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Madoff Soberano

The Sovereign Ponzi

In lay terms, Ponzi set out to arbitrage International Reply Coupons between Italian and US rates using investor money.  However, after running into a wave of red tape, Ponzi realised that the impressive returns that were being promised could simply be paid out of fresh money as long as he could secure a consistent flow of fresh investor capital.

If we re-evaluate part of the penultimate sentence…”could simply be paid out of fresh money as long as he could secure a consistent flow of fresh investor capital”…we get to the point of today’s email: Confidence.  More specifically, confidence in Sovereigns.

At this point, I would like to ask how a Ponzi scheme differs from the modern sovereign bond market?  If the primary activity in government bond markets is the refinancing of existing debt, are we not in a Ponzi scheme of our own?  By this, I mean that Modern Governance and Treasury is based upon the idea of securing a consistent flow of investor capital to meet payments of the existing principal.  Is it not?

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