Caught in a Fraud? Blame the FED

Probably many if not most libertarians have heard of Galt’s Gulch Chile (GGC), the proposed real estate development originating with Jeff Berwick of The Dollar Vigilante. Jeff and 73 other libertarians, including lucky me, were defrauded in the affinity scam run by a poser named Kenneth Dale Johnson. This con man (i.e., wolf) dressed in libertarian (sheep’s) clothing used Berwick’s anarcho-capitalist reputation to suck in $10.45 million dollars and deliver nothing on his promise of a community “to give Objectivists, libertarians and other proponents of individual liberty the opportunity to live according to their principles of free markets, voluntary association and minimal to no government interference.” (See the original GGC press release)

Johnson enlisted lib celebrities Ben Swann, Josh Tolley, Bob Murphy, Jordan Page and Wendy McElroy to unwittingly lend their credibility to the fraud, and hired free market believers to work in marketing and sales. He even appealed to those who are worried about an economic collapse – a constant theme in libertarian leaning investment newsletters – touting the agricultural operations on the GGC properties.

With the original buzz generated last fall when the GGC affinity scam was publicly revealed, we investors became the punching bag for all the blame-the-victim statists posting on comment sections around the internet. Excluding the sentiments that attributed libertarian philosophy itself as the cause of our losses, I can’t argue with any of our critics. As a group, we certainly were dumb, naive, inexperienced and at times, down right lazy, to have fallen for Johnson’s pitch. But are we ultimately the ones at fault? Does blaming the GGC victims really make sense?

Of course, the person truly culpable is Ken Johnson. And to a large degree, we are responsible for being scammed, and I’ve acknowledged this often over the past year of working to recover the project.

However, I don’t think our failures are the full explanation for the GGC affinity scam. It seems that fraud is generally on the rise. For example, several well-heeled, sophisticated GGC investors have been caught up in other scams over the past few years. These are people who performed their due diligence, hired attorneys to check their contracts and researched the background of the people with whom they were investing. Yet still, they were cheated out of hundreds of thousands, and in one case, millions of dollars in multiple frauds. How can this be?

I think we should blame the FED.

The FED’s Ponzi Economy–We’re All Speculators Now

A lot of sins flow from over 100 years of inflation. By maintaining a constant inflationary environment, the FED makes it impossible for the average person to follow a lifetime of prudent saving to protect himself from whatever slings and arrows the future may bring. In fact, anyone who saves in this economy is looked at as a hopelessly old fashioned sucker. The FED has forced multiple generations of Americans to become speculators just to stay on the economic treadmill, forget about get ahead. These are people who, by and large, have neither the time, the inclination nor the skills to be speculators.

Moreover, we can blame the FED’s zero interest rate policy that has been forcing investors to reach for yield. Ten years ago, a retiree with $1 million saved could live off the interest at 6% and not be taking on too much risk. Now, that retiree would earn barely enough to buy his daily designer coffee with the interest on that same $1 million. Risk is not adequately rewarded in a ZIRP economy.

The FED’s bailouts have emboldened even small time crooks, like Johnson. When the criminals on Wall Street can get away with – even be rewarded for – their massive frauds perpetrated in broad day light, an atmosphere of general corruption and lawlessness sets in. Witness the MF Global embezzlement, Wachovia money laundering, Libor rigging. Why should the little guy fear the law with his penny ante transgressions?

These FED generated economic conditions have pushed libertarians and free market proponents to thrash around for years desperately searching for how to protect themselves and their wealth. One strategy that has bubbled up time and again is to own foreign real estate, and particularly foreign agricultural real estate. It’s private, no government reporting required, can’t be confiscated by the US government and produces a yield, too. And what could be better than agricultural real estate in the least corrupt country in all of Latin America?

None of this is true. Foreign agricultural real estate isn’t private. There is government reporting in the foreign country that likely goes straight back to DC. Depending on how you own it, there can be other reporting requirements, as well. It can be confiscated by the foreign government. Or a corrupt US judge could force a sale under pain of imprisonment. Or the US government could levy an astronomical tax forcing divestment. Both are equivalent to confiscation. And you’ll be lucky to get a consistent, decent yield on agricultural investments, especially in Latin America, where poaching and theft are the national sports.

As for choosing the least corrupt government in Latin America? Even though the jury is still out on Chile’s reputation as far as GGC investors are concerned we see very hopeful signs. Our civil litigation against Johnson and his Chilean accomplices is proceeding very well. This past week we submitted two criminal charges against Johnson and one criminal charge against two Chileans (see here) and are cautiously optimistic that we will prevail. Our attorney in Chile said that justice may be slow, but it will come.

What is the answer to our FED created economic dilemma? Surely, advice from a sucker like me is the last thing you need. Instead, you might want to follow the advice of a potential GGC investor who was wise enough to sniff out Johnson’s perfidy before losing her life savings. She posted this comment to one of our articles: “Don’t fall for dumbass Ponzi schemes.”

Cathy Cuthbert [send her mail] is a former homeschooling mother, biochemist and MBA who believes in the old saying, “When the going gets tough, the tough get going.” For the past year, she’s been working with a small group of GGC investors on the toughest job she’s ever had: recovering GGC’s libertarian community. Go to their website, GGCRecovery.com for the full story. It’s a wild one and entertaining, even if at our expense. Visit often for breaking news.

[The above is by Galt’s Gulch Chile Buyer Cathy Cuthbert]