Was whole economy a Ponzi scheme?

I'm curious if we can generalize even more. For example, can we call Academia a giant Ponzi Scheme that will collapse when run out of naive new recruits laboring their years away hoping to reach top of the pyramid one day?

In the short-term, yes. In the long-term, no.<p>When dealing with investments, over the long-run their price will match their value. However, in the short-run, the price will be whatever other people are willing to pay for it. So, in boom times that's often higher than value and in recession that's often lower than value. And in the short-run, new buyers of a stock pay back the older buyers just like a Ponzi scheme, but in the long run the company's value is what determines the price.<p>So, maybe you want to play the system and buy and sell based on these trends, but that's hard. Heck, Harvard's endowment fund couldn't do it, you think you'll be able to? It's a lot easier to focus on the long-run and invest in things that are good values.<p>The real problem that we're seeing here isn't that there are market fluctuations. It's that people wanted to put things in stocks that they thought they'd be using as cash in 6-18 months - specifically, retirement savings. If you're not one of the rich whose wealth will outlast their life, you need to move money from stocks into less risky investments as your retirement date approaches. If you don't, then you have to be flexible with when you retire and how much you'll have. But everyone wanted that extra hundred-grand or something to retire on - why move into safe investments when stocks have done so well? I don't want to loose out on some additional cash for retirement!<p>Heck, most investment firms have auto-adjusting funds that become more risk averse as you reach retirement age, but they aren't as popular as they should be because people don't want safe as much as they want more. In some ways it's like an unintentional scam. Investment professionals will caution you against being too risky just like a con-person tries to dissuade their mark, but the mark sees what they want and thinks the con is trying to keep them from money. . .and then it collapses. The difference is that the investment professional is (usually) being sincere about avoiding risk.<p>Be careful, don't over-extend yourself with visions of gold, and don't count those golden eggs before they hatch.

not exactly, people want to think there is some huge conspiracy run by evil geniuses...the reality is actually much more horrifying. The people running the show aren't evil geniuses....they are just as stupid as the rest of us.<p>Most of the decisions made by these financial geniuses, can pretty much be summarized by a series of if then statements, that they learned through out their lives

<i>That $50 billion is likely to turn out to be not the amount lost but the amount people wrongly thought they had.</i><p>'Zackly.

It seems that the behaviour fuelling those "Ponzi bubles" is &#60;a href="<a href="http://www.theatlantic.com/doc/print/200812/financial-bubbles"&#62;rooted" rel="nofollow">http://www.theatlantic.com/doc/print/200812/financial-bubble...</a> in our basic psychology&#60;/a&#62;.

If you measure the strength of the USD not in relation to other currencies, but what you can buy, either in gold, silver, or a basket of goods (since after all, money is a means to exchange things); then it is reasonable to point out that over the last 100 years, the purchasing power of $1 USD in 1910 has collapsed to about 4 cents today.<p>In 1910, $20 would get you 0.96 ounces of gold (the $20 gold coin), or 15.4 ounces of silver (20 of the $1 Morgan Dollar), or about 600 loaves of bread (bread was about 3 cents a loaf), or over 360 bottles of beer (36 bottles was $1.75).<p>Savers have been punished severely, spenders rewarded as over time, inflation reduced the bite of the debt they took on (they could pay back a mortgage with greatly-inflated dollars).<p>Capital gains taxes did not allow you to adjust for inflation (e.g. if you were given something worth $20 in 1920 as a baby gift and sold it when you were 80 for $900 you didn't really make anything on it).<p>... it may be quite painful for those of us in the USA over the next few years.

"We too thought our retirement funds and houses were growing miraculously, though ours was an illusion fueled by debt rather than fraud"<p>This is clearly true regarding housing prices and the returns and market prices of financial companies, but it ignores the effects of productivity increases when applied to other types of companies. Increasing productivity should allow equity capital to produce higher returns and it is difficult to separate this effect from the effect of a leveraged balance sheet when pricing equities. The market will certainly overshoot on the downside at some point but it's difficult to determine where that occurs because consumption must be lower in the short and long term due to deleveraging by businesses and consumers.

Well yeah, sort of.<p>If you think about it what is stock, you pay $10 for a share that someone else paid $5 for, pretty much just because of rumours the company may do better in the next month or year, it's like buying air.<p>At least with commodities it seems like there is something material behind that contract; grain, oil, sugar. It's not like one day people will suddenly decide, or could be capable of deciding, to cut out sugar.