Friday, June 25, 2010

The 1078 little pigs

Once upon a time, two little pigs each won $10,000 in a lottery. The first little pig said "I'm going to do the safe thing and buy gold." He put the gold in a safety deposit box in the piggy bank and would occasionally go look at its brightness and enjoy its smooth cool weight. The second little pig said "I'm going to do the safe thing and put the money in a long-term certificate of deposit at the piggy bank."

The gold was indeed safe. It sat safely and quietly in the safety deposit box. No one knew it was there except the first little pig.

The second little pig's money in the piggy bank stayed there for a month, then a third little pig, the piggy bank manager, loaned $8000 to a fourth little pig to buy a brick house. He was a very careful manager and would not approve a mortgage on a straw house (unlike some pigs). It took another month for the loan to close, after which $6000 went to piggy bank #2 that had the old mortgage on the house, which was controlled by a fifth little pig. The remaining $2000 went to a sixth little pig who had sold the house.

The sixth little pig let his money sit in his checking account at the piggy bank for a month, and then decided buy stock in a piggy company. He bought stock from a seventh little pig through a broker (pig #8). A month later, the seventh little pig used the $1980 from the stock sale as downpayment on a new car from the piggy auto dealer (pig #9). The broker who arranged the stock sale (pig #8) used his $20 commission to buy beer from the piggy bar (pig #10). Piggy auto dealer paid his employees (piggies #11, through #15) and the auto manufacturer and his employees (piggies #16 through #1015)

Meanwhile, piggy #5 (the manager of piggy bank #2 that got the $6000 when the house sale closed) used $4500 of that money to help finance a little piggy #1016 who was starting a new company. This entrepreneur piggy used the money to pay piggies #1017 through #1029 who were building piggy widgets to sell. These piggies used their pay to buy groceries, drink beer, and go to football games - contributing to the paycheck of piggies #1030 through #1054.

And then the economy started to look bad. The second little pig decided that his $10,000 wasn't safe in the bank, so he paid the penalty for early withdrawal and bought gold, just like the first little pig. The sixth pig sold his stock at a loss and also put the remaining money into gold (broker piggy again went to the bar with his $20 commission). Piggy #3, who managed the piggy bank, was worried about declining deposits and the collapsing stock market so he decided to cut back on loans.

Entrepreneur piggy's company was hit hard by the downturn, and he needed a bridge loan to keep needed money to buy materials for his company, but the piggy bank turned him down. Entrepreneur piggy had to fire his workers (piggies #1017 through #1029) and close the company.

Piggy #7 defaulted on his car loan and piggy #9 repossessed the car. Because of losses on the repossessed car and reduced car sales, piggy #9 laid off piggies #14 and #15. The auto manufacturer put piggies #20 through #1015 on reduced hours (but made sure that executive piggies #16 through #19 still got their year-end bonus).

Then little piggy #1055 (an economist) said, "Since banks aren't loaning money and companies are laying off workers, the government should stimulate the economy. We need to get the economy moving so that piggies sitting on gold are comfortable investing, piggy workers are working, and piggy companies are hiring. This will bring more useful money into the economy in the long run." This sounded like a good idea to the piggies who were out of work.

Then piggy #1 (who owned gold) said,"But if the government borrows money to stimulate the economy, we'll have to pay it back someday out of higher taxes." This sounded like sage wisdom to the other piggies that owned gold (piggies #2 and #1056 through #1078).

Economist piggy #1055 tried to explain how the money supply works and how the speed of money as it moves through the hands of many piggies has more economic power than the same money locked up as gold in a bank safety deposit box. He had charts and tables, powerpoint graphs, and elegant mathematical models. He very carefully explained that when a dollar passes through the hands of 10 or 12 piggies in a year, then the piggy government gets more in taxes than if the dollar is gold in a vault. He warned that if everyone stops loaning and spending money the economy contracts, which becomes even more reason to stop loaning and spending money in a viscous feedback cycle. He argued that "You have to spend money to make money" is also sage wisdom.

The golden piggies were unconvinced. They were bored by economist piggy's wonkish talk and his mathematical models of the economy. They were sure that government finances work exactly like a piggy's personal budget - just because that is the way it should be and it made sense to them. If a piggy has to tighten his belt, then so should all piggy companies, piggy banks, and the piggy government. The golden piggies could not explain how the economy recovers from a depression cycle, but they were absolutely sure they were right. They knew there couldn't be anything in the world that was more complicated than their budgeting wisdom. Indeed, they were so sure that they were willing to bet the future of all the unemployed piggies.

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