The following is quoted from a paper by Chris Jarvis, Senior Economist at the IMF. Written 2000.
" The Dynamics of a Pyramid Scheme
Pyramid schemes work on the principle that money paid in by later investors is used to pay artificially high returns to earlier investors. There are typically four stages in the life cycle of a pyramid scheme.
1) Early investors are drawn in by advertising promising high interest rates or huge capital gains after a short period. Most schemes have a gimmick, often based on some real or imagined market inefficiency or loophole in the law.
2) News of the high returns spreads by word of mouth or advertising, and more people invest. Their payments are used to pay interest and, if necessary, principal to the early investors. More often, though, the early investors will reinvest their principal, and sometimes their interest in the hope of still higher gains. Most people, however, remain skeptical.
3) With a reputation for solvency based on a good payments record, which overrides doubts about the feasibility of the scheme, many more investors come into the scheme. Some remain skeptical but invest anyway, believing that they can make a quick profit and then get out before the scheme runs into trouble. For a time, the scheme appears successful.
4) The final stage is the collapse of the scheme. The interest and principal due to the old investors exceeds the money that the scheme is able to attract from new investors. As soon as payments are interrupted, confidence in the scheme evaporates. The investors rush to get their money out, but there is little to be had. What has not been paid to the early investors in interests has usually been used to buy highly visible but often not very valuable assets to make the scheme look prosperous, or has been stolen outright by the operators. "
End of quote.
My observation in Haïti is that we are somewhere between stages 2 and 3. The rise in interest rates offered, some "coops" are already advertising 14% per month up from 10 and 12%, is a proof that they already have trouble attracting new investors.
The coops are buying flashy busses to put in public transportation, and we know that these are not very lucrative operations. They are buying food markets, very visible but thin margin assets. They just spent a huge amount of money in the carnival paying for bands and floats and stands along the carnival road.
Anybody with any good sense should stay away from those schemes. The collapse is coming. I will not venture to say when but it sure is coming.