The document discusses the US dollar being considered the world's biggest Ponzi scheme. It provides an example of how a Ponzi scheme works through the example of Charles Ponzi. It then explains how the US government is running a similar scheme by borrowing money to repay old debts, making it reliant on new borrowing. Countries invest in US financial securities due to demand for safe assets, allowing the US to maintain low interest rates and continue borrowing. However, this system relies on continuous borrowing and makes the US vulnerable if other countries stop investing in US assets.

1. 24
MONEY PERSONALFINANCE www.dnaindia.com
Mumbai, Friday, January 9, 2009 epaper.dnaindia.com
US dollar is the world’s countries in the world have a good por- your parents.”
tion of their reserves in the US dollar, “I might borrow from you,” she replied
which they in turn invest in financial se- smiling.
curities issued by the US government. “Well. The point is, if you cannot earn
You’d know that China and Japan are the it and repay it, you will have to keep bor-
BIGGEST PONZI scheme two biggest exporters to the US; they are rowing and playing pass-the-parcel. Sim-
also the two biggest investors in financial ilarly to put it in a very simple way that’s
, ,
securities issued by the US government. exactly what the US government is doing.
So what does that tell you?” When one set of financial securities be-
Caught in spiral of debt, an Italian immigrant to the United States rency Countries
. “You tell me.” comes due for repayment, it issues new
of America (US), who promised investors buy and sell “Well, it means there is significant de- financial securities to repay the investors
the US govt has little in 1919 that he would double their money goods in dollars. mand for these financial securities. holding the old financial securities. So,
in 90 days, which he later reduced to 45 They also have a Thanks to the demand, the returns of- money brought in by the newer investors
choice but to print more days. At its peak, the scheme had 40,000 major propor- fered on these securities are low, which is used to pay off the older investors.
investors who had invested around $15 tion of their for- in turn ensures that interest rates in the That’s what makes it a Ponzi scheme.
currency notes million in the scheme. Ponzi had no busi- eign exchange US are also low. This encourages more And they can keep doing this because
ness model in place. All he ended up do- reserves in US and more people to borrow and buy countries which export majorly to the US
Vivek Kaul. Mumbai ing was using the money brought in by dollars. And goods and services that the Chinese and are ready to keep recycling the dollars
the new investors to pay off old ones. He where do they the Japanese have to offer. And when that they earn through the US economy and
“Where have you been?” she asked, as I ran his scheme till the money coming into get all these US happens, China and Japan earn US dol- reinvest in the US government securities.
ran into her in the elevator. the scheme was greater than the money dollars? A ma- lars. These dollars are again invested in Worst come worst, the US government
“Everywhere,” I replied, trying to leaving the scheme. One fine day that , jor portion of the financial securities issued by the US can print more dollars to repay,” I ex-
sound funny . stopped and the scheme went bust.” this comes from government.” plained.
“I’ve been looking for you. See I have a “And what makes the US dollar a Ponzi selling goods “But why is the US dollar and the econ- “Hmmm… interesting.”
doubt. Why don’t we have coffee at my scheme?” I asked. and services to omy a Ponzi scheme?” “If you and I run a Ponzi scheme, we
place?” “I think I asked you that…” the US. The US “Oh, I thought you would have known get labelled as fraudsters. But when the
“Okay Coffee with Kiran can’t be all
. “Did you? Well then I should answer GDP is around by now. Well, let us say you have a credit government runs a Ponzi scheme, it is
that bad.” that. See, over the years, the US and its cit- 25% of the card and you go on a spending binge. said to be financing a deficit.”
