Peter Major looks to the future of capitalism.

As any literate, news-reading person knows, a Ponzi scheme is an investment scam that pays "returns" to a batch of investors from money paid by the next batch of investors.

So why does Cadiz Corporate Solutions' Peter Major, speaking on the Moneyweb Market Commentator Podcast, say that "capitalism is the world's greatest Ponzi scheme"?

Well, it's very simple, actually. Right now, all over the world, governments are providing great big juicy stimulus packages (read: returns) to current citizens (read: investors), paid for by the labours of future, as-yet-unborn citizens (read: investors).

Take the USA as an example. Under President Barack Obama, America has spent $800bn on direct fiscal stimulus, plus almost $2trn on bank bailouts, and various other miscellanies. In total, Congress has spent roughly $3trn over the last few months. That's a lot of money, even for America. It's certainly more than the US government takes in annually from taxes and the like, which is roughly $2trn a year.

If the US government is spending much more than it's earning, the money has to come from somewhere, and in the case of America, it comes from the capital markets. The US is the largest debtor in the world, with public debt of around $12trn, financed by countries like Japan and China, which purchase US government Treasury Bills.

Now, that debt is going to have to be repaid eventually, and the burden of that repayment is going to fall squarely on the shoulders of the next generation, which will face higher taxes, and, possibly, lower living standards because government spending will have to be pared down.

In other words, as Major puts it, "We're all spending money from future investors and the only way we keep this Ponzi scheme going is we keep the population growing."

Just like Bernie Madoff's Ponzi, the system only works if we keep getting new investors into the mix. But in many countries in the world, populations are stagnant, and in some cases even declining. Countries like Japan, Italy and Spain are facing the historically unprecedented situation of having more old people than young people (for details see the UN's report World Population Ageing: 1950-2050).

This trend is likely to have a crippling effect on economies around the world, and, as Major says, "the countries that are worried about population flattening out, are the biggest Ponzi scheme holders, because they want to know who is going to pay all the debt that the current people have taken on."

For the full podcast, visit the Moneyweb Podcast page.

Write to Felicity Duncan: felicity@moneyweb.co.za

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