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Mark O'Byrne

Mark O'Byrne

Mark O'Byrne is Executive Director of Gold and Silver Investments Limited. He is regularly quoted and writes in the international financial media and was awarded…

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Our Global Pyramid Scheme

Recently here in Ireland there has been a sad news story which has interesting parallels with the global economy. It concerned that very old confidence trick or financial scam of a 'pyramid scheme' or a 'pyramid selling scheme'.

It is believed that this particular scam, which was euphemistically called 'Women Empowering Women', was begun in the U.S. in the late 1990's and spread to the U.K. and subsequently to Ireland. Everywhere it has collapsed leaving the few who are first in and first out very wealthy. Meanwhile, the majority of those beguiled by stories of easy, no risk returns have been left a lot poorer.

In reading about and listening to various current affairs radio programs discussions about this modern day morality tale, I was reminded of the many parallels between this bogus pyramid scheme and our new and increasingly bogus 'asset based' global economy where earnings and savings are disrespected in favour of the blind pursuit of capital gains in the property market.

This particular bogus pyramid scheme worked like a chain letter in which only women can take part. It is based on individual contributions or "gifts" of €3,000 given to a member of a network. In return, each participant may expect to receive multiples of that amount up to €24,000 as they progress through the network hierarchy. However, this is dependent on new participants continually joining the scheme.

The danger is that these types of networks break down as the pool of new investors eventually dries up. Thus there must be continual measures to keep the investment network expanding (Greenspan and the Federal Reserve would be able to relate to this). Participants joining the scheme late stand a good chance of losing their original contribution never mind any return.

Thus it doesn't require a BA from Yale and an MBA in Business from Harvard to realise that this scheme is doomed to collapse and the majority of those who've been entangled are going end up out of pocket.

The Pyramid Scheme 'Women Empowering Women' also known by the Orwellian 'Happy Hearts Club',(and like most perversions of the English language this euphemism was slowly found out and soon became the 'Broken Hearts Club') was based on what all pyramid schemes are based on - maintaining confidence among those already in the pyramid and there being a growing number of new recruits to replenish the base, feed the peak of the pyramid and prop up the proverbial 'house of cards'. A drop in new recruits is akin to taking one card out from the bottom of the house of cards.

It's a fraud because the promoters know the sums don't add up and it's bound to collapse. They know the implied promises will not materialise, and all but a few will be left with nothing from their involvement. The confidence trick only works as long as confidence in the scheme remains.

The two themes which emerged from the mercenary affair were the ability of a few amoral or immoral individuals to convince the mass of people of no risk, easy money profits and the great credulity of the mass of the people in believing the fairy tale profit story spun for them by the convincing sale's spinmeisters. There would not be 'investment suckers' without cunning enablers and there would not be cunning enablers engaged in such schemes unless there are less astute investment suckers.

Amorality, immorality verses credulity and naiveté - a toxic combination which when they feed of each other lead to dreams of early retirement, the blind pursuit of riches and subsequently big round bubbles ripe for pricking with the inevitable tears and much gnashing of teeth which follow.

On hearing the tale I was immediately struck with the thought that if one was to substitute the word 'women' in the title 'Women Empowering Women' for that of 'investor', the parallels between this scheme and our current asset based global economy would become evident. Wall Street and the financial press' continual spin is that 'we are all investors now' and that we can all get rich by getting involved in 'investing', especially in that one way street to riches - the property market.

The property markets of the western world are very similar to a massive Pyramid Scheme. Rather than 'Women Empowering Women', these property markets could be called 'Investors Empowering Investors'. Rich and poor, blue collar and white collar, moms and pops are all property 'investors' now. They are forming the base of the pyramid and their money will go to the 'smart' money at the top of the pyramid who have had the sense to get out of the property markets in recent months and take their capital gains or are in the process of doing so. The smart money knows it is better to have money or gold stored in a secure location rather than owe a lot of money to the bank.

The process of collapse of any Pyramid Scheme begins when doubts begin to percolate into mainstream consciousness of the group or society. These doubts could include significant financial, economic, political and military challenges facing a nation or indeed the world. All it takes is a small but significant astute minority to take the courage of their convictions and go against 'the herd' and the conventional wisdom of the mass media and sell their home, investment house, houses, apartment or apartments and the property decline will begin.

The ironic and stupid thing is that our modern day property market's 'Investors Empowering Investors' scheme is completely moral and legal and barely questioned unlike the 'Women Empowering Women' Pyramid Scheme which is completely illegal and was the subject of massive opprobrium and disgust when revealed.

The British Secretary of State for the Department of Trade and Industry and Minister for Women, Patricia Hewitt were suitably outraged, "This scheme has a nasty sting in the tail and preys on vulnerable women." Would that she were as concerned for the millions of mom and pop investors soon to face a rude awakening on their property 'investments' when interest begin their rise.

She populistically continued, "I am extremely concerned that many have lost thousands of pounds of their hard-earned cash and potentially many more will lose out." A sentiment to be expressed frequently by 'outraged' politicians in the years to come?

Ms. Hewitt finished, "I want the public to be aware of the risks associated with schemes of this kind. I would urge them to think long and hard before they get involved, and then think again." My sentiments exactly about our massively speculative property markets.

I remain 'cautiously optimistic' on the global economic recovery. However unlike financial sham shills who claim to be 'cautiously optimistic' and then advocate throwing caution to the wind investment-wise and getting their customers into massive debt in order to 'invest' in property, I am genuinely cautious and thus advocate reducing one's debt burden and investing at least a small part of one's earnings or assets in those ultimate hard assets and financial insurance - precious metals.

Let us hope that our global economy has a happier ending than the Women Empowering Women Happy Heart Club's ending did and does not become the Investors Empowering Investors Global Broken Heart Club.

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