“I read in a recent interview in DNA izens have been on a consumption and world GDP of $55 trillion. So the US is a same time earn some return,” I ex- How will you return that money?” “But isn’t the Government of India
Money that the US dollar is the world’s borrowing binge. The US is the world’s major market for anything and every- plained. “Well. I will return it when I get my also doing the same thing? They also
biggest Ponzi scheme. What does that largest debtor nation. As on November 19, thing. Once a country has earned these “But why does the US government is- next salary .” spend more than what they earn and bor-
mean?” she asked as she opened the door 2008, it owed a whopping $10.6 trillion to dollars, what does it do with them? It can sue these financial securities?” she asked. “What if you have spent much more row the remaining?” she asked.
to her flat. others,” I said. either keep these dollars in its vaults or “Well, for the simple reason that it than what you can realistically repay “Yes it is. And I can smell milk burn-
“You know what a Ponzi scheme is, of “But how did they get around borrow- invest them somewhere. And where does spends much more than it earns. So to through your salary?” ing. Ponzi has spoilt my coffee with Ki-
course?” I shot back, making myself com- ing so much in the first place?” it invest them? It invests them in financial make good the deficit it needs to borrow “I will probably borrow from my par- ran, too.”
fortable on the sofa. “The advantage with the US is that its securities issued by the US government money And in order to borrow money it
. ents.”
“Yeah, it’s named after Charles Ponzi, currency is the international reserve cur- as they are deemed to be safe and at the issues these financial securities. Most “And how will you return money to (The example is hypothetical)
Arbitrage opportunity for To claim
just 5 questions
D R Dogra
Deputy managing director,
investors in buyback offers or not
CARE Ratings
■ In the light of recent events,
how does a rating agency deal
with issues of credibility as
Those who see an
far as a company’s numbers
to claim
are concerned?
uptrend in share
As a rating agency we rely on audited financial
,
numbers. We may do our own adjustments to the
towards maximum
reported numbers on the basis of our expert
analysis. However, the recent case can be taken
buyback price can buy
as a one-off event as far as credibility of numbers
You can claim tax benefit on life insurance premium for
is concerned.
last financial year paid this fiscal to keep policy in force
■ How do you see investor sentiment being Sachin P Mampatta. Mumbai
affected by the Satyam fraud?
Khyati Dharamsi. Mumbai
Of the 22 companies whose buy-
The investor sentiment has already been af-
back offers are currently open, as made to keep the policy alive can be
fected which can be observed by the sharp fall in
many as 21 have current market Declaring investment details can be quite claimed for deduction. So, the premium of
the Sensex on Thursday. Satyam fell by a hefty
prices going at a discount to the tricky Santosh Kamat thought, sitting in
, the previous year paid to keep the policy in
78% on Thursday. The incident may call for a
maximum buyback price an- the middle of all his premium receipts, force can be claimed for deduction too.”
close inspection of the company and its accounts
nounced by them. fixed deposit certificates and mutual fund Kamat was relieved as he wouldn’t have
by regulatory agencies.
■ What kind of reaction do you see from the Experts say this offers an arbi- statements. Kamat had forgotten to pay his to save additionally to that extent this year.
trage opportunity for those who are insurance premium, the due date for He immediately entered double the
FIIs?
confident of an uptrend in the mar- which was February 26 last year. amount in the form that his human re-
The FIIs had raised their voice on the issue of
ket, to the tune of 60%. He didn’t receive the first letter, which sources (HR) department had provided
corporate governance during the Satyam-Maytas
Jagannadham Thunuguntla, eq- the insurer sent him. After about three-odd him to declare the investments in the year.
deal (which was later called off). No doubt, the
uity head, SMC Capitals Ltd said an amount for arbitrage to occur. lowed through can be gauged by months, he received a letter from the in- But had Kamat’s single year premium
FIIs would surely draw some lessons from this
investor who is bullish on any of “The maximum buyback price how much of the stock has already surance company which stated that he had
, been more than Rs 50,000, he would have
incident, but I don’t see a case of shaken confi-
these scrips can buy it at current can serve as an indication of the in- been bought back by the company missed the premium paying date. had a problem.
dence impacting other reputed Indian IT compa-
levels. “There is an opportunity to trinsic value of the company as de- and whether there has been a dec- “What to do now?” Kanu Doshi, a tax expert and dean, Wel-
nies in times to come. The Indian IT industry has
book a profit if it rises closer to the cided by the management. As such laration as to how much of a mini- The insurance company’s letter had a ingkar Institute of Management, said, “If
always been regarded as a ‘White Jewel’ in the
maximum buyback price, thus pro- if the share is trading at a price be- mum amount the company would solution in it. It said, “If you wish to avoid you are paying two years insurance pre-
India Inc story .
