Friday, September 26, 2008

Squirrel Economics 101

Imagine a group of squirrels saving nuts for winter and depositing them in a bank (one nut one credit in their account). Let’s imagine that a truck pulls up and helps themselves to 80 percent of the nuts. The bank now has a problem. It can’t cover all of the deposits. But notice, if there isn’t a run on the bank, there is no real problem. Squirrels are depositing and withdrawing nuts with no problem.

In this little example even if there was some form of bank insurance, what ever it was, it could not replace the nuts (their winter food supply). The amount left for all of the squirrels is pretty much set to the 20% remaining plus net deposits made until winter. In this case, there is no inflation (you cannot print the squirrels food supply). The squirrel has no idea of the life or death consequences of what the bank has done until winter arrives (retirement).

The real estate market is the truck that pulled up to our personal savings and looted the bank. In this case, we have government insurance to “make us whole again.” The money taken was spent. Notice that every dollar deposited had to be worked for (a squirrel nut).

Labor created some product. By not consuming this nut and saving it, you were putting this towards retirement consumption. The money from the boom (real estate loans) was spent on many lavish toys and is forever gone. Now we have financial institutions with only 20% of capital left. In actuality, there is only 20% of product produced left (the nuts). The rest has been consumed. It is rather academic whether or not the government prints more money to make us w(hole) again.

We have a choice, leave the banks with the 20% which will buy the 20% of produced product left or we print enough money to restore everyone’s bank balance.

I am sure this little analogy could get me shot again or could be picked apart easily. I present it as an illustration of how money relieves us from the bother of having to barter for services and goods. Once you accept the convenience of money vs bartering, the concept of just printing it, is the equivalent to stealing.

So if you are a squirrel, “It’s grab your NUTS and RUN!

Copyright 2008 All rights reserved



I've been airing something similar today. Maybe we need a plan to get the moneylenders out of housing altogether, in gradual stages.

frakrak said...

Jim thank you for your blog and your concise and insightful opinions! I am imagining most of your readers (like me) are looking for a way of making sense of what is happening in their world, through a little old fashioned logic and clarity. I have read with interest the opinions posted here in the past months. I have picked up from some ones comment that 75% of this “toxic debt” was sold world wide over the past recent years, to spread the liability? If this is factual then I would suggest the rats were jumping ship back then with the ship wreck just moments ahead. The point is, it isn’t happening now, it happened way back when …. Your bailout appears to be an attempt by your government to get you into the proctologists’ waiting room with a lot sick a**holes (Wall Street)! Wait for them to be treated, then to be told to pickup their tab!! I can imagine your indignation!! America, get ready to bend over and pickup the soap your regulators dropped!!

Jim in San Marcos said...

Hi Sack

I think its too late. The game is over. How long it takes to pick up the pieces is another story.

Its the retirees that get the shaft on this one.

Jim in San Marcos said...

Hi Frakrak

I'm glad you like it.

The odd thing I can't figure. It can't get much worse if we do nothing. But throwing printed money after it doesn't cure the real problem. The debt will not be paid in actual produced goods.

you can print a million dollars, you cannot print a million bushels of wheat. There is a difference.

As for making sense of what is happening, it's hard to tell what the government will do next to "save us."

Thank you for your comments

Anonymous said...

Bottom line, the President of the U.S., the Treasury Secratary and Federal Reserve Chairman do not appear before committees or make speeches to the nation unless there is one (or many) real BIG problem(s) out there. I do not think this is soley designed to bail out "Wall Street".

Lisa said...

wonderful blog as always! Thanks for taking it easy on us.

Jim in San Marcos said...

Hi Anon 9:36

You are right the problems are very big. Government cannot solve this mess. There is nothing wrong with trying something that hasn't been done before.

Our government says they still have money (they still have a full book of blank checks).

Too many more big checks and this government could print itself out of existance.

Thank you for your comments

Jim in San Marcos said...

Hi Lisa

Thank you, glad you like it

Anonymous said...

Quote: "Bottom line, the President of the U.S., the Treasury Secratary and Federal Reserve Chairman do not appear before committees or make speeches to the nation unless there is one (or many) real BIG problem(s) out there."

Actually, yes they do. Remember the runup to Iraq? Same thing, except we had Powell addressing the UN instead of Paulson addressing Congress.

Hank Paulson has several hundred million dollars in deferred income riding on the health of Goldman Sachs. If I were Hank, I'd say the sky was falling too... just until January when I could collect my mega-super-giganto payout from Goldman Sachs. Rudy Guiliani's firm is already lining up clients to profit from this bailout; the amount of embezzlement and grift we are about to witness will be staggering; with taxpayers left holding the bag.

It is Dubya's swan song (and I usually vote GOP).

Jim in San Marcos said...

Hi Anon 10:04

Not to take a political side here, but I think that Republicans in general have more to lose than most Democrats. You tend to lean towards being Republican if you have money.

It's beginning to look as if, the richer you are, the greater your impending loss.

When you say, "The taxpayer gets stuck holding the bag," I have to suggest one question. The top 20 percent pay 80 percent of the taxes. Who gets to pay taxes after the top 20 percent (the group that has money) goes broke?

If you give it some thought, we all get to pay for this mess it's called inflation.

Anonymous said...

Forgive me for the lack of financial knowledge and for asking what might be a trivial question.

I have a savings account in HSBC and the amount is less than $100,000 (The FDIC insurance limit). Should I worry about the safety of this money and withdraw it immediately?

I know my HSBC account is FDIC insured. But with the latest economic scenario, I am not sure if FDIC (or the government) has enough money to cover it. Please advice a non-financial person as to what to do?

Should I withdraw all the money? If yes, what should I do with the money withdrawn? Just keep it in my home or is there a better option?

an international student studying in USA!

Jim in San Marcos said...

Hi Anon 11:27

Your money is safe in the bank.

Our discussion was on whether or not to use the dollars to wall paper the upstairs bathroom or the kitchen pantry.

You can't depend on others for investment advice. It's kind of like letting you neighbor play poker with your money.

Our government is changing the rules daily. The real question is: "What will your dollars buy in 5 years."

I don't really have an answer for you, other than to diversify your investments. Best of luck to you in whatever you decide.

Anonymous said...

Thanks for your reply. I am not worried about investing (I do not have that much money!) right now. I am more worried about its safety and being able to pay my next tuition bill!

Anonymous said...

Maybe we should trade our FRN's for an old English "tally stick", seemed to have worked for centuries till a "mo better system" took it's place.

Anonymous said...

That squirrel picture is pretty funny.

Anonymous said...

That squirrel pic is really funny
Catholic girl

Jim in San Marcos said...

Hi Catholic Girl and Anon 0:02

My son downloaded that squirrel as a windows background a couple of months ago. So I've been looking at if for a while.

Bernanke and his reference to having a bazooka and the squirrel analogy kind of all went together for a good laugh.

Glad you liked it, I hope the creator of that cute picture forgives me for the added remark