Why the U.S. Dollar is a Ponzi Scheme

An op-ed by a 20 year banking veteran.

Hello friends and happy weekend to all!

As we’ve come to the midway point of Coincidence Speaks, I’m taking a breather to publish something new and quite different this week.

Having spent twenty years of my life in commercial banking, with roles up and down the corporate ladder from file room clerk to market executive, I’ve learned a great many things.

None more poignant than this.

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Why the U.S. Dollar is a Ponzi Scheme

Ponzi Scheme:

A form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors.

This type of scheme misleads investors by either falsely suggesting that profits are derived from legitimate business activities (whereas the business activities are non-existent), OR by exaggerating the extent and profitability of the legitimate business activities, leveraging new investments to fabricate or supplement these profits.

A Ponzi scheme can maintain the illusion of a sustainable business as long as investors continue to contribute new funds, and as long as most of the investors do not demand full repayment or lose faith in the non-existent assets they are purported to own.

(Wikipedia)

“There’s one thing in banking that’s going to seem a little backwards for you at first,” the President & CEO peered over his reading glasses at his first ever Management Trainee. Me. “For a bank, loans are assets.”

“Wait…” my twenty-year-old fledgling business mind whirred into action. “So then that means… for a bank, deposits are… liabilities?”

He nodded.

“Banks make money from charging interest on loans, and we pay our depositors interest to keep their money with us. So for us, a loan is an asset, and a deposit is a loan.”

It made sense at the level of my college-trained brain.

It made zero sense at the level of my gut. In fact, I hardly even noticed the subtle way it knotted up. But for some reason, I never forgot that exact moment, like it was frozen in time: For a bank, loans are assets.

It would take another decade before I started to remember why.

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Accounting is the official language of business, and numbers are its alphabet. Like any language, over time it can become incredibly expressive and nuanced and complex, to the point you need multiple degrees, advanced training, exams and certifications, not to mention years of real world experience just to begin to truly understand it.

This is not entirely unintentional. It’s how the simplistic nature of money has become so obscured. In fact in the grand scheme of all things finance, even with twenty plus years in a banking career, I do not claim to be 100% fluent.

But everyone knows what money does anyways, right? It buys stuff! With some added eloquence: the intended function of money is to facilitate the exchange of goods and services. But in my experience, most people don’t really know how money is created, or what money is. And most crucially — why that matters.

It matters because, for better or for worse, money is the consensus symbol for the ability to enforce one’s will within society. Money is the conduit for power. And not knowing the means behind its creation or how it is being used leaves one open to manipulation by those who do.

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Heck, my nine year old is soliciting me for 2,800 “V-Bucks” as we speak. For him, 2,800 V-Bucks is a super sweet limited edition ‘skin’ that will upfit his favorite Fortnite character as a Ninja Turtle. For me, it’s $22.99 USD, plus time and energy to wade through accounts and passwords and emails and two factor authentication and terms of service, not to mention the requisite mental space for consideration in how best to approach my son’s request.

His power is in asking me over and over, in new and different ways. The power of frequency, of repetition. Wearing me down. Sometimes attempting to break through my defenses with humor, sometimes with creative logic. I love all of his tactics. I love him.

That’s good news for my son, because I’m the bank in this situation — The Bank of Dad™️. Because to the best of my son’s current level of experiential knowledge, I control the money supply. Because I am the one with access to V-Bucks, I get to decide the final parameters of any potential transaction, and indeed whether to grant him said V-Bucks from The Bank of Dad™️ at all.

In this real-time playout of power dynamics, happening right now as I write, each of us wants something — maybe my son wants an awesome new ‘skin’ for the aesthetics, to look cool for his friends and his 40-year-old Uncle Nando, who also loves Ninja Turtles. Maybe this particular skin gives him a sense of nostalgia from older seasons of Fortnite.

