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If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State.” (Joseph Goebbels)

Truth is the mortal enemy of the lie. This is a profound observation from such an evil man. The definition of truth is being in accordance with fact or reality. The Nazis were masters of using propaganda to manipulate facts and produce the reality that suited their wicked purposes. Other states have attempted to repress dissent and rule by using the Big Lie. The Soviet Union and Communist China come to mind.

Our country was created with a Constitution that attempted to insure tyranny that occurred under British rule could not happen in the United States. Truth and freedom of speech are essential for a Republic to thrive. In the last two decades, facts and reality have been obscured, twisted, manipulated and obfuscated by our government, corporations, investment professionals and media. The Big Lie can be perpetrated by states, corporations, or individuals. The multitude of lies has made Americans increasingly dependent. The State gains more power as citizens become more dependent.

The following quote attributed to Scottish history professor Alexander Tyler in 1787, seems to portray an accurate reflection of what has occurred during our 200+ years of existence as a democracy.

A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.

The average age of the world’s greatest civilizations from the beginning of history, has been about 200 years. During those 200 years, these nations always progressed through the following sequence:

  1. From bondage to spiritual faith;
  2. From spiritual faith to great courage;
  3. From courage to liberty;
  4. From liberty to abundance;
  5. From abundance to complacency;
  6. From complacency to apathy;
  7. From apathy to dependence;
  8. From dependence back into bondage

These words were written two years before George Washington became our first President. There is so much truth in these words it makes me shudder, especially since we are clearly in stage 7. An honest appraisal of our country’s downward spiral is necessary to begin the process of redemption. We have continually voted ourselves increased benefits, dependent upon the printing presses of the Federal Reserve to sustain our country’s ponzi scheme. We have pawned our future and the bill will eventually come due.

The Great American Republic

My assessment of the chronological sequence our democracy has progressed through, follows.

From bondage to spiritual faith (1760 to 1769)

  • King George III becomes King of England
  • Currency Act, Sugar Act, Stamp Act, Quartering Act, Townshend Act passed by Parliament
  • Sons of Liberty formed by John Adams, Samuel Adams, Paul Revere, John Hancock, Patrick Henry, among others.

From spiritual faith to great courage (1770 to 1783)

  • Boston massacre
  • Samuel Adams organizes the Committees of Correspondence
  • Parliament passes the Tea Act
  • Boston Tea Party
  • The First Continental Congress
  • Battle of Bunker Hill
  • Thomas Paine publishes Common Sense
  • Revolutionary War rages for six years
  • British surrender at Yorktown
  • Treaty of Paris ends Revolutionary War

From courage to liberty (1784 to 1865)

  • Constitutional Convention
  • Constitution ratified by 13 states
  • George Washington elected President
  • Bill of Rights passed
  • Fugitive Slave Act passed
  • Louisiana Purchase
  • Robert Fulton invents steamboat
  • War of 1812
  • Monroe Doctrine
  • President Andrew Jackson battles bankers which leads to the Panic of 1837
  • U.S. Mexican War
  • California gold rush
  • Compromise of 1850
  • Dred Scott Decision
  • Abraham Lincoln elected President
  • Confederate states secede from the Union
  • Emancipation Proclamation
  • Civil War rages for four years
  • Union is restored
  • 13th Amendment abolishes slavery

From liberty to abundance (1866 to 1969)

  • Civil Rights Act of 1866
  • First Trans-Continental Railroad
  • Alexander Graham Bell invents the telephone
  • Industrial Revolution
  • General Electric founded
  • Spanish American War
  • U.S. Steel founded
  • Airplane invented
  • Automobile invented
  • Federal Reserve created
  • World War I
  • Great Depression
  • New Deal programs implemented by FDR
  • Golden Gate Bridge completed
  • World War II
  • Holocaust
  • Atomic bomb used to end war with Japan
  • Marshall Plan rebuilds Europe & Japan
  • US emerges from the war as the only great economic power
  • Cold War
  • Korean War
  • Interstate highway system built
  • Civil Rights Movement
  • John F. Kennedy assassinated
  • Vietnam War
  • Great Society programs implemented
  • Civil Rights Act of 1964
  • Martin Luther King assassinated
  • Neil Armstrong walks on the moon

