China WMP – Is this the Catalyst to the Coming Crash?

A Ponzi scheme is a form of fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors.

It is said that US Social Security is a Ponzi scheme. Bernie Madoff was the biggest, most famous Ponzi scheme. Apparently, Chinese banks (including State-owned ones) are running Ponzi schemes.

Chinese banks are selling Wealth Management Products (WMP). These products offer ~5-8%+ of “guaranteed” returns. But these aren’t bonds. WMPs are something like the collateralized debt obligations (CDOs). Guess what took down Lehman? … CDOs. :/

Look where these things invest:

Madoff was a $65B Ponzi scheme. China WMP are at $9-Trillion. Markets are as inter-connected as they’ve ever been. Once there is a failure and people start to panic and pull money out of these things, it’s over.

Apparently though, the Chinese consumers feel like their money is safe (at least the principal). The Government will bail them out, if there are any problems (like FDIC insurance, in a way).

This is why Kyle Bass has been betting against the Yuan. His theory is that the Chinese Gov’t will have to drastically devalue the Yuan to save the system. Remember, many of these are State-owned banks investing in State-owned projects.

Read more at Jim Rickard’s Daily Reckoning blog.