And maybe I want to be left alone to finish this article. Maybe I want this to be a teachable moment, which helps me feel like I’m doing a good job as a parent. Maybe I was traumatized by authority figures as a kid, and now I subconsciously get off on controlling others. Or maybe I just want him off freaking screens and outside more.¹

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Since its humble inception in days of yore, money has moved further and further away from a representation of value we can physically see and touch, and more and more towards the conceptual. The intangible. More like a true currency — with all of the related connotations that electricity implies.

My nine year old thinks money mainly comes from mom and dad, who get paid by the work they do. He also thinks money is made from paper that comes from trees, and is then taken to the bank which makes it electronic. And this is true, to a certain extent — but only relative to the limits of his individual experience.

Anywho, most everyone (I hope) knows that money isn’t literally being printed much nowadays — the actual cold hard cash in circulation is a tiny percentage of the trillions upon trillions of dollars pinging around in the world economy.

So let’s get down to it: how are those dollars created, and who does the creating?

Is it the U.S. Treasury? The Federal Reserve?

The answer may surprise you:

It’s created out of thin air, by a bank, every time a loan is made.

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It surprised me, and I worked at a bank.

Watch how it plays out in real life:

You just found the house of your dreams for $400,000. (The median U.S. house price as of March 2024 is freaking $420,000—holy smokes!)

A loan officer shepherds you through all the glory of the loan process —prequalification, underwriting your risk profile based on credit history and cash flow, property and title insurance due diligence, etc… annnnnd eureka you’re approved for a $300,000 loan!

The day of closing finally arrives, and after signing several rejected novel manuscripts worth of paperwork, you are awarded a set of keys to access all the magic of your very own, brand new-to-you home.

Ready for the real magic?

When the loan closes, the bank enters its brand new loan on its accounting system, creating an electronic ledger for it.

POOF! (or, «clack» as the case may be) … with one keystroke, a $300,000 asset instantly appears on the lending bank’s books.

POOF! A $400,000 deposit shows up from the loan proceeds ($300,000 plus your $100,000 down payment) at the seller’s bank.

Congratulations! You just added $300,00 to the global money supply! You, and every individual and business entity who has ever or will ever take out a loan, are what “prints” money.

But wait a minute — if this is the case, wouldn’t every new dollar created dilute the value of the existing dollars? Wouldn’t this cause systemic hyperinflation and economic catastrophe?

Enter the Federal Bank of Dad™️.

Better known as the Fed.

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Money, in its present iteration, is debt going exponential within a global system called “fractional reserve banking.” Fractional reserve banking means that banks are only required to keep a fraction of cash on reserve relative to the loans it makes. Historically this used to be in the 10% range. As of March 2020, U.S. banks are not required to hold any liquid assets on reserve to back their loans.

I know, I know — this is incredibly exciting stuff, and personally I’d rather be watching videos of cat fails than writing about it — but that’s part of the power game. Bore people to death with finance/accounting/shareholder-ese, while distracting everyone with an entire internet riddled with awesome cat fails. And don’t forget the biggest distraction of all: making ends meet. So stick around! It’s going to get worse before it gets better.

This system not only allows — but incentivizes — exponential growth in money supply. In other words, unlimited growth in debt.

To combat the issues inherent to this, the Federal Reserve/Federal Bank of Dad™️ was put in place a century ago, and its dual mandate is 1) to stabilize prices, and 2) to achieve maximum employment. In today’s reality, stabilize prices means the application of multiple levers to slow down the inevitable inflation inherent to the system itself, and achieve maximum employment means to encourage, if not outright compel the American public to maximize GDP output and pay taxes to keep said system going.

To be clear, I’m all for a stable banking system based on 100% reserves and fully transparent accounting, and a productive society promoting gainful work and creative opportunity for all.

The Fed/Federal Bank of Dad™️ has multiple levers at its disposal to stop prices from skyrocketing too quickly, all of which directly influence banks’ appetite for making loans, which again, controls the money supply. The most well known lever is moving the Fed Funds Rate, which most of us have gotten familiar with over the past several years as rates have gone up.