From abundance to complacency (1970 to 1989)

  • Roe vs Wade
  • President Nixon resigns in disgrace
  • Oil embargo
  • Ronald Reagan elected President
  • Military buildup and tax cuts
  • Fall of the Soviet Union

From complacency to apathy (1990 to 2000)

  • Gulf War
  • Bill Clinton elected President
  • Stock market boom
  • Gridlock between Congress & President leads to budget surpluses
  • President Clinton acquitted in impeachment trial

From apathy to dependence (2001 to 2007)

  • George W. Bush elected President
  • Nasdaq stock bubble bursts
  • 9/11 attack
  • Alan Greenspan lowers rates to 1%
  • Invasion of Afghanistan
  • Department of Homeland security created
  • Invasion of Iraq
  • Hurricane Katrina
  • Home prices double
  • Financial derivatives grow to over $100 trillion

From dependence back into bondage (2008 to ????)

  • Housing prices collapse
  • Financial firms collapse
  • Government and Federal Reserve intervene to prop up the worldwide financial system
  • Government bailouts of financial firms and auto manufacturers
  • Federal Reserve & U.S. Treasury commit over $8 trillion of taxpayer funds
  • Barrack Obama elected President
  • Immediate borrowing & stimulus packages exceeding $1 trillion are discussed
  • Federal Reserve lowers rates to below 1%

Fact is Fiction and TV Reality

"I can't believe the news today

Oh, I can't close my eyes

And make it go away

And it's true we are immune

When fact is fiction and TV reality"

U2 – Sunday, Bloody Sunday

The greatest fraud in the history of our country was exposed in the past week. Bernie Madoff perpetuated a $50 billion ponzi scheme fraud on his formerly wealthy investors. The size of the losses is mind boggling, three times the size of the proposed bailout of the US automakers. His entire investment fund has been a big lie for decades. The immorality of his actions is incomprehensible. Charities have been wiped out, the life savings of entire families have been lost, and innocent lives have been ruined.

The potential sentence of 20 years in a country club prison and a $5 million fine is not nearly equal to the pain caused by this man’s immoral evil actions. This man was well respected by the Wall Street investment community, a prominent Jewish philanthropist, and part of the wealthy high society crowd located in West Palm Beach. This begs the question, if this man has been running this type of scam for decades, how many more cockroaches are out there on Wall Street? After a year of never ending tales of scandal, fraud, lies, greed and mismanagement, this episode should be the final straw which convinces the American public the investment game is rigged and they do not have a chance.

This tragedy is a failure of morality, a failure of regulation, failure of unbridled capitalism and a failure of common sense. Bernie Madoff started his firm Bernard L. Madoff Investment Securities in 1960 with $5,000. It started as a classic American success story and is ending as an American tragedy. Mr. Madoff had a spectacular rise on Wall Street. His firm was one of the founding members of the NASDAQ. He emerged as one of the key leaders in the rise of the NASDAQ and eventually became Chairman of its Board. Madoff served as the Chairman of the Board of Directors of the Sy Syms School of Business at Yeshiva University, as well as Treasurer of its Board of Trustees. A college class in ethics in his youth may have benefitted Mr. Madoff’s clients. His firm was one of the top market makers on Wall Street. His estimated net worth grew to between $200 and $300 million.

He adapted easily to his rise from humble beginnings to immense wealth. He owns estates in Roslyn, N.Y., Montauk, Long Island, a luxury apartment that occupies the entire12th floor on Manhattan's Upper East Side valued at more than $9 million. He also owns mansions in Palm Beach and France and is a member of the Palm Beach Country Club. He also possesses a 55-foot fishing boat named "Bull." After this week’s revelations, it seems appropriate that one of George Carlin’s words you can’t say on TV should have been added to “Bull.” His offices were located in the famous “Lipstick” building in NYC. The building is famous for being shaped like a lipstick case. The building could be considered shaped like a less flattering sexual object, and is more fitting to what Mr. Madoff did to his investors.


