The rules of a Ponzi scheme are basic – keep it simple, make it chaotic, never disclose – and U.S. President Donald Trump is following them all, Kim Sawyer writes.
A PONZI SCHEME uses the capital of new investors to pay high returns to old investors.
It is the art of robbing Peter to pay Paul. It is the art of division.
However, it's more than that. It is a pyramid of ignorance where everyone is uninformed except the one at the top.
A Ponzi scheme relies on the ignorance of some to underwrite the advantage of others. The pyramid collapses when everyone finds out.
The scheme is built on a number of principles: leverage the capital of others, keep it simple, make it chaotic, never disclose. All are necessary, but not to disclose is especially important. For a Ponzi scheme, disclosure is death.
I never had cash. I was always a little bit low in the cash. Because I would make a deal. It would be a great deal. I’d make another deal; a great deal. I’d take the profits from that and have it spent before the money even came in. And that’s OK too. The problem with that is that when things get bad, and they always do at some point, you’ve got to fight too hard, and I don’t want to do that.
The Trump Presidency is a kind of Ponzi scheme. As President, he uses the votes of his base to pay high returns to those closest to him. In a Ponzi scheme, the ignorance of the many generates returns for the few.
As President, he has leveraged the decisions of previous administrations and the Federal Reserve to claim credit for the strong economy, when most know the economic cycle is too uncertain to be credited. Yet Trump will accept the credit as no other president would. He is a man who borrows from the legacy of others.
Simplicity drives his agenda. Build a wall, shift an embassy, levy a tariff and cut corporate tax. Simplicity is his antidote to a complex world. The simple mantras of the campaign have become the simple mantras of the Presidency. The Trump world is a zero-sum world of winners and losers, as it was for Charles Ponzi.
Winners earn arbitrarily high returns. When everyone else paid five per cent, Ponzi offered fifty per cent. When everyone else offers reason, Trump offers "greatness". "Greatness" is the Trump equivalent of Ponzi’s fifty per cent return. To make America great is to make you a winner and them losers. It was the same for Ponzi.
A Ponzi scheme is defined by chaos. Chaos ensures no one can tell the signal from the noise. Ponzi knew that. He changed the terms of his scheme every day. Trump also knows it and it's how he gains control. The thought bubble no one expects, the tweet no one else would tweet, the decision no one else would decide — Trump has anchored us to the arbitrary.
In an experiment first published by Amos Tversky and Daniel Kahneman in 1974, individuals were asked to spin a wheel to determine one of two numbers, ten or 65. They were then asked to estimate the percentage of African countries in the United Nations.
The result showed that those who received a ten on the spin on average estimated the percentage to be 25, while those who received 65 estimated the percentage to be 45. The experiment showed the bias of anchoring to an arbitrary value.
If Trump were asked to spin the wheel and it came up ten, he would probably answer 25. And if the next day he were asked to spin the wheel again and it came up 65, he would probably answer 45. The logic of Trump is the logic of the spontaneous. The problem is not just that a significant number of people accept this, it's that a significant number have to respond to it.
The first week of March this year has revealed his style: the flip-flop on guns; the tariff decision; the resignation of Gary Cohn. The art of the deal is really the art of the unpredictable. The chaos is there for all to see, but many will not. They are anchored to noise. They are anchored to the incumbency. They are anchored to the office.
The history of Ponzi predicted his demise. Ponzi was a man of the deal — he moved from one deal to the next, he was spontaneous, he had a history of deception, he disclosed nothing. He was like Trump but, unlike Trump, he lacked lawyers.
Ponzi had been imprisoned early in Montreal. Upon full disclosure of the insolvency of his scheme, his history became relevant. His erstwhile supporters joined the dots that needed to be joined — they were then able to read the fine print.
Trump has also tried to purge his history. It is a history punctuated by lawsuits, undisclosed settlements, undisclosed tax returns and business bankruptcies. Trump’s history alludes to who he is and who he will be known to be. We will never know how much he owes because he follows the rule to never disclose.
Now his debt is greater — and a debt to the nation rather than the banks.
It should have been so simple, it should have been mandatory. He should have been compelled to disclose his tax returns. Then we would have known whether Trump was just another Ponzi.
Dr Kim Sawyer is a senior fellow in the School of Historical and Philosophical Studies at the University of Melbourne. His principal research interests are in whistleblowing, regulation, finance and philosophy.
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