Just like a Ponzi scheme, the fractional banking system keeps humming along just fine as long as the music keeps playing. As long as too many investors don’t ask for their money back at once, there’s plenty of time to reallocate and releverage and create more out of nothing, to pay the existing debt by financing new debt.

The Fed does this by manipulating the cost of borrowing between banks via the Fed Funds Rate, and by utilizing incredibly yawn-inducing things like “quantitative easing,” “treasury buybacks,” “reverse repos,” and the like. All of these are sophisticated multi-layered methods engineered to achieve one thing: create new money to meet its previous debt obligations.

Congress does its part by raising the infamous “debt ceiling” whenever it comes due. There isn’t much choice—to do otherwise would signal to the rest of the world that the game is up. It HAS to be raised, or the federal government cannot borrow more debt to pay its existing obligations.

Fortunately for the U.S., the rest of the world is in the same boat, at least for the time being. World Debt in Realtime

Does this fit the definition of a Ponzi scheme so far? That’s up for you to decide — there are many more layers of complexity involved here than could possibly addressed in a single post. My primary goal in writing about this topic is not to shift opinion — but to show the actual mechanics of money creation.

As for me though, the only question is not if, but when the music will stop.

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The other important qualification of a Ponzi scheme is that it must be considered fraud — and this is where it gets to be a highly grey area, as far as I see it. Because the basic terms of agreement are spelled out, pretty much verbatim, on the actual dollar bill.

The U.S. dollar is a fiat currency — a nominal currency that is not backed by anything physical, since the U.S. came off the last vestiges of the gold standard (i.e. the last vestiges of accountability) back in the 70’s. The dollar had already become the world’s reserve currency post WWII, and when Nixon nixed the last ties to gold, the rest of the stunned world didn’t have much of a choice but to comply. Soon after, the U.S. brokered a power deal whereby the vast majority of the world’s oil (the global power supply) had to be purchased with dollars, and has wielded dominant economic authority ever since.

The definition of fiat is “by decree,” meaning it has value purely because an authority says it does. The events described above are what allow the U.S. that authority at a global level.

So what is a fiat dollar, really? Well, it’s right there emblazoned at the top: A Federal Reserve Note.

A bank note is just that—a written promissory note. A loan. A promise to repay. An IOU. Except it’s not truly redeemable for anything but more IOU’s, which is also written right there in plain sight: “This Note is Legal Tender for all Debts, Public and Private.”

Simply put, a fiat dollar is an IOU, backed by governmental power. In this case, the U.S. government’s ability to enforce its will within its own borders (via collecting taxes) and abroad (via global economic and military prowess).

By the same token, a government and its people are two sides of the same coin. And what the American public may not realize through all of the layered financial complexity is that they are the lender, and the banks are the borrowers.

I’ll say it again — We the People are the lender, and the banks are the borrowers.

And if it’s the people who are the lender, then what is it that they are lending out?

Their efforts, their work, their labor—in other words, their creative power.

As it stands today, the fractional banking system is quite literally mortgaging human productivity just to sustain itself — and in return for the people’s investment, the very dollars that are accepted as payment are IOU’s with ever-diminishing value.

There is zero incentive at the governmental level for responsible fiscal management, or to ever repay its debt — in fact, to do so would compromise the very system that sustains it. When loans are repaid, the money supply dries up, and economic activity grinds to a halt.

The economy relies on constant expansion, because the banking system is set up that way.

That’s why the “growth is inevitable” mindset is so pervasive, especially in business. But it’s not growth that is inevitable — it’s change.

Growth is a conscious choice.

Apologies as this got a little longer than expected, so PART II—What You Can Do About It will have to be included in an upcoming post.

But don’t wait around for me.

1. This is the father/son pathway we ultimately went down.