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Foreign Exchange

World’s biggest Ponzi schemes launched

While all the talk this week is about Bernard Madoff’s giant $50 billion Ponzi scheme, I’d like to report some far bigger smoke-and-mirror investment opportunities.

A string of governments around the world are ramping up their bond issuance. For instance, the UK debt management office is planning to attract £118 billion ($183 billion) in fresh investment in 2009. This is a scheme it has been running for years. The DMO promises a safe and steady return – since 1900, the average annual yield on the 2½% Consolidated Stock has come in at 5.8% – and the UK government then promises to invest the money.

Some of the funds have already has been earmarked to buy up banks on the cheap. Most of it, however, will no doubt disappear into that bureaucratic black hole called the public sector. The only way the scheme can continue to operate is by paying out existing investors with the money pulled in from fresh ones. The scheme is likely to explode if there are sudden, unexpected and large redemptions.

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