Financial manager and Pacific Investment Management (PIMCO) co-founder William H. Gross coined the name “Sammy scheme” (“Uncle Sam” + Ponzi scheme) in PIMCO’s November 2010 Investment Outlook. The Federal Reserve announced that it would print more U.S. dollars (called “quantitative easing"), but Gross wrote that the Fed was running a Ponzi scheme with the American economy. Pumping more and more dollars into the system would ultimately lead to a financial collapse, as with a Ponzi scheme. Because the federal government ("Uncle Sam") was doing this, Gross used the illiterative name “Sammy scheme.”
Gross’s article was linked on many financial blogs on October 27, 2010.
Wikipedia: Ponzi scheme
A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned. The Ponzi scheme usually entices new investors by offering returns other investments cannot guarantee, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors to keep the scheme going.
The system is destined to collapse because the earnings, if any, are less than the payments to investors. Usually, the scheme is interrupted by legal authorities before it collapses because a Ponzi scheme is suspected or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases. While the system eventually will collapse under its own weight, the example of Bernard Madoff demonstrates the ability of a Ponzi scheme to delude both individual and institutional investors as well as securities authorities for long periods: Madoff’s variant of the Ponzi scheme stands as the largest financial investor fraud committed by a single person in history. Prosecutors estimate losses at Madoff’s hand totaling roughly $21 billion, as estimated by the money invested by his victims. If the promised returns are added the losses amount to $64.8 billion, but a New York court dismissed this estimation method during the Madoff trial.
The scheme is named for Charles Ponzi, who became notorious for using the technique in early 1920. He had emigrated from Italy to the United States in 1903. Ponzi did not invent the scheme (Charles Dickens’ 1857 novel Little Dorrit described such a scheme decades before Ponzi was born, for example), but his operation took in so much money that it was the first to become known throughout the United States. His original scheme was in theory based on arbitraging international reply coupons for postage stamps, but soon diverted investors’ money to support payments to earlier investors and Ponzi’s personal wealth.
Wikipedia: William H. Gross
William Hunt Gross (born 1944) is an American financial manager and investment author who co-founded Pacific Investment Management (PIMCO).
William H. Gross | November 2010
Run Turkey, Run
Now, however, with growth in doubt, it seems that the Fed has taken Charles Ponzi one step further. Instead of simply paying for maturing debt with receipts from financial sector creditors – banks, insurance companies, surplus reserve nations and investment managers, to name the most significant – the Fed has joined the party itself. Rather than orchestrating the game from on high, it has jumped into the pond with the other swimmers. One and one-half trillion in checks were written in 2009, and trillions more lie ahead. The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not. This one is so unique that it requires a new name. I call it a Sammy scheme, in honor of Uncle Sam and the politicians (as well as its citizens) who have brought us to this critical moment in time. It is not a Bernanke scheme, because this is his only alternative and he shares no responsibility for its origin. It is a Sammy scheme – you and I, and the politicians that we elect every two years – deserve all the blame.
Introducing… the Sammy scheme
Posted by Jennifer Thompson on Oct 27 2010 16:42.
Why is Pimco’s Bill Gross feeling gloomy today (emphasis ours)?
Answer: QE2 is shaping up rather like a Ponzi scheme (emphasis Pimco’s):
I ask you: Has there ever been a Ponzi scheme so brazen? There has not. This one is so unique that it requires a new name. I call it a Sammy scheme, in honor of Uncle Sam and the politicians (as well as its citizens) who have brought us to this critical moment in time. It is not a Bernanke scheme, because this is his only alternative and he shares no responsibility for its origin. It is a Sammy scheme – you and I, and the politicians that we elect every two years – deserve all the blame.
New York City • Banking/Finance/Insurance • (0) Comments • Thursday, October 28, 2010 • Permalink