■ What kind of trajectory do you expect the viding a window of opportunity for low it, they can also be bought for be buying back. your policy from lapsing, please pay the mium in one year, you can claim a deduc-
arbitrage.” the long term,” said Thunuguntla. Of the 23 companies that have re- premium along with an interest at the ear- tion subject to the limit of Rs 1 lakh.”
markets to follow in the near term?
K Srinivas, MD of Saffron Capi- In the case of a buyback, the cently announced buybacks, 13 liest.” The receipt of Rs 1,700 paid as interest
With the global scenario appearing bleak due
tal Advisors, agrees, but advises company management in consulta- have made such a declaration. Half Thankfully Kamat had sincerely paid
, lay before Kamat and he wondered if it
to the financial crisis and negative GDP growth
caution. “The arbitrage opportuni- tion with its merchant bankers ar- of these have used less than 50% of the premiums on his policy for the initial was of any use. Doshi said, “Kamat can
in major developed nations, the Indian markets
ty exists for sure. But it is important rives at the maximum price it the money allotted for the buyback. three years. Had he missed the premium also claim the amount paid as penalty or
are expected to follow the same lines and thereby
not take it for granted. It would de- would be willing to pay to buy back However, in many cases, the buy- payment in those three years, he couldn’t the interest on the premium he failed to
remain subdued in the near term.
■ What is your outlook on the IT sector as a pend a great deal on the market con- the stock. It makes an announce- back period has more than six have been able to revive his policy . pay firstly Section 80 (C), under which de-
.
ditions during the period of the ment that it would be willing to pur- months left. Kamat felt relieved after reading that he duction for insurance is claimed, states
whole?
buyback,” he said. chase the stock at any price below It isn’t easy for a company to could save his money He immediately paid
. that amount paid “to keep the policy in
The IT sector is already impacted by sub-prime
Among the bigger names that this maximum price, which the back out of a buyback. Going by ex- the premium with an interest of Rs 1,700. force” can be claimed.
crisis hitting major US and European banks as
have announced buybacks are Re- market assigns to the stock. perts, if a company were to an- Thus, in the financial year 2008-09, he The penalty paid too is an effort to avoid
the BFSI sector was a key revenue earner for
liance Infra, DLF and Godrej Con- However, it is important to re- nounce a buyback and then renege paid the premium twice for the same termination of the insurance contract and
them. Even though some reputed Indian compa-
sumer Products. member that the announcement of on it, it could be actionable. This is policy . it can be claimed for deduction. Kamat
nies have added new clients during the last 2-3
According to data from SMC Cap- a buyback merely serves as a state- because the announcement could But, can Kamat now claim deduction on now had an additional Rs 1,700 he paid as
quarters, the outlook remains subdued.
ital, the current market price of ment of the intention of a company . count as information which has af- double the premium paid? interest too on his investment declaration
these companies makes possible a It does not in any way oblige the fected the price and subsequently Experts say yes. form. A learned Kamat smiled his way to
theoretical arbitrage of 10-60%, the company to actually follow through not turned out to be true. Nikhil Bhatia, partner — personal tax the HR department with the form.