Source: Wikipedia

The words on Mr. Madoff’s website now seem gravely ironic.

In an era of faceless organizations ... Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner's name is on the door. Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark.

It is doubtful that the words “high ethical standards” will grace Mr. Madoff’s gravestone. Even as his ponzi scheme was unraveling, his high ethical standards led him to try and distribute his $200 to $300 million to family, friends, and employees before the victims of his crimes could attempt to recover some of their money. It is too soon to conclude what the long term effects of this scandal will have on our financial system. It is likely that the name Bernard Madoff will go down in the history of ignominy with Michael Milken, Ivan Boesky, Ken Lay, Bernie Ebbers, and Dennis Kazlowski as examples of the most disgraceful behavior in the history of our financial markets.

How can a man live such a Big Lie for decades and sleep soundly at night? Aspects of Theodore Dreiser’s classic novel An American Tragedy are evident in this heartrending story. Dreiser’s theme of the desire to rise up socially and financially in modern America holding the very seeds by which such desires are denied is clearly apparent in this tale of woe. The lure of materialism isn't solely the acquisition of wealth and goods, but the attraction such wealth and goods holds over people, often at the expense of other values.

As Mr. Madoff’s success grew, his desire to attain ever higher social status must have led him to take more risk and use illegal means to continue up the social ladder. This overwhelming aspiration for acceptance and accolades in the wealthiest high society of Manhattan and West Palm Beach led this man to risk everything. The result has been a tragedy of epic proportions. This fraud is reminiscent of the 1938 indictment of the respected former President of the NYSE Dick Whitney for looting his firm, friends, relatives, and charities of millions to fund his high society lifestyle. Those who forget the past are condemned to relive it.

The definition of a ponzi scheme is a fraudulent investment operation that involves paying abnormally high returns to investors out of the money paid in by subsequent investors, rather than from net revenues generated by the business. Mr. Madoff’s investment firm ponzi scheme was incredibly unsophisticated. He was spectacularly successful at marketing his fund to the ultra-rich Jewish communities in New York and Florida as well as Europeans at ski competitions attended by the rich ruling elite. His fund generated returns of 12% to 13% per year consistently for decades. The fund only had five losing months since 1996.

The market has had dramatic monthly moves over this time. It is a virtual statistical impossibility for an investor to have such a consistent record through bull and bear markets. Madoff refused to provide his clients online access to their accounts. He sent out accounting statements by mail, whereas most hedge funds email statements and allow them to be downloaded via computer for easier analysis by investors. His books were audited by a three-person accounting firm, Friehling & Horowitz, operating out of a 13-by-18 foot location in an office park in New York City’s northern suburbs. A $17 billion fund could not possibly be audited by one partner and one accountant. These facts were all warning signals that many skeptical investment analysts had pointed out years ago to the SEC and in articles in Barron’s.

It was not topnotch undercover investigating that revealed this fraud. The SEC investigated Madoff’s firm twice in the last eight years and found nothing. Madoff’s son-in-law was an SEC official. The SEC has an annual budget in excess of $900 million and has failed miserably in its mission to protect investors. The oversight of hedge funds has been virtually non-existent during the Bush administration. Again, Alan Greenspan, the patron saint of free markets, proved his prescience in 2000 when he campaigned before Congress to not regulate hedge funds. He described hedge funds as

a vibrant trillion-dollar industry dominated by U.S. firms. They are essentially free of government regulation, and I hope they will remain so. Why do we wish to inhibit the pollinating bees of Wall Street?

These killer bees have contributed greatly to the biggest financial destruction of wealth in history. What are the odds of one man being on the wrong side of every major financial debacle in our country in the last ten years? Mr. Greenspan wins the grand prize again.

