Are we living through another financial bubble?

Ponzi Schemes and Financial Bubbles

Odds & Ends

By Pawan Kumar

As artificial intelligence continues to dominate markets and headlines, a growing number of investors are asking an uncomfortable question: are we living through another financial bubble? Others go further and ask not whether, but when it will burst. The surge in AI valuations is increasingly fuelled by a familiar and dangerous sentiment  —  the fear of missing out. History shows that such moments of technological euphoria often conceal financial bubbles, and when these bubbles collapse, they frequently expose elaborate frauds that flourished unnoticed beneath the surface.

Paul David Richard Griffiths of EM Normandie reminds us that Ponzi schemes are rarely obvious while markets are booming. A Ponzi scheme pays existing investors using funds from new investors rather than genuine profits. It depends on continuous inflows of capital and inevitably collapses when confidence falters. While difficult to detect in real time, these schemes appear astonishingly simple in hindsight. The critical question, therefore, is whether Ponzi schemes leave identifiable footprints within technology-driven bubbles that might help us anticipate the next crisis  —  possibly under cover of today’s AI frenzy.

To explore this, Griffiths compares two emblematic cases separated by more than a century: the railway mania of the 1840s, orchestrated in part by George Hudson, the so-called “Railway King”, and Bernie Madoff’s vast fraud, enabled by information and communications technology and sustained by the dotcom and housing bubbles of the late twentieth and early twenty-first centuries.

In both cases, the macroeconomic environment played a decisive role. Britain’s railway mania began in 1829, driven by exuberant expectations surrounding a transformative new technology and a shortage of alternative investment opportunities after the government curtailed bond issuance. Railway companies proliferated rapidly, with more than fifty registered in the first four months of 1845 alone. Cost estimates were routinely understated by over 50 percent, while revenue projections were wildly optimistic. Accounting standards were primitive, allowing directors enormous discretion, and regulation was weak. Hudson, who was also a member of parliament, actively promoted deregulation of the railway sector.

Similarly, Madoff’s scheme thrived in an environment shaped by technological optimism and regulatory blind spots. His reputation was built in the 1970s on technological innovation in trading, and his firm, Bernard L. Madoff Investment Securities (BLMIS), benefited from the explosive growth of ICT companies during the dotcom era. Between 1996 and 2000, more than 1,900 technology firms listed on US exchanges. By 2000, Madoff’s fund reportedly held $300 million in assets. The subsequent expansion of complex financial derivatives  —  including credit default swaps and collateralised debt obligations, which grew by over 450 percent between 2001 and 2007  —  created a climate in which abnormal returns seemed normal.

In both eras, cheap money amplified the bubble. Interest rates were exceptionally low during the railway boom, just as the US Federal Reserve’s rate cuts in the 2000s lowered mortgage costs and fuelled the housing bubble. When liquidity is abundant and asset prices are rising, uncomfortable questions tend not to be asked.

The personal styles of Hudson and Madoff reveal further striking similarities. Both restricted access to information and discouraged scrutiny. Hudson raised vast sums without clear investment plans, while Madoff avoided investor meetings and relied on personal networks and philanthropy to attract funds. He deliberately employed under-skilled staff and overcompensated them, reducing the likelihood of probing questions. In both cases, there were warning signs: shareholders suspected Hudson’s misconduct, and whistleblowers alerted the US Securities and Exchange Commission about Madoff. Yet action was delayed, reflecting regulatory weakness, limited technical understanding and, in Madoff’s case, his close relationships with oversight bodies, including his former role as Nasdaq chairman.

When the bubbles burst, the truth became undeniable. Both schemes were classic Ponzis, using new capital to pay existing investors while financing lavish personal lifestyles. Hudson embezzled an estimated £750,000  —  roughly £74 million today  —  while Madoff’s fraud reached a staggering $65 billion in claimed losses, with actual investor losses of around $18 billion. Both men ended in disgrace: Hudson fled to France, and Madoff died in prison.

What lessons does this history offer today? Griffiths warns that investors should be wary of AI companies with rapidly rising valuations led by charismatic, well-connected figures, especially when those leaders enjoy close relationships with political power. The quality of communication with investors matters profoundly  —  particularly transparency around capital allocation and cash flows. Audited financial statements alone are insufficient. Deep scrutiny of business models, revenue generation and investment strategy is essential, and auditors themselves will need to raise their standards.