TCS CLARIFIES obvious rider being that the share on one. and FBT at KPMG, said, “Any payment d_khyati@dnaindia.net
price has to rise by the same How aggressively it is being fol- sachin_m@dnaindia.net
In response to the article titled ‘When ants turn
into tigers on balance sheets’, which appeared
on this page on January 7, 2009, Tata Consul-
stock breakouts
tancy Services has clarified that it did change
Nifty hourly resistances
NRI queries be taxable and if the same is above Rs 1.50
its depreciation policy at the beginning of 2008-
lakh, a tax return would be required to be Arvind : Sell below Rs 14.60, target Rs 13.85, stop loss 14.90. Close
09 in order to align the depreciation policy to
for January 9, 2009
below previous bottom is expected to trigger a further down slide
filed. Both the rental income as well as any
the actual usage period of its IT investments.
Ballarpur Industries: Sell below Rs 17.70, target Rs 16.80, stop loss
Sandeep Shanbhag capital gain from sale of property may be re-
“This was done at the beginning of a new fi- 18.05. Close below previous bottom is expected to trigger a further
Time Resistance Upon surpassing Rally
mitted abroad after payment or provisioning down slide
nancial year and fully disclosed to all analysts, AM/PM of resistance exhausts
As an NRI, can I invest in for due taxes. Note that though there is no re- Deccan Chronicle: Sell below Rs 41.50, target Rs 39.85, stop loss 42.35.
investors and discussed during the earnings (1) (2) at (3)
Close below previous bottom is expected to trigger a further down slide
Indian real estate? If so, what striction on purchase and sale, in the case of
call and earnings conference in detail.” 9.55 - 10.30 2966 3000 3036
DLF : Sell below Rs 231, target Rs 221.75, stop loss 235.65. Close below
requirements do I need to residential property sale proceeds of a maxi-
, previous bottom is expected to trigger a further down slide
10.30 - 11.30 2946 2986 3024
follow? If these investments mum of two properties may be repatriated IRB Infrastructure : Sell below Rs 117, target Rs 112.35, stop loss 119.35.
SUNDARAM BNP CLARIFIES 11.30 - 12.30 2926 2972 3012
Close below previous bottom is expected to trigger a further down slide
earn profit, say by rentals abroad. A certificate from an Indian chartered
Omaxe : Sell below Rs 57.50, target Rs 55.20, stop loss 58.65. Close 12.30 - 13.30 2906 2958 3000
or dividends, what are the government accountant would be required to be submitted
Sundaram BNP Paribas Mutual Fund has clar- below previous trend signal an downward move.
and tax rules that I have to follow? to the banker before affecting the remittance. 13.30 - 14.30 2886 2944 2988
ified that it has exited all exposure to Satyam Orchid Chemicals : Sell below Rs 89.55, target Rs 85.95, stop loss 91.35.
—Sridhar Alampalli This is as far as direct investment in proper- Close below previous trend signal an downward move. 14.30 - 15.30 2866 2930 2976
Computers across its various schemes by Jan-
NRIs can freely invest in Indian real estate. ty is concerned. If the intention, however, is UTV Software : Sell below Rs 246, target Rs 236.15, stop loss 250.95.
uary 6, 2009. This is in response to Thursday’s NOTES
Close below previous bottom is expected to trigger a further down slide
RBI has granted general permission for this to invest in a company which in turn would
,
DNA Money story ‘Holding Satyam could cost
, Trading derivatives is a risky activity. These
purpose and there is no requirement of get- invest in real estate, FDI guidelines in this re-
funds, insurance firms dear’, where it was studies do not assure profits. Please consult a
Jatin Rathod & Kamal Nanavati, Midas Touch Capital Advisors
ting any specific authorisation from any au- gard will have to be followed. certified financial analyst before trading.
