Tomato Bubble (Part 1)

[Porsche-O-Phile]

http://www.tomatobubble.com/id39.html

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This is a good explantation to understand economic realities, debt spending, central banking (and its inherent corruption), fiat currency, and a few other interesting topics that we see daily but few ever take the time to truly understand. I intend this to be educational and spawn positive discussion, not promote petty PARFy partisanship (apologies for the alliteration - just having some fun).

Let's keep it at a level above that - please don't PARF this up. I thought it a good read and way of simplifying things.

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My name is Mortimer M. Moneybags III and this is the true story of how I bankrupted and enslaved my hometown of Tomatoville, USA:

THE SETUP

One night, Bill, Frank, John, and Mike came over to my place for a friendly game of poker. My four neighbors are all prosperous tomato farmers. Tomatoes actually serve as the currency of Tomatoville, USA.

Before starting, the five of us agree to each put up 10 tomatoes as our "risk capital." That's a total of 50 tomatoes. (Gross Domestic Product - GDP)

Play begins and we realize that trading tomatoes during our bets is awkward. I suggest that we utilize paper notes to represent our tomatoes instead. Because I hold a degree from Harvard, all agree that I should act as "Central Banker".

We place our tomatoes in the center of the table and I print 50 paper notes with the face of Tomatoville's founder on them (corresponding to the 50 total tomatoes, 10 notes for each player). Each paper note therefore represents 1 tomato....simple. (sound money/hard money/gold standard)

As play resumes, I have an unseen advantage over my guests. At 30 minute intervals, I repeatedly excuse myself for a "bathroom break." (Fed Meetings) During this time, I'm actually sneaking into my bedroom and printing up more 1 tomato notes (fiat money).

The Money Magician creates money out of thin air.

Upon returning, I gradually gamble and inject ever increasing amounts of notes (liquidity) into the game (the economy). By midnight, the original 50 notes has increased to 500 total notes.
After ebbs and flows, the game was remarkably even at midnight. The five of us, who had each started out with just 10 notes apiece, now held 100 notes apiece. As you might expect, due our newly found "wealth", the size of each player's bets increased in direct proportion to the growth in the supply of Tomato Notes. (price inflation).

But the same 50 tomatoes -the true intrinsic value of the game - (GDP) remain in the jackpot.

Because we are getting so "rich" from the game, I propose that instead of ending the game, we leave everything as is and resume play the following month.

"Why don't you fellows spend some of your Tomato Notes, and save some to invest in next month's play. Tell the shopkeepers that each Tomato Note represents one tomato that is still sitting on this table. They'll accept the Notes as if they were actual tomatoes."

"Great idea Mortimer! The paper is so much more convenient to trade than the tomatoes." replied Mike.

All agree to suspend play and resume next month. Before they leave, I announce that I'm cashing in 20 of my 100 notes in order to make tomato sauce the following day.

At the original ratio of 1 note to 1 tomato, my 20 notes trade for 20 tomatoes. I have doubled my original "investment" of 10 tomatoes (profit taking), and still have 80 paper notes with which to resume the game next month. There are now only 30 total tomatoes remaining on the table.

As I expected, my friends have no intention of cashing in any of their "winnings" because the returns from the game are so high. They each hold 100 notes and really believe that their original 10 tomatoes have yielded a 10 to 1 return from playing the game (Bull Market, irrational exuberance).

"Let's go shopping!"

When the players explain to the town merchants that the Tomato Notes represent actual tomatoes that are stored at my house, the merchants gladly accept the notes as if they were actual tomatoes. During the ensuing month, the players spend many of their notes and take out various loans as well.

Bill buys his wife a new sports car by putting down 25 Tomato Notes and taking a loan for the balance. (Detroit prospers.)
Frank takes out a small business loan to open up that restaurant he's always dreamed about (job creation).

John puts down a 50 Note down payment and signs a contract for a new home mortgage (housing boom).

Mike spends 40 of his Tomato Notes and also goes on a credit card shopping spree (consumer confidence).

The local bank manager also trusts that the Tomato Note income of the borrowers represents true wealth, so he honestly believes that he is not engaged in risky lending when he lends out his depositors tomatoes to the successful poker winners. (Sub Prime mortgages, No Money Down Mortgages)

The bank then sells some of the loan notes to The Tomato Street investment houses. Blinded by greed, and ignorant of "the big picture", Tomato Street portfolio managers believe that the debts are solid investments for their clients. (secondary market ,mortgage backed securities)

So not only do the four players believe that they are prospering, but the businessmen that are now selling more goods to the wealthy poker players believe that they are earning more Tomatoes also! They too increase their personal spending and borrowing accordingly. (multiplier effect)

As the new "prosperity" makes its way through the town, the prices of goods and services also begin to rise - exactly like the size of the bets in the poker game had risen, and exactly for the same reason! Everyone thinks they are getting "richer", but their new wealth is artificial and temporary.

