Saturday, September 26, 2009

Squirrel Economics 101

The following article may look familiar to some of you, it is a reprint from exactly one year ago today. I thought it worth repeating for those that missed it.

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!"


ca said...

At this point, the question is "run where."

Jim in San Marcos said...

Hi Ca

To the squirrel, withdrawing his food supply means survival through the winter.

The bank in this example only has food to feed 20 percent of the squirrels through the winter.

The nuts represent product produced and still available for consumption. It matters little that you might have 100 squirrel nut certificates, if only 5 nuts are available. You won't make it through the winter.

Right now a walk down a supermarket isle is sticker shock. Prices have doubled, but I guess that stuff isn't included in the CPI anymore.

Look at the squirrel as a future retiree, the bank as our government and winter as a time when we are too old to work.

We need to be able to convert our cash certificates to tangible products in the not too distant future, before government printing makes them worthless.