The Great Tomato Bubble, an allegory

[SnyderShrugged]

I didnt write this, but it has started spreading among those that are very concerned at recent economic events and a general distrust of Central planning.

THE GREAT TOMATO BUBBLE

I invite Bill, Frank, John, and Mike over to my place for a friendly game of poker. My four buddies are all prosperous tomato farmers. Tomatoes actually serve as the currency in our little town.

Before actual play begins, we agree to each put up 10 tomatoes as our "risk capital." That's a total of 50 tomatoes.

Play begins and we realize that handling and trading tomatoes during our bets is awkward. I suggest to my guests that we utilize paper notes to represent our tomatoes instead. Because I hold an economics degree from Harvard, all agree that I should act as "Central Banker". We all put our tomatoes in the center of the table and I print 50 paper notes (corresponding to the 50 total tomatoes) with my face on them. Each paper note therefore represents 1 tomato....simple!

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

Upon returning to the table, I am able to boldly 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 numerous ebbs and flows, the game was remarkably even at midnight. The five of us, who started out with 10 notes apiece, now had 100 notes apiece! But the same 50 tomatoes (the true intrinsic value of the game) remain untouched in the jackpot.

Because we are all getting so rich from the game, I propose that instead of ending the game, we just leave everything as is and resume play the following month. All agree that this is a great idea and suspend play and call it a night. But before my friends leave, I inform them I'm cashing in 20 of my 100 notes beacause I needed some extra tomatoes for the week.

At the original ratio of 1 note to 1 tomato, my 20 notes trades for 20 tomatos. I doubled my original "investment" of 10 tomatoes, and I still have 80 paper notes with which to resume the game again next month.

As expected, my friends have no interest in cashing in any of their "winnings" because the returns from the game are so high. They all still think that their original 10 tomotoes have yielded a 10 to 1 return from playing the game.

During the ensuing month, Bill buys his wife an expensive new sports car on credit. Frank takes out a small business loan to open up that restaurant he's always dreamed about. John signs a contract for a new home. Mike goes on a credit card shopping spree.

The local bank manager believes that the tomato notes represent true wealth, so he honestly believes that he is not engaged in risky lending when he lends out the bank's tomatoes to the poker winners. Me? I just rub my hands in glee and laugh at how stupid these guys are.

We meet again at my place and pick up right where we left off. After a few hours, there are 1000 notes circulating almost evenly among the players (200 each). My friends 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 some of their abundant paper notes for tomatos (equity) and pay everything off free and clear.

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

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

By now, I have "earned" a total of 40 of the original 50 tomatoes from the table, quadrupling my wealth. Wheras my little scam was not readily apparent before, my friends can now clearly see that the true value of the tomatoes (housing market, stock market) has diminished. They each came with 10 tomatoes. So how can they now hold hundreds of notes when there are only 10 tomatoes left for the four of them?

Bill panics. "I'm trading in!" he declares. He dumps all 200 of his notes and grabs the remaining 10 tomatoes. He ends up even.

Frank, John, and Mike are left with 200 notes each, but there are no tomatoes left to trade back in for. The paper tomato note currency is now worthless and they have lost their entire original 10 tomato investment.

But the real problem is that the four suckers, believing that they were "wealthy", had charged up a lifestyle that they can no longer sustain.

That new car Bill bought for his wife? Can you say "Repo Man?"

Franks new restaurant? The chefs and some waiters will have to be laid off.

Mike's credit card bills? Soon to be delinquent and destroying his credit rating.

John's new home? Foreclosure, followed by divorce.

My bewildered and frightened friends don't understand how this could have happened. Because I have accumulated so much wealth, they look to me for answers.

I explain to them that we are in a liquidity crisis:

"This is all part of the natural business cycle. Sure, you guys may have suffered a short term loss, but in the long term we all come out in due time and the markets regain their value. You all saw how much wealth you had earned. If you get out of the game you'll be locking in your losses. The market has hit bottom. Truth be told, you guys helped create this mess yourselves with your reckless consumer borrowing, and the local bank should have known better than to lend so carelessly. This is the problem with free market capitalism sometimes."

"Don't worry, the Mayor and I will institute more regulation (control) over private enterprise and we will create a social safety net in order to protect you from the downturns of future naturally occuring business cycles. Free health care! Free education! Liberty! Equality! Fraternity! Change we can believe in! Hope! Yes we can! Workers unite! You have nothing to lose but the chains which bind you!"

"As far as the poker markets go, now is the time to play even more aggressively. Trust me guys, I went to Harvard. We'll meet again next month. In the meantime, work your butts off and save up 10 more tomatoes to bring to next month's game. I'll print up some more notes so we can have liquidity and that will induce the banks to loosen up tomato credit once again. If necesssary, I'll even act as the lender of last resort and lend some more tomato notes to the local Bank and Mayor's office (at interest of course) We will recover. I promise. So go out and keep shopping. We have nothing to fear but fear itself!"