What brought down Bernie Madoff was not his guilty conscience, but redemptions of $7 billion from investors that overwhelmed his ability to pay them from new funds. The story that he wants everyone to believe is that he was the only one who knew about the fraud. His brother, two sons, niece, and other family members held high level positions in the firm. It is beyond believability that none of these people knew what was going on. A $50 billion fraud can not be perpetuated by one man acting alone. It certainly appears that as a 70 year old man, he is attempting to shield his family members who should also be spending 20 years in prison. If he was truly remorseful, he would have done the world a favor and taken a swan dive off his 12th floor balcony. Instead, he will hire high powered lawyers, using his phony wealth, to extend his life of luxury secluded in his 12th floor hideaway. This is a man who gives Ponzi a bad name.

Ultimately, Mr. Madoff will be judged by his Maker. A special place in Hell awaits him, next to Hitler, Stalin, and Timothy McVeigh. The victims of his crimes are many. The Robert I. Lappin Charitable Foundation has lost its entire $8 million endowment; The North Shore-Long Island Jewish Health System and the Texas-based Julian J. Levitt Foundation have lost millions; the town of Fairfield, Conn. has seen 15 percent of its retiree pension fund totaling $42 million vanish; Maxam Capital Management run by Sandra Manzke has been wiped out; Tremont Capital Management has lost millions; and thousands more have lost their life savings. A personal story told by Minyanville writer Justin Rohrlich about his grandfather addresses the true heart breaking tragedy of this man’s immoral actions.

Last night, it happened to my 88 year-old grandfather Carl. World War II veteran, Captain in the Army, saw combat in the Philippines. His father was a dry-cleaner, his grandfather was a fabric dyer on the Lower East Side at the turn of the century. My granddad was scheduled to go into the invasion of Japan before we dropped the bomb. Instead of going into certain death, he came home and went to the City College of New York on the GI Bill.

Armed with a mathematics degree, my Grandfather eventually landed a job at Neuberger Berman. Became a CFA. Was a director of Tishman Speyer. Helped build Roosevelt Raceway. Ran the pension fund for Price Chopper supermarkets. I had dinner with my grandfather on Wednesday night. Over sushi, he told me about how amazing Bernie Madoff was. This was a common refrain in our conversations. “While the rest of the market is tanking, Madoff is up for the month.” Today, I bought the New York Post on the way to the subway. Bernie Madoff was on the front page. His fund was described as a “Ponzi scheme” that lost $50 billion. My phone rang. It was my mother.

“Your grandfather just lost everything,” she said.

This blackest of marks in investment history will forever alter the faith that investors have in investment managers, financial advisors, mutual funds, and hedge funds. Americans are being buried under a blizzard of lies. This is truly an American Tragedy.

The Sun Will Set For You

"And the shadow of the day

Will embrace the world in grey

And the sun will set for you"

Linkin Park – Shadow of the Day

There is a reason old sayings become old sayings. They have an underlying truth that spans the test of time. Some old sayings that apply to our current economic and investment environment are:

  • If it seems too good to be true, it probably is.
  • Don’t put all your eggs in one basket.
  • The cards are stacked against you.

The Madoff affair illustrates that rich people can be just as gullible and foolish as poor people. In their quest for social status and fitting in with the “smart” money crowd, affluent people all over the country put their life savings into the hands of this criminal. No investor can generate positive returns using the same strategy through all market cycles. Warning bells should have been going off. Diversification is the golden rule of investing. The foolishness of these people putting every dime with one man is maddening. Mr. Madoff’s nickname, “the Jewish T-bill”, is fitting today with T-bills providing negative yields.

Another American Tragedy is in the making. A much bigger Ponzi scheme that will shock every person in America is still operating. It is being conducted by the U.S. government and your elected politician leaders. It is called our National Budget. With most of our spending on automatic pilot, the aging of the baby boom generation will put tremendous strain on our economic system in the coming years.

