Source: http://www.worth.com/articles/Z9805E01.html

98/05 The Ponzi Pair By Jim Rogers

The IMF and the World Bank keep issuing larger and larger loans to their borrowers--a practice that has all the earmarks of a classic financial swindle

In 1990, curious to take a hard look at the planet, I embarked on a two- and-a-half-year motorcycle trip around the globe. One reason I wanted to do this was to see what happened when Western public money was spent on projects mounted by developing nations. I knew that thousands of these undertakings, worth tens of billions of dollars, had been set up and funded by U.S. and European agencies, public and private. So I steered to the sites of these works as often as I could to see just how successful they had been.

I visited many such projects in Latin America, Africa, and Asia. Upon arriving at the scene, however, I often found only factories that were falling apart, telephone systems that didn't work, fertilizer plants that had collapsed, roads that led nowhere, and overgrown agricultural developments that raised nothing. In Bangui, the capital of the Central African Republic, I saw uninhabited college dorms and an empty soccer stadium. In Zambia, I saw vast networks of muddy ditches that had been dug for a water project that was abandoned.

Today, these memories seem almost surreal as I peruse the sleek annual reports of the International Monetary Fund and the World Bank. They list page after page of projects that have been funded over the years, billions spent to bring water to the thirsty, work to the unemployed, shelter to the homeless, and electricity to those in the dark of night. But how is it I saw so few of these successes on the ground? And why is it there has never been a failure to pay back these massive development loans when I found so many projects that had failed?

As I delved further into these questions, I discovered some interesting things. One is that the bureaucrats at the IMF and the World Bank were once graded by the amount in loans they placed--not by their loan-loss ratio, a technique employed by most successful lending institutions. The first commandment of banking, after all, is to make sure loans are repaid. This, however, wasn't a top priority of the IMF or the World Bank.

They knew that every time a loan failed they could just make a new, larger one to the original party, covering up the problem. These countries learned they could go back year after year for new loans--and they have. Take this mode of operation to the extreme and what you have is a Ponzi scheme. A Ponzi scheme? At the august World Bank? The benevolent International Monetary Fund?

Afraid so. Both are enterprises that, in effect, repay established investors with money from newer investors, as opposed to profits from a successful ongoing operation. When a developing country borrows $50 million for a water project, making IMF consultants, favored contractors, the nephews of in-country bureaucrats, and local Mercedes- Benz dealers rich, it doesn't matter so much if the water project is productive or even successful as long as the original loan, its interest, and expenses are repaid by yet another loan the year after.

This is precisely what has happened with every bailout of Mexico. Each go-round, the amount needed is larger and larger. The last bailout was $50 billion. The next will probably reach $100 billion. In other countries, new IMF and World Bank loans are being made, in ever increasing amounts, to cover bad old loans.

And where does all this new money come from? From what the IMF and the World Bank call the "contributions" of taxpayers around the world--such as you and me--who are told their national treasuries are making bulletproof loans to help the poor and homeless. The American taxpayer coughs up close to 20 percent of the IMF's needs.

After reviewing the financial statements of thousands of businesses over the years, I've developed a pretty good sense for when the numbers are solid and when they're simply smoke. The first hint of smoke: reports that are confusing to read. The balance sheets of well-run, profitable enterprises make no secret of their true virtues. The financial statements published by the World Bank are as hopeless to follow as anything

I've ever seen. I can't tell you what's wrong with them because they are impossible to decode. But I can tell you I'd never invest in a business that tried to feed me this sort of financial spaghetti.

Perhaps more important, the mere existence of these two outfits provides a worldwide disincentive for prudence. After all, if you and I could invest at a high rate of return and have the risk of failure covered by the U.S. taxpayer, wouldn't we put in all the money we could beg, steal, and borrow? The Mexican financial system--overhung with huge debts, cronyism, and featherbedding--desperately needs to be cleaned out in order to become lean and truly profitable. But what's the incentive as long as the IMF and the World Bank are in place to preserve the status quo?

