this country’s future. The 2 main parties each have opposing views on how to run the government budget and the economy with one party saying reduce taxes and expenditures and the other saying increase taxes and expenditures. No one wants to say increase taxes but then decrease money to federal programs.

These reasons are why the US national debt can be framed as a Ponzi Scheme. We have in theory a debt solution, running a budget surplus, but like Ponzi with his needing an unfeasible amount of ships with their low margins, in reality, it is very difficult to achieve and unlikely to happen. Although Ponzi gave much higher interest rates and spent a higher portion of his budget to pay off the payments, the US still spent a large portion of its budget paying back the interest on the loans it took. To start fighting back against the debt, fiscal policy in the current political climate would have to change drastically to induce austerity measures similar to that of Germany, where the constitution requires the size of the federal government's budget deficit to stay below 0.35% of Germany’s GDP (with separate provisions for emergencies like Covid) (Debt Brake, 2022). This problem is unique to the United States as smaller countries can usually rely on bailouts from organizations such as the IMF or even bigger countries like Germany, but the US is far too large to be saved by these measures.

Edited by Baran Pasa

References

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$396 Million Ponzi Scheme. [Illustration]. (2024). fbi.gov. https://www.fbi.gov/news/podcasts/inside-the-fbi-podcast-396-million-ponzi-scheme