As Peter Schiff of Euro Pacific Capital points out : Although the $50 billion loss engineered by Madoff is truly a staggering accomplishment (and was done using old-fashioned fraud rather than the mathematical wizardry that has characterized Wall Street’s recent larcenies) the size of the scheme pales in comparison to the multi-trillion dollar Ponzi structures run by the United States government.

Charles Ponzi, an Italian immigrant, started the first such scheme in Boston in 1916. He convinced some people to allow him to invest their money, but he never made any real investments. He just took the money from later investors and gave it to the earlier investors, paying them a handsome profit on what they originally paid in. He then used the early investors as advertisements to get more investors, using their money to pay a profit to previous investors, and so on.

To keep paying a profit to previous investors, Ponzi had to continue to find more and more new investors. Eventually, he couldn't expand the number of new investors fast enough and the system collapsed. Because he never made any real investments, he had no funds to pay back the newer investors. They lost all the money they "invested" with Ponzi.

Just like Ponzi's plan, Social Security does not make any real investments -- it just takes money from later "investors," or taxpayers, to pay benefits to earlier, now retired, taxpayers. Like Ponzi, Social Security will not be able to recruit new "investors" fast enough to continue paying promised benefits to previous investors. Because each year there are fewer young workers relative to the number of retirees, Social Security will eventually collapse, just like Ponzi's scheme.

Government orchestrated pyramids have the advantage of required participation. As a result, they can maintain the illusion of viability for several generations. But the longer such schemes operate the larger will be the losses when they ultimately collapse.

The United States Government runs its own balance sheet based on the Ponzi principal as well. Our national debt always grows and never shrinks. As existing debt matures, proceeds are repaid by issuing new debt. Interest payments on existing debt are also made by selling new debt to investors. The whole scheme depends on an ever growing supply of new lenders, or the willingness of existing lenders, to continue to roll over maturing notes. Of course, as was the case with Madoff, if enough of our creditors want their money back, the music stops playing.

In Madoff’s case, the rug pulling was provided by the huge financial losses suffered by some of his clients in other non-Madoff investments. When enough of these clients looked to sell some of their apparently well-performing Madoff assets to help offset such losses, the scam collapsed. The same thing could befall the United States Government. Now that China and our other creditors are looking to spend some of their U.S. Treasury holdings to stimulate their own economies, there could be a similar outcome with even more dire implications.

The main difference is that while Madoff took elaborate steps to conceal his scheme, the U.S. government operates in broad daylight. It truly is amazing how faith in government is so pervasive that many can believe that politicians will succeed where private individuals fail, and that governments are somehow immune to the economic laws that govern the rest of society. Like those unfortunate to have been duped by Madoff and Ponzi, the world is in for a rude awakening.