My friends leave my place full of hope and grateful that a financial "expert" and inspirational leader like me is in charge of the recovery plan. Incredibly, they actually believe that it was free enterprise and limited government (the actual pillars of their original prosperity), that caused their poverty! Instead of seeing my montary schemes as their problem, they view me as their savior! Damn this is so much fun!

Now my ancestors and I have been running this tomato bubble scam for centuries. During my perioid of wealth accumulation, I've managed to buy up the local newspaper. My "philanthropic endowments" to the local college ensure that my version of poker economics is taught to the students. So, when my friends read the local paper, or hear the local professor speak on TV, their false beliefs are reinforced and they all come to trust me completely.

All except for John that is. He is the critical thinker of the bunch and he figures out the tomato bubble scam. John embarks upon a one man Internet crusade to expose my game. Through my agents and dupes in the press, I manage to convince my friends that John is "paranoid", and an "extremist" who is a mentally unstable "conspiracy theorist". My impoverished friends defend my intellect and character vigorously and disassociate themselves from John completely. Eventually, John becomes a Ron Paul supporter.

I'm keeping my eye on John. I'm content to let him rant for now. But if my friends begin to listen to him, I'm not worried. I financed the "conservative" mayor's election campaign (as well as that of his "liberal" opponent's) so the local cops are at my disposal.

Not only is the town deep in tomato note debt in to me (the "safety net" that my monetary schemes necessitated are very expensive!) but I've got so much dirt on the mayor that if dares to bust up my poker parties and take my printer away, my newspaper contacts will ruin him.

Let's keep playing!

[Hubbs]

I'm a bit vague on the sticking point here - I was under the impression that dollars don't have a direct equivalent in terms of gold (or anything else). How could anyone, from a local banker to someone at the Fed, pull off the switcheroo that's described here?

[SnyderShrugged]

I'm a bit vague on the sticking point here - I was under the impression that dollars don't have a direct equivalent in terms of gold (or anything else). How could anyone, from a local banker to someone at the Fed, pull off the switcheroo that's described here?

The Fed DID pull off the switcheroo, it was just over a longer period of time and long ago.

[Hubbs]

So 99% of the bankers, economists, investors, CEOs, and other financial geniuses out there haven't noticed this going on for decades? An overwhelming majority of the smartest economic minds in America have just been oblivious?

[Predicto]

So 99% of the bankers, economists, investors, CEOs, and other financial geniuses out there haven't noticed this going on for decades? An overwhelming majority of the smartest economic minds in America have just been oblivious?

Yep. It's all a big trick. Every econ Phd is sworn to secrecy that he will never admit that the entire economy is just a house of cards. Only the truthiness of internetz bloggers can save us from their deceit.

We need to return to Mercantilism, ASAP.

[dfitzo53]

Gotta love the Ron Paul mention out of nowhere too.

[The Sisko]

I'm a bit vague on the sticking point here - I was under the impression that dollars don't have a direct equivalent in terms of gold (or anything else). How could anyone, from a local banker to someone at the Fed, pull off the switcheroo that's described here?

That's just one of the fatal flaws in this story. Silver/gold certificates which could be exchanged for an equivalent amount of gold or silver were discontinued when Nixon took us off the gold standard IIRC. Therefore everyone is stuck with their "tomato" notes and can't cash them in. Furthermore, SS fails to explain how going back to the gold standard would prevent consumers from overspending with credit, how it would have prevented one of the big causes of the current crash, i.e. investment banks securitizing/overleveraging mortgages and hedging their bets with worthless CDOs.

It was a mildly entertaining story though.

[DjTj]

Gotta love the Ron Paul mention out of nowhere too.

It makes sense because pizzas support Ron Paul.

[SnyderShrugged]

That's just one of the fatal flaws in this story. Silver/gold certificates which could be exchanged for an equivalent amount of gold or silver were discontinued when Nixon took us off the gold standard IIRC. Therefore everyone is stuck with their "tomato" notes and can't cash them in. Furthermore, SS fails to explain how going back to the gold standard would prevent consumers from overspending with credit, how it would have prevented one of the big causes of the current crash, i.e. investment banks securitizing/overleveraging mortgages and hedging their bets with worthless CDOs.

It was a mildly entertaining story though.

SS failed to explain it because SS doesnt believe that a gold standard is the right way to go at this stage. SS believes that legalizing a competeing currency that is backed by something of real value would allow the market to decide what is strongest and best for the people to use. :2cents:

[SnyderShrugged]

So 99% of the bankers, economists, investors, CEOs, and other financial geniuses out there haven't noticed this going on for decades? An overwhelming majority of the smartest economic minds in America have just been oblivious?

who said that they havent noticed? The power lies with the Fed, and many people take what Fed economists say as gospel, and look where we ended up.