Monday, August 01, 2011

A Bailout Fairy Tale from 2008

I usually do not burden you with articles about economics, except in
the case of cyber-pen-pals suffering from sleep disorders.

But what with the collapse of "Obamanomics" or Obama stimulus policy,
the extremely high American unemployment rate, the poor performance of
the US economy in spite of multi-trillions in federal expenditures on
"stimulus," the debt limit crisis in the US this week, and the rest of
the mess, I really could not resist sending out one posting to say I
TOLD YOU SO. Ok, it is not my usual cyber-fare here.

But I thought you might find it amusing that in the midst of the world
enthusiasm over the Obama "rescue plan" in 2008 and near unanimous
applause for Obama in the early stages of the world financial crisis,
I published this item to explain why the Obama "stimulus" would not
work at all.


Dec. 19, 2008

A Bailout Fairy Tale

Posted By Steven Plaut On December 19, 2008 @ 12:06 am In
Culture,Entertainment,Humor & Fun,Lifestyle,Money,Politics | 14

Once upon a time there was a tropical island in the South Pacific in
which the natives polished nice shiny marbles made out of the exotic
pebbles that sometimes washed up on their shores. In the evenings the
tribesfolk would gather around a bonfire and exchange tales and songs.
Sometimes they would also exchange the pretty marbles among

One day a whaling ship was blown off course and anchored in the lagoon
of the island. The captain decided to investigate the island
civilization. It was discovered that the islanders were all enormously
happy and satisfied with their lives, largely because they were so
wealthy. "Every single one of us is richer than even the richest
whaling captain in your lands," they explained. "You see, each of
these shining marbles is worth 100,000 gold nuggets in our economy. We
trade them actively among ourselves. Any of us can convert a single
marble into cash or real assets at that rate any time we want."

Sure enough, the going rate for domestic trading in the shining
marbles was 100,000 gold nuggets each! The marbles could be used to
purchase huts, fields, canoes, harpoons, or anything else. "A paradise
on earth," observed the captain in his log.

Two years later, the same whaling ship with the same captain made a
stop at the same island to take on provisions. But this time the
atmosphere there was different. "We are all so depressed," explained
the tribesfolk. "Our entire economy has been collapsing for many
months. The pretty shiny marbles that were worth 100,000 gold nuggets
two years ago have been dropping in value. They are now trading in our
local marble exchange for a mere 5000 nuggets each."

Sure enough, the marbles could still be used to purchase mangos, huts,
and wives, but at a far less favorable rate of conversion.

"I am a little confused," said the whaling captain. "Help me to
understand. The marbles are trading at a lower conversion value, but
what has happened to the total number of marbles in the possession of
the residents of the island?"

"Oh, that has not decreased," answered the tribal witch doctor. "In
fact we have a bit more of them than we had when you were last here,
thanks to some new coral pebbles being washed up onto the beaches."

"Ok, so what about the fields and the huts and the canoes?" asked the captain.

"They are all still intact. We have at least the same number of each
sort of real asset as we had the last time you anchored here. We have
even more marbles and gold nuggets than before."

"But then you are not really any worse off than you were back then,"
observed the captain.

"You are forgetting about the value of our marbles," sighed the tribal
chief. "Our tribesfolk are unwilling to accept marbles in exchange
for real goods at a rate of conversion any more than 5% of the old

"Yes, but that is because the islanders living here have subjectively
re-evaluated the pretty marbles and assigned to them a new lower
trading value." The captain added: "The current value is no less
authentic than the previous high value we observed when we were last
requisitioning things here two years ago."

"But you misjudge the mood of our islanders," objected the chief.
"Because of the massive losses in their wealth from the drop in marble
prices, we are observing family breakups, increasing drunkenness and
consumption of rum, outbreaks of shingles, and a few people even
jumping to their demise out of coconut trees."

"That is sad," observed the whaler's first mate, "but something here
is still wrong. Nothing in the real sector of island life has changed.
You have as much food, housing, and clothing as you had last time we
were here, more in fact. So why are the islanders convinced they have
been impoverished?"

The crew of the whaling ship scratched their heads in wonder. They
decided to extend their stay on the island to investigate what was

Meanwhile, the tribal witch doctor came up with a new plan. "We have
got to rescue the islanders and save our standard of living," he
insisted, in between partaking of traditional dances around the
bonfire. "Here is what I suggest. Let us restore the value of pretty
shiny marbles at close to their previous exchange value. We will
collect all the gold nuggets and half the fields from our tribesfolk
and we will then use these to buy up pretty marbles from our islanders
at the conversion rate of 90,000 gold nuggets per marble. This will
restore the wealth of our people to close to the levels that they
enjoyed before the collapse in marble prices. We will restore their
confidence in our leadership and in the economy."

When the rescue plan was announced, cries of joy came from the huts of
the fishermen and the farmers. "At last our chiefs are taking real
action to rescue us! Our wealth is now safe!"

But the whaling captain was still skeptical. "All you are doing is
inflating the conversion value of the marbles," he objected. "But
there is no new real wealth being added to your island. You do not
have any more fields, huts, or pineapples than you did before."

"Not only that," chimed in the first mate, "but what you are really
doing is taking gold nuggets and fields away from the islanders, to be
used to buy marbles back from those same islanders. When you are
done, the islanders as a group will have the same number of gold
nuggets and fields as they did before your rescue plan. In fact, the
island will also have the same number of shiny marbles. At most, you
are redistributing marbles, nuggets, fields, and spears among your

At that point the whaling shift lifted anchor. But a year later it
did return to the island for one last visit before whaling was
outlawed by the world council. This time, things really had changed
on the island. Over the past year, the islanders had finally figured
out that it was they who were being required to supply the resources
to be used to rescue the value of the marbles and to finance those
repurchases from themselves at the higher marble conversion rates.

Because of the massive requisition of nuggets and fields needed to
finance the rescue plan, many of the farmers and fishermen had decided
to stay home sipping tropical juices rather than produce. After all,
the taxes they were forced to pay to finance the rescue plan convinced
many that effort and labor were not worthwhile. Others decided to take
early retirement. "After all," explained one ex-fisherman, "the
government has promised to keep the value of our marbles high." In
other cases, tribesmen concluded that diving for reef fish and other
dangerous activities no longer paid enough after taxes to make them
worthwhile. Still others stopped sweating in the plantain fields
because they figured the tribal chiefs would take care of them and
make sure they had enough purchasing power as retirees. After all,
just think of all those valuable marbles the chiefs had bought up and
were holding, which could be used to support those who stopped

Overall, food production was down, the fleet of fishing canoes had
decreased sharply, and huts were being allowed to deteriorate. Social
cohesion was being undercut, as fewer islanders had enough real assets
to purchase brides, and the fertility rate had decreased.

"Now what will you do?" asked the whaling captain. "Simple," replied
the island chief. "We will increase the tax rates on our islanders so
that we will have more resources to expand the rescue plan and so we
will help the economy to an even greater extent."

As the whaling ship lifted anchor and sailed off into the sunset, the
captain made an entry into his log that read, "The islanders have lost
their marbles."


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