Back in the 1980s, the IMF bailed out a number of South American countries with a program of currency loans and austerity policies (higher taxes, lower spending, and higher interest rates) that seemed to give the region a boost. But note that the nation that got the least help--Chile--now has the soundest economy in the Western hemisphere.

Maybe Mexico won't be the bankbuster; Asia may beat it to the punch. Korea alone may need $60 billion, not to mention the tens of billions required by Thailand and Indonesia. Much of the turmoil in Asia began when China devalued the yuan several years ago. The devaluation made China's goods more competitive in world markets but hurt the exports of other Asian countries. The decline in exports, in turn, caused a crisis among the banks that had lent money to Asian manufacturers. Indonesia, Korea, and Thailand have responded by devaluing their currencies. But what's to stop China from devaluing again, repeating the whole cycle?

The lack of foresight on the part of the IMF and the World Bank is nothing short of astonishing. It's not as if they weren't warned. In its June 1996 annual report, the Bank for International Settlements sounded an alarm about Asian lending practices--a full year before the crisis appeared. But listen to what the World Bank had to say as recently as its annual report for fiscal year 1997: "East Asia enjoys enviable macroeconom-

IC conditions and an unprecedented growth momentum." As of only a few years ago, the solutions of the IMF and the World Bank always included the imposition of exchange controls, which have since been totally discredited.

The World Bank and the IMF each has a staff of thousands, many of whom have been steeped in the esoteric economic theories cooked up in the world's most expensive graduate schools. The World Bank's financial statement for fiscal 1997 states that it has a net worth of $27.7 billion and that its pension plan holds $8.7 billion. Those dedicated to helping the disadvantaged seem to have advantaged themselves very well indeed, a case of doing well by doing good. Workers at the IMF do even better: Its pension plan is larger than its special disbursement account--that part of the balance sheet that you and I would call its net worth.

The activities of these two organizations are gussied up in sanctimonious prose about aiding the poor and raising the living standards of the third world. Don't be fooled. These bailouts are really about protecting the interests of Chase Manhattan, J. P. Morgan, and Fidelity Investments. Of course, if Chase went directly to Congress and asked for taxpayer help to cover a bad loan it had made to Korea, it's not hard to imagine the response Chase would get. But under the cover of the IMF and the World Bank, it can do this regularly without so much as a peep of criticism.

The IMF will tell you that it lends money to a nation only when the nation has agreed to serious reform and that this practice has done much to strengthen the economies of the world. But I don't buy it. In my experience, the only discipline that forces us to learn financial lessons are the hard consequences of our foolish actions--our mistakes-- not someone else's pious sermons about what works and doesn't work.

The discipline that's required to ensure a sound currency comes only when corrupt and soggy systems are allowed to collapse and begin anew. There's no better illustration of this than the current performance of the economies of Chile and Mexico. Chile has gone from utter collapse in the 1970s to a shining model of capitalism at its best. Mexico, propped up by one rescue effort after another, has never fully reformed; it has only papered over one carload of bad loans after another. The pity is that with its huge population and proximity to our giant markets Mexico could have been placed on a sound footing years ago and might well have become an economic miracle in its own right.

The global monetary system is far more complex and interconnected today than it was when the Bretton Woods agreement was signed in 1944 or when it fell apart in 1971. In 1998, more than a trillion dollars' worth of currency a day is traded around the world, whereas none was traded just after World War II. The bailouts in our global system are becoming larger and larger, and if they continue, they must continue to grow larger. The day must also come when the crack is too wide to fill. Korea or Italy or China will fail to obtain enough emergency infusions, and they will then fail to pay Chase and Morgan, which will fail to pay banks in Germany and Japan, which will fail to pay...

