Brilliant Economics – Mail Forward…

It is the month of August, on the shores of the Black Sea. It is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit.

Suddenly, a rich tourist comes to town. He enters the only hotel, lays a 100 Euro note on the reception counter, and goes to inspect the rooms upstairs in order to choose one. The hotel proprietor takes the 100 Euro note and runs to pay his debt to the butcher.

The butcher takes the 100 Euro note, and runs to pay his debt to the pig grower. The pig grower takes the 100 Euro note, and runs to pay his debt to the supplier of his feed and fuel. The supplier of feed and fuel takes the 100 Euro note and runs to pay his debt to the town’s prostitute that in these hard times, gave her “services” on credit. The hooker runs to the hotel, and pays off her debt with the 100 Euro note to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.

The hotel proprietor then lays the 100 Euro note back on the counter so that the rich tourist will not suspect anything. At that moment, the tourist comes down after inspecting the rooms, and takes his 100 Euro note, after saying that he did not like any of the rooms, and leaves town.

No one earned anything. However, the whole town is now without debt, and looks to the future with a lot of optimism…And that, ladies and gentlemen, is how the United States is doing business today.

Amul Girl & India Politics…

Nice cartoons. Borrowed from MINT. Creatives by DaCunha Agency.

A superb comedy scene from the Tamil Movie Friends…

Hilarious stuff. No matter how many times I see this, just can’t control laughing.

Another explanation of the Financial Crisis that I understand…

Linda is the proprietor of a bar in Cork. In order to increase sales, she decides to allow her loyal customers – most of whom are unemployed alcoholics – to drink now but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans). Word gets around and as a result increasing numbers of customers flood into Linda’s bar. Taking advantage of her customers’ freedom from immediate payment constraints, Linda increases her prices for wine and beer, the most-consumed beverages. Her sales volume increases massively. A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Linda’s borrowing limit. He sees no reason for undue concern since he has the debts of the alcoholics as collateral. At the bank’s corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities are then traded on markets worldwide.

No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items.

One day, although the prices are still climbing, a risk manager (subsequently of course fired due to his negativity) of the bank decides that the time has come to demand payment of the debts incurred by the drinkers at Linda’s bar. However they cannot pay back the debts. Linda can not fulfil her loan obligations and claims bankruptcy. DRINKBOND and ALKBOND drop in price by 95 %. PUKEBOND performs better, stabilizing in price after dropping by 80 %. The suppliers of Linda’s bar, having granted her generous payment due dates and having invested in the securities are faced with a new situation. Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor.

The bank is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties (and vested interests). The funds required for this purpose are obtained by a tax levied on the non-drinkers.

How is an economic bubble created?

One of the best forwards I have ever received – fantastic.

Once there was a little island country. The land of this country was the tiny island itself. The total money in circulation was $ 2 as there were only two pieces of 1 dollar coins circulating around.

1) There were 3 citizens living on this island country. A owned the land. B and C each owned $ 1.

2) B decided to purchase the land from A for $ 1. So, A and C now each own $ 1 while B owned a piece of land that is worth $ 1.

The net asset of the country = $ 3.

3) C thought that since there is only one piece of land in the country and land is non producible asset, its value must definitely go up. So, he borrowed $ 1 from A and together with his own $ 1, he bought the land from B for $ 2.

A has a loan to C of $ 1, so his net asset is $ 1.

B sold his land and got $ 2, so his net asset is $ 2.

C owned the piece of land worth $ 2 but with his $ 1 debt to A, his net asset is $ 1.

The net asset of the country = $ 4.

4) A saw that the land he once owned has risen in value. He regretted selling it. Luckily, he has a $ 1 loan to C. He then borrowed $ 2 from B and and acquired the land back from C for $ 3. The payment is by $ 2 cash (which he borrowed) and cancellation of the $ 1 loan to C. As a result, A now owned a piece of land that is worth $ 3. But since he owed B $ 2, his net asset is $ 1.

B loaned $ 2 to A. So his net asset is $ 2.

C now has the 2 coins. His net asset is also $ 2.

The net asset of the country = $ 5. A bubble is building up.

(5) B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for $ 4. The payment is by borrowing $ 2 from C and cancellation of his $ 2 loan to A.

As a result, A has got his debt cleared and he got the 2 coins. His net asset is $ 2.

B owned a piece of land that is worth $ 4 but since he has a debt of $ 2 with C, his net Asset is $ 2.

C loaned $ 2 to B, so his net asset is $ 2.

The net asset of the country = $ 6. Even though, the country has only one piece of land & $ 2 in circulation.

(6) Everybody has made money and everybody felt happy and prosperous.

(7) One day an evil wind blowed. An evil thought came to C’s mind. ‘Hey,what if the land price stop going up, how could B repay my loan. There is only $ 2 in circulation, I think after all the land that B owns is worth at most $ 1 only.’ A also thought the same.

(8) Nobody wanted to buy land anymore. In the end, A owns the $ 2 coins, his net asset is $ 2. B owed C $ 2 and the land he owned which he thought worth $ 4 is now $ 1. His net asset become $ -1.

C has a loan of $ 2 to B. But it is a bad debt. Although his net asset is still $ 2, his Heart is palpitating.

The net asset of the country = $ 3 again.

Who has stolen the $ 3 from the country ? Of course, before the bubble burst B thought his land worth $ 4. Actually, right before the collapse, the net asset of the country was $ 6 in paper.

(9) B had no choice but to declare bankruptcy. C as to relinquish his $ 2 bad debt to B but in return he acquired the land which is worth $ 1 now. A owns the 2 coins, his net asset is $ 2. B is bankrupt, his net asset is $ 0. B lost everything, C got no choice but end up with a land worth only 1 dollar (C lost one dollar), A gained $ 1 & the net asset of the country = 3 dollar.

There is however a redistribution of wealth. A is the winner, B is the loser, C is lucky that he is spared.

Morals:

(1) When a bubble is building up, the debt of individual in a country to one another is also building up.

(2) This story of the island is a close system whereby there is no other country and hence no foreign debt. The worth of the asset can only be calculated using the island’s own currency. Hence, there is no net loss.

(3) An overdamped system is assumed when the bubble burst, meaning the land’s value did not go down to below 1 dollar.

(4) When the bubble burst, the fellow with cash is the winner. The fellows having the land or extending loan to others are the loser. The asset could shrink or in worst case, they go bankrupt.

(5) If there is another citizen D either holding a dollar or another piece of land but refrain to take part in the game. At the end of the day, he will neither win nor lose. But he will see the value of his money or land go up and down like a see saw.

(6) When the bubble was in the growing phase, everybody made money.

(7) If you are smart and know that you are living in a growing bubble, it is worthwhile to borrow money (like A) and take part in the game. But you must know when you should change everything back to cash.

(8) Instead of land, the above applies to stocks as well.

(9) The actual worth of land or stocks depend largely on psychology.

(10) If the world market values petrol at $ 140 a barrel today and later values it at $ 100 some few months / years later (when electric cars alternate fuel automobiles come into play?) – there is surely some bubble that is going to burst!