mentioned that the fund had over 67 lakh Disclaimer: DNA takes no responsibility for investors who act on the basis of the above
trading tips. The authors may or may not have positions in the above scrips. They advise
thority for this purpose. Rental income would sandeep.shanbhag@ gmail.com
shares as of December 31, 2008. —Vijay Bhambwani
observing strict stop-losses. DNA advises investors to consult investment experts before
actually taking short-term calls
NET ASSET VALUES OF MUTUAL FUND & INSURANCE SCHEMES
Scheme NAV(Rs) Scheme NAV(Rs) Scheme NAV(Rs) Scheme NAV(Rs) Scheme NAV(Rs) Scheme NAV(Rs) Scheme NAV(Rs) Scheme NAV(Rs) Scheme NAV(Rs) Scheme NAV(Rs) Scheme NAV(Rs) Scheme NAV(Rs) Scheme NAV(Rs) Scheme NAV(Rs) Scheme NAV(Rs) Scheme NAV(Rs)
^Banking Sec-G. . . . . . . . . 19.91
^Large Cap-G . . . . . . . . . . 12.91 ^Quant Plus-RT-D . . . . . . . . 7.01 ^Fin Serv Oppr-Reg-D . . . . 9.68
^Premier Multi-Cap-G . . . 13.43 ^Arbitrage-B-D . . . . . . . . . 10.51 ^Contra Sch-G. . . . . . . . . . 11.33
AIG India MF Canara Robeco MF Power Energy-D . . . . . . . . 10.13 Equity Growth . . . . . . . . . . 8.61 L.Link Maximir-Gr II . . . . . 19.75 LT Gold Multiplier. . . . . . . . 5.55 Pension Gilt. . . . . . . . . . . . 14.97 SAIP-B . . . . . . . . . . . . . . . . . 8.93 Tips II - Midcap. . . . . . . . . . 6.25
^Contra-D . . . . . . . . . . . . . . 8.09
^Resurgent India Eq-D . . . . 7.46 ^Quant Plus-RT-G . . . . . . . . 7.01 ^Fin Serv Oppr-Reg-G . . . . 9.67
^Top 200-D. . . . . . . . . . . . . 28.90 ^Arbitrage-B-G . . . . . . . . . 11.87 ^Eq Arbitrage - D . . . . . . . 10.71
Equity - IP - D . . . . . . . . . . . 5.98 ^Emerging EQ-Bonus . . . . . 7.77 Power Energy-G . . . . . . . . 10.13 Family Gain Pure Eq. . . . . 11.14 L.Link Maximr-Gr . . . . . . . 36.08 LT Gold Pens-Multi II . . . . . 6.19 Reliance Life SAIP-C . . . . . . . . . . . . . . . . 10.53 Tips II - Money Mkt . . . . . 10.71
^Contra-G . . . . . . . . . . . . . . 8.09
^Resurgent India Eq-G . . . 52.47 ^Reg Sav-Debt-G. . . . . . . . 11.53 ^Growth-D . . . . . . . . . . . . . . 8.62
^Top 200-G. . . . . . . . . . . . . 97.57 ^CEF-D . . . . . . . . . . . . . . . . . 8.96 ^Eq Arbitrage - G . . . . . . . 12.86
Equity - Reg - D. . . . . . . . . . 5.92 ^Emerging EQ-G . . . . . . . . . 9.28 Fidelity MF Life Long Gain . . . . . . . . . 11.89 L.Link Pe Balancer . . . . . . 23.84 LT Gold Pens-Multi IV . . . . 6.16 AIP - A . . . . . . . . . . . . . . . . . 7.44 SAIP-Corporate Bond. . . . 11.56 TIPS II Pure Equity . . . . . . . 6.54
^Div Yield-D. . . . . . . . . . . . . 8.85
^Services Indus-D. . . . . . . . 7.92 ^Reg Sav-Equity-G . . . . . . 14.59 ^Growth-G . . . . . . . . . . . . . 54.31
HSBC MF ^CEF-G . . . . . . . . . . . . . . . . 12.38 ^Global-India-D. . . . . . . . . 11.17
