A Fable

In my previous post I talked about what happens when an economy takes money from the consumer and concentrates it in the hands of those at the top of the economic spectrum.

Simple math--you can't run a consumer economy when consumers have no money to spend.

I also talked about the flaws within a system which relies on growth based on speculative investment with no inherent value other than its market worth. (Can we say "junk bonds", "hedge fund", "derivatives"?)

Pick your decade of the last several. There was a financial instrument in that decade driving the market that crashed and burned. The tech bubble saw 100 fold increases in stock prices for companies that had not yet put a product on the market. Hhmm.

You don't need to understand what these financial instruments were. You do need to know that if you had a 401k that you probably had your money invested in them. Or at least you need to know that when they collapse they bring the rest of the market (and your 401k) down with them.

So think twice before you jump on an offer that looks too good to be true. Maybe it is. As I said recessions represent a cyclical transfer of wealth from those who earn it (you and me) to those who accumulate it (the oh, so precious few).

I felt stupid in the 80's when my friends were scoring big in stocks while I stuck to bonds. Then not so stupid in the 90's and 00's when my friends lost big chunks of their life savings in a series of market crashes. Now they think I am a genius to have barely lost a cent in all of those years. I wouldn't come to that conclusion but here's a fable for those that think they are too stupid to understand economics:

A peasant saves the life of a king in what could have been a horrible accident. In gratitude the king offers to give the peasant his golden carriage.

The peasant says, "I cannot afford to keep a horse so I have no need for your carriage your highness."

The king offers him 1000 acres of fertile farmland. The peasant says that he can barely maintain the small plot that he already works and has no need for more land.

The king makes several more offers of extravagant gifts. The peasant turns down all of them.

Finally the king, in exasperation, cries, "Well, you have saved my life, I feel I owe you something. What would you like?".

The peasant thinks it over for a moment. He asks the king if he has a chess board.

The king says, "Yes."

"I would like you to put a penny on the first square on the first day of next week. On the second day, double that amount on the next square. On the third day double that amount on the third square and so on until all the squares on the chess board have been used."

The king is confounded. "Are you sure that is all you want? I have many riches."

The peasant says, humbly, "No, I was pleased to have simply saved your life, but since you insist, this is all I ask."

The king shook his head and finally agreed.

The king put on penny of the first square on the first day, two pennies on the second day, four on the third, eight on the fourth and so on. By the end of the month he was forced to sell his team of horses. By the end of the chessboard wager he had surrendered all of his land and riches.

The peasant of course lived on a tight budget and understood simple mathematics. The king, may it be said, had so much wealth that he had rather lost sight of obvious economic principles.

According to the fable, that peasant lived a comfortable life, gave away much of his money, offered the king respectable work and people in the village were content for many, many years.

This fable illustrates the logical fallacy in chain letters that involve solicitations of money. If you do the math you run up to a very high number very quickly and the whole scheme becomes unsustainable.

In the economics world there is a financial device called a "Ponzi scheme" which has a similar rationale that goes against the logic of math. Ponzi schemes been ruled illegal (http://en.wikipedia.org/wiki/Ponzi_scheme) but the principle is not all that different, in my humble opinion, from our current mostly legal, if not logical, economy.

And Obama is having a heck of a time making some of the highly questionable practices that got us into the current mess illegal. Of course he can't even change the wall paper in the White House without being attacked by the people who benefit by keeping things they way they are.

There are many lessons in the fable. One of them is: Don't underestimate a peasant. Another is: Do your math.

Another is: Read Working Class Weekly for other valuable lessons in Blue Collar Economics.