Me? I just rub my hands in glee and laugh at how foolish these people are.

The economy of Tomatoville is BOOMING......or so it seems.

THE STING

The Poker players and I meet again at my place and pick up where we left off the month before. The mood is jovial as the players look forward to another round of "earnings". After a few hours of more silent note injection, 1000 notes now circulate evenly among the players (200 each). My guests boast among themselves about all the new toys they have recently charged. They aren't worried about the debts they are incurring because, if necessary, they can always cash in their abundant paper notes for tomatos (equity) and pay everything off free and clear.

John then mentions that he has noticed that the town merchants have increased the prices of their goods and services.

"Have you guys noticed how expensive milk and eggs have gotten lately?" John asks.

"Yes! I noticed that too." said Bill. "And a cup of coffee now costs 2 tomato notes! Why is that Mort?"

Anticipating that this question would arise, I launch into my cleverly planned explanation:

"Well gentlemen, there are three underlying causes behind the price inflation you are seeing at the town stores. First, when the town merchants learned of your new prosperity, they increased their prices because they knew you could now afford to pay more. That's typical capitalist price-gouging."

"Those greedy bastards!" shouted Frank.

I continue:

"Yes. Greed is a main factor. But our shopkeepers aren't the only greedy businessmen. The second reason for this inflation is that the folks over in Oilville have got us over a barrel. They too have increased their oil prices. Because all of the goods we buy have to be shipped by train and truck, the increase in transportation costs gets passed on to you the consumer."

Mike leaps to his feet and angrily declares: "I say we bomb Oilville back to the stone age and just take their damn oil!"

"I don't know about going to war, but we definitely need to develop solar and wind energy here in Tomatoville." adds Frank.

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(Continued...)

[Porsche-O-Phile]

(Part 2, continuation of above):

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"What's the third reason for this inflation?" asks John.

To which I reply:

"The third reason isn't related to greed. It is due to the prosperity of the people over in Potatoville. As Potatoville develops its economy, they grow and sell more potatoes. This increases their own demand for oil. That increased demand pushes oil prices up. Again, because our economy runs on energy, Potatoville's prosperity is contributing to the inflation you are seeing here in Tomatoville."

To my amazement, the men, acting as if they have been enlightened by some deep philosophical discourse, all nod their heads in agreement at the utter nonsense I have just spewed. We then resume the game.

After a few more hours of play, I decide to trade in 20 more paper notes for 20 more tomatoes (insider trading). My friends ridicule me. "Mortimer! Why would you trade in notes for tomatoes when we are all making so much money?" they ask.

"I just want to lock in some of my winnings now. You never know if fortunes may turn." I replied.

I have now "earned" a total of 40 of the original 50 tomatoes from the table, quadrupling my initial investment. Whereas my scam was not obvious before, my victims now clearly see that the true value of the tomato jackpot has diminished (recession, Bear Market). They each started with 10 tomatoes. So how come they hold hundreds of notes when there are only 10 tomatoes left for the four of them to divide?

Bill panics. "I'm trading in!" he declares. He dumps all 200 of his notes and attempts to grab the remaining 10 tomatoes (stock market crash, bank run)."

Not so fast Bill!" declares Frank. "If you get those remaining tomatoes there will be none left for us!"

"Oh my God! Mortimer! How am I going to pay off my debts to the town's merchants? What's happened here?" Mike asks.

My expression turns somber as I reply:

"Damn! I was afraid this might happen. Because we were doing so well, the game "overheated". The Tomato Note fell against the tomato. When that happens, the cost of playing goes up (inflation) and then a contraction occurs (recession). It's a natural cycle."

"So how do we allocate the remaining tomatoes?" John asks.

"Simple." I replied. "It's called currency devaluation. You four each have 200 notes in hand, and I have 160. That's a total of 960 notes in circulation (money supply). There are 10 tomatoes remaining. Divide the 960 notes by the remaining 10 tomatoes and the new cost of a tomato is therefore 96 notes (hyper-inflation). That means that your 200 notes can buy back 2 of the remaining 10 tomatoes for each of you."

The paper Tomato Note currency has lost its purchasing power (inflation, bubble bursting) and my 4 neighbors have each lost 8 of the original 10 tomatoes they had once owned. I walk away with 42 of the original 50 tomatoes. (real wealth)

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There's a lot more good discussion on the web site (no affiliation, just found it interesting).