History suggests a simple but sobering conclusion. When investors are swept up in technological excitement and markets appear unstoppable, conditions are ripe for deception. Around the corner of every frenzy, a Ponzi may be waiting.

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High Seas Piracy or High-Stakes Geopolitics?

The Caribbean has long been a theatre of American influence, but recent actions by the second Trump administration have signalled a shift from traditional diplomacy to what critics are describing as “international piracy”. Following the December 10 interception and boarding of a Venezuelan oil tanker — an act a Venezuelan government spokesman labelled “barefaced robbery” — the world is beginning to grapple with the “Trump Corollary,” a revival of 19th-century regional dominance that threatens to upend international law and global alliances, argues Jonathan Este, The Conversation

 

The Venezuelan Intercept and Narcoterrorism

The seizure of the oil tanker is only the latest in a series of aggressive maneuvers. The administration has conducted 22 strikes on Caribbean vessels suspected of transporting “narcoterrorists,” resulting in at least 87 deaths. While Donald Trump has remained cryptic, stating only that “other things are happening,” the legal community is sounding alarms. Mark Chadwick, an international law expert at Nottingham Trent University, suggests these actions tread dangerously close to — or outright over — the legal definition of piracy under international statutes.

Critics have noted a jarring irony: while the administration targets maritime pilots in the name of anti-drug efforts, President Trump simultaneously issued a pardon for a man previously convicted of flooding the United States with cocaine. Furthermore, legal scholars like Elisabeth Schweiger note that “targeted killings” and extrajudicial strikes have been so frequent in recent decades that they are becoming normalized, shifting the global conversation from if such strikes should occur to how they are executed.

The Return of the Monroe Doctrine

The driving force behind these actions is a reimagined National Security Strategy. The administration has invoked the Monroe Doctrine, a 19th-century policy asserting that any interference by foreign powers in the Americas is a hostile act against the U.S. While the Obama administration declared the era of the Monroe Doctrine “over” in 2013, the current White House has introduced the “Trump Corollary.” This states unequivocally that the American people — not “globalist institutions” or foreign nations — will control the destiny of the Western Hemisphere.

This policy is a direct challenge to China, which has spent decades building trade and military ties with Latin American nations. As the primary buyer of Venezuelan oil and a supplier of arms to Caracas, Beijing has responded with admonitory warnings against “external interference.” The collision between Washington’s hemispheric claims and Beijing’s global economic interests creates a volatile friction point that could lead to a modern “Gulf of Tonkin” incident — a fabricated or exaggerated confrontation used to justify wider conflict.

Europe and the Risk of “Civilizational Erasure”

Trump’s 2025 National Security Statement is equally disruptive regarding the transatlantic alliance. The 33-page document barely mentions Russia or North Korea, instead focusing its ire on Europe. The administration describes a continent weakened by “out of control” immigration, warning of a looming “civilizational erasure.” This rhetoric aligns with the “great replacement theory,” a concept obsessed over by far-right thinkers who argue indigenous Europeans are being replaced by immigrant populations.

The administration’s stance toward Europe is not one of isolationism, but of a “protector” of a racially and culturally defined Western civilization. This has led to a dramatic shift in security dynamics:

* Endorsement of Candidates: Trump has hinted at endorsing European candidates who align with his MAGA vision over current leaders.

* The End of the Alliance: Security experts Stefan Wolff and David Dunn conclude that the cornerstone of European security — the U.S. as a backstop — has effectively ceased to exist.

* Scrambled Budgets: While European nations are increasing defense spending to meet Trump’s demands, they are also forming a “coalition of the willing” to handle regional security without U.S. reliability.

Conclusion: A Hemisphere and a World in Transit

The administration’s actions in Venezuela are more than a crackdown on drugs; they are a manifestation of a world where the liberal international order is being dismantled in favor of “strategic states” driven by nationalism. Whether boarding tankers in the Caribbean or critiquing the birth rates of European nations, the White House is signaling that it is no longer bound by 20th-century norms.

As the Nobel laureate María Corina Machado waits for the “correct moment” to return to a Venezuela under U.S. maritime siege, the rest of the world watches the horizon. The transition from a rules-based order to a “might-makes-right” maritime policy is no longer a theoretical fear — it is the current reality of the high seas.

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Mauritius Times ePaper Friday 19 December 2025