As you can see, Medicare costs will explode over the next 40 years. The increasing debt will result in interest payments on the debt becoming the largest expenditure in the federal budget. The longer we wait to address this unavoidable train wreck, the more likely it will result in generational war between the baby boomers and younger generations. Mandatory spending for agriculture subsidies, unemployment benefits, civilian and military pensions and health benefits continues to grow. The ponzi aspect of this system is that we continue to pay out benefits by printing money. We are obligated to pay $53 trillion that we do not have. Social Security has run at a surplus since its inception. The money is not in some lockbox. Your trustworthy leaders have spent all of the surpluses ever generated by Social Security to keep the ponzi scheme going.

click to enlarge

The following chart proves beyond a shadow of a doubt that we cannot use the Republican Big Lie of growing our way out of this problem. As entitlements and net interest grow, discretionary spending gets squeezed. Non-defense programs, which include activities related to children, transportation infrastructure, education, training and research that should promote future economic growth and prosperity, are crowded out. We are forced to pay no heed to investments in the future in order to honor commitments made decades ago. The short term focus of Washington politicians has ruined our fiscal future. Children don’t vote, and younger people are less involved in the political process. As a result, the political gain from immediate increases in spending or reductions in taxes outweighs the eventual economic benefits of more politically costly but fiscally responsible choices. This is a criminal and immoral act upon our future generations. President-elect Obama is about to embark on the largest unfunded expenditure program in the history of our country. This will move us closer to the point of no return where the ponzi scheme implodes.

The Government Accountability Office provided a troubling deficit forecast in January 2008 which showed we would reach a fiscal deficit of $1 trillion in 2016. Democrats and Republicans have proven that when they truly work together they can accomplish anything. The $1 trillion deficit will be reached 7 years early, in 2009. Adding enormous new spending programs is like being trapped in a deep hole and deciding to dig deeper. Something called shared sacrifice for the benefit of future generations is essential to avoid another American Tragedy. Shared sacrifice is something that hasn’t been asked of U.S. citizens since World War II. They are known as the Greatest Generation. Now is time for the Next Great Generation.

Bernie Madoff’s ponzi scheme came crashing down when investors requested their money back and no one was willing to give him the funds to pay them off. The American ponzi scheme will come crashing down when our foreign creditors decide to no longer fund our foolish ventures. Foreigners own more than 50% of our existing government debt and have been buying 70% of our new issuances. The Treasury bills and bonds are paying less than 2.5%. Our unfunded liability of $53 trillion increases by $3 trillion per year. Our National Debt exceeds $10.6 trillion. In 2009 and 2010 we will run annual deficits in excess of $1 trillion. The Federal Reserve is printing dollars as fast as humanly possible. Every dollar printed makes the previous dollars less valuable. As our currency is debased, it will eventually collapse. Foreigners will refuse to pour more money down this rat hole. The biggest ponzi scheme in the history of the world will be over.

Friends ask me why I’m such a pessimist. These questions made me consider what I thought would happen over the last few years. I thought that the housing market would decline 10% to 20%. It has declined 30% to 50%. I thought the stock market could decline 30%. It has declined 40% to 50%. I thought our deficits due to wars could reach $500 billion. The deficits will easily exceed $1 trillion. I thought gold might reach $600 an ounce. It reached $1,000 an ounce and is poised to go much higher. All of my pessimistic projections have been surpassed to the downside. Examining Alexander Tyler’s stages of democracy, I am optimistic we can avoid the final stage of Dependence back into Bondage. It seems inconceivable to me that our country could fall under the rule of a dictator. But in the midst of a total economic collapse, I guess anything is possible. Let’s hope my worst fears are not realized. If enough Americans seek the truth, the Big Lies can be exposed before it is too late. Truth is the mortal enemy of the lie.

Disclosure: I have no positions in any stocks mentioned.

Source: How We Can Avoid Another Tragic Ponzi Scheme