Equity - Reg - G. . . . . . . . . . 5.92 ^Emerging Eq-Income . . . . 6.40 ^Equity-D . . . . . . . . . . . . . . 11.18 Liquid . . . . . . . . . . . . . . . . 12.43 L.Link Pe Balancer II. . . . . 17.18 LT Gold Preserver(ST) . . . 13.95 AIP - B . . . . . . . . . . . . . . . . . 8.93 SAIP-Energy . . . . . . . . . . . . 6.70 W+HP Energy . . . . . . . . . . . 6.70
^Div Yield-G. . . . . . . . . . . . 15.42
^Services Indust - G . . . . . . 7.92 ^Reg Sav-Hybrid-G . . . . . . 11.65 ^India Leadership-D . . . . . . 8.47
^Advantage India-D . . . . . . 7.53 ^IEF-D . . . . . . . . . . . . . . . . . 10.15 ^Global-India-G. . . . . . . . . 15.76
Infra & Eco-IP-D . . . . . . . . . 4.70 ^Eq Divers-Growth . . . . . . 26.17 ^Equity-G . . . . . . . . . . . . . . 16.78 Liquid Pension . . . . . . . . . 12.41 L.Link Pe Maximr-Gr II . . . 20.36 LT Gold Preserver-III . . . . 12.61 AIP - C . . . . . . . . . . . . . . . . 10.53 SAIP-Equity . . . . . . . . . . . . . 6.61 W+HP Infrastructure . . . . . 6.57
^Energy-Growth . . . . . . . . . 6.73
Quantum MF ^Vision-Bonus . . . . . . . . . . 24.40 ^India Leadership-G. . . . . 23.30
^Advantage India-G . . . . . . 8.85 ^IEF-G. . . . . . . . . . . . . . . . . 11.20 ^Lifestyle - D . . . . . . . . . . . . 6.13
Infra & Eco-IP-G . . . . . . . . . 4.70 ^Eq Diversified-Bonus . . . 14.16 ^India Growth-D . . . . . . . . . 5.70 Premier Bond . . . . . . . . . . 12.24 L.Link Pe Preserver-ST. . . 13.92 LT Gold Preserver-IV . . . . 11.28 AIP - Corporate Bond. . . . 11.56 SAIP-Gilt. . . . . . . . . . . . . . . 11.15 W+HP Midcap . . . . . . . . . . 6.15
^Energy-Income . . . . . . . . . 7.61
LT Equity - D . . . . . . . . . . . . 9.27 ^Vision-D . . . . . . . . . . . . . . 30.41 ^Media & Enter Oppr-IP-G10.56
^Dynamic-D. . . . . . . . . . . . . 6.71 ^PEF-D . . . . . . . . . . . . . . . . 13.80 ^Lifestyle - G . . . . . . . . . . . . 7.08
Infra & Eco-Reg-D. . . . . . . . 4.67 ^Eq Divers-Income . . . . . . 14.16 ^India Growth-G . . . . . . . . . 5.70 Premier Eq Index . . . . . . . . 9.10 L.Link Pe Protecr-Inc . . . . 16.11 LT Gold Protec IV . . . . . . . 11.67 AIP - Equity . . . . . . . . . . . . . 6.61 SAIP-Infrastructure . . . . . . 6.57 W+HP Pure Equity . . . . . . . 6.54
^Equity-D . . . . . . . . . . . . . . 25.07
LT Equity - G . . . . . . . . . . . . 9.20 ^Vision-G . . . . . . . . . . . . . 145.32 ^Media & Enter Oppr-RD. 10.51
^Dynamic-G. . . . . . . . . . . . . 6.71 ^PEF-G . . . . . . . . . . . . . . . . 13.80 ^Mid-Cap-D . . . . . . . . . . . . . 9.03
Infra & Eco-Reg-G. . . . . . . . 4.67 ^Infrastructure-D . . . . . . . 10.04 ^India SSF - D . . . . . . . . . . . 9.39 Premier Equity Gr. . . . . . . . 8.09 L.Link Pe Protecr-Inc II. . . 13.54 LT Gold Protec(Income). . 17.94 A