Banks always have loans involved in periodic crises, but they are big boys and resourceful. If no international bailout exists to rescue them they'll have all the more incentive to figure out how to save not only their customers but also their own hides. They will certainly have more of such expertise than the IMF. Today thousands of MBAs are on planes seeking out opportunities for private investors all over the world, a far cry from the limited private funds that existed just after World War II. The IMF and the World Bank might have been needed then; today they provide services that the private sector can perform far, far better. Bureaucrats cannot figure out the best place to put a water plant, a new road, a telephone line, or an airport. Private capital can and will, for it must obtain a return or cease to exist, a discipline that holds the investment to strict accountability. It's what we mean by the old adage "A fool and his money are soon parted."

If we taxpayers don't insist on full accountability for our investments, sooner or later we're going to be like the outraged investors lined up outside Mr. Ponzi's Boston office--broke and disappointed. The world has changed dramatically since the IMF and the World Bank were created, and now that the crisis of the Second World War is long since over, it can get along without them.

Senior contributing editor Jim Rogers is an international investor and the author of Investment Biker (Adams).

-- Rick (rick7@postmark.net), February 24, 2000

Answers

Sounds like the over-all attributes of the ten-horned beast of Revelation 17 fame.

Keep watching and listening.

-- Connie (hive@gte.net), February 24, 2000.

Your tax dollars at work. The only way to stop this bull excretment is to stop funding your governments. That means avoiding taxes wherever possible, especially the so-called income tax. If you don't, you are just sticking your butt in the air and saying "do me" -- while Slick Willy (or Bush, whoever) saying "Ah feel yur pain".

http://www.ottoskinner.com
http://www.edrivera.com

-- A (A@AisA.com), February 24, 2000.

Actually, it is not a ponzi scheme, it's a bribery scheme. The goal is to have all the third world nations in debt up to their eyeballs. Then, the IMF and the UN threaten them on a continuous basis, that they will not receive any new loans/money if they don't do certain things that the UN/US wants. Of course, the people running the UN are even more stupid than those running the IMF, so the whole mess is a joke at the taxpayer's expense. As our economy continues to tank, less money will be available for this kind of BS - and this will have further adverse effects on the worldwide economy. Hence, Ruben's comment that our economy is supporting the economy of the world.

-- Y2kObserver (Y2kObserver@nowhere.com), February 24, 2000.

I saw the PBS program on the IMF--they are SCOUNDRELS!

-- Mara (MaraWayne@aol.com), February 24, 2000.

The reason we put up with this BS is because the media doesn't say a peep except that the IMF or World Bank is bailing somebody out yet again. No mention about how many taxpayer dollars are at stake or what has occurred on previous loans and certainly in the smallest of print is when they forgive loans permanently.

-- Guy Daley (guydaley@bwn.net), February 24, 2000.

Thanks, Rick. Great article.

Sounds like "cascading cross defaults" coming sooner or later to a bank near all of us, ie the whole world.

It appears the global finacial system is taking on ever greater stress, especially since Nixon abandoned the gold standard in 1971 and left fiat paper as the means for commerce.

The first groups to object will likely be those with physical assets of high worth that no longer desire the exchange of their high value assets for eroding value paper, read Oil; read OPEC. Arab OPEC nations have floated a dinar as an alternative currency to the US dollar. The EU is moving towards increasing the amount of gold supporting the value of the Euro. The dinar and the Euro could undermine fiat dollars as the preferred method fro keeping score in international trade and finance, In which case, US firms and banks could have to exchange their fiat for real currency at unfavorable rates making American import, export and finance more costly.

For most of us, the bottom line is to hold some physical hard assets (gold, silver, oil etc) as an insurance against inflation and a loss of the dollar's purchasing power.

Many months ago, the Y2K effects were thought to be impacting the global finance system in such as a way as to trigger cascading croos defaults because Bank A couldn't pay Bank B who had Bank C waiting for payment from Bank B. It appears that this scenario is still possible.

Jim Rogers is as insightful an analyst as any and is a member of the Establishment. So I would take this as a timely warning NOT to drop ones guard and stay alert.

-- Bill P (porterwn@one.net), February 25, 2000.