Ponzi Scheme

The term Ponzi scheme was named after Charles Ponzi, an Italian immigrant to America, who was charged for deceiving investors in 1920. A Pony scheme means a fraudulent investment that pays investors from their own money or pays investors from subsequent investor money. In simple terms, it means "Robbing Peter and Paul to pay Ponzi."

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Because few people understand what a Ponzi scheme is, they don't see that the biggest Ponzi schemes are still in operation today.

— Robert Kiyosaki; Rich Dad's Conspiracy of The Rich

In 2009, one of the biggest problems facing mutual fund companies is outgoing cash flow. Today, many mutual fund companies are having trouble raising enough money to pay investors who are leaving. Investors are now finding out that most mutual funds are legalized Ponzi schemes.

— Robert Kiyosaki; Rich Dad's Conspiracy of The Rich

And I don't think Social Security is the only Ponzi scheme still in operation today. I found it amusing that during George W. Bush's presidential term he pushed legislation for younger workers to put money into the stock market rather than Social Security. I think he wanted younger workers to put their money into one of the biggest Ponzi schemes of all: the stock market. In the stock market, investors only make money as long as stock prices rise— as long as new money is being pumped into the market. If money is pulled out of the marker, stock prices fall and investors lose their money.

This is why knowing the difference between capital gains and cash flow is important. All Ponzi schemes are based on capital gains. For prices to go up, new money must come in. That is why I consider the stock market to be a Ponzi scheme. If no new money comes in, the market crashes. The same is true with real estate or the bond markets. As long as cash flows in, the Ponzi scheme of capital gains keeps the boats floating. But if people want their cash back, prices drop, and there is not enough to pay everyone back.

— Robert Kiyosaki; Rich Dad's Conspiracy of The Rich

If you think of the definition of a Ponzi scheme and its implications, then you might conclude that Social Security is the biggest Ponzi scheme in U.S. history. The Social Security system only works if younger workers keep putting money into the pot. Most people understand that the Social Security fund is empty, yet people keep pumping money into what I consider a government-sponsored Ponzi scheme, hoping there will at least be enough for their retirement.

— Robert Kiyosaki; Rich Dad's Conspiracy of The Rich