The Economics of the World Apartments
by Gregory Wyche
Originally posted Oct 26 2010
Why pretending to have money is a bad idea…
IMAGINE AN APARTMENT BUILDING REPRESENTING THE WORLD, and imagine different countries residing in the building, each within their own apartment. Each of the tenants in the building own and produce various things. Imagine then, a long time ago the tenants began trading with each other to obtain things they didn’t have. A few of the tenants were lucky enough to have gold mines. It turned out gold was something everyone in the building liked. As time went by each apartment ended up owning some gold as they traded goods with the tenants that had mines. Gold was rare, ever- lasting and considered beautiful. It was worn by both men and women and used to symbolize intimate relationships.
An agreement was made that rather than having to exchange one good for another (which was cumbersome and inefficient) the building would use gold for medium of trade. This caused gold to become currency. Some apartments had used salt as currency as it was once very rare. Later salt was discovered almost everywhere which caused it to lose its rarity (and so devalued) and it was no longer suitable as currency.
Thousands of years went by and some of the tenants decided to use paper notes that would represent the gold they owned. Soon each tenant used their home printers to make notes and paper money was born. This made trade easier since gold was heavy and hard to carry from one floor to next; after all, the building had not yet installed elevators. The ability to exchange paper money for gold created trust between neighbors and trade increased. After a while the tenants of the world apartments enjoyed a wide variety of goods they purchased from each other with notes back by gold.
From time to time tenants disagreed with each other. If the disagreements were serious games (war) were played to resolve them. The winning apartment received a prize from the looser. Games were expensive to play so many tenants began to avoid them. In the 1960’s two tenants (USSR and USA) played a very expensive game in Southeast Asia’s apartment. The game dragged on and in 1971 some tenants worried about the value of the US money.
They went to the US apartment and demanded their notes be exchanged for gold. The US gold reserves were insufficient and it decided not to honor its exchange and defaulted on its promise. The US told the other tenants to keep using dollars as money because they said it was money. This didn’t make sense to the other tenants but they quickly realized they could do this as well and fiat currencies (paper backed by nothing) were born.
The US also told its neighbors that gold was so 2000 BC and not hip anymore. Fiat money was the latest trend and if they didn’t want to be considered relics of the past they better get with the program and print their own. The game in Southeast Asia ended in a draw with no clear winner and no prizes awarded. The dollar became very common, a little like what happened to salt, and was more and more devalued. The game proved especially expensive to the USSR causing it to fall apart and became a number of smaller countries. Southeast Asia’s apartment was trashed by the long game and it took years to clean up the mess.
Two of the tenants, Argentina and Zimbabwe decided to use printed money to pay all their debts. They printed truck loads of money. This caused the value of their notes to be worth less then salt. The other tenants refused to accept their money forcing them to trade whatever else they owned just to eat. This upset all the tenants because they started to realize that none of the fiat paper money had anything behind it. Still they loved the ability to print money not realizing that their money was looking more and more like salt. In some ways salt was turning out to be more valuable then fiat money as it had hundreds uses and was even consumed in food. Alas, no one wanted to eat fiat money. People continued to wear gold but printed money was never worn.
In 2010 the American apartment was in a very difficult position. It continued to print money to play games, this time, in Middle Eastern apartments. Just like in Southeast Asia the US was having trouble finishing the game. It totally trashed two apartments to the horror of the other tenants. It also stopped making most of the things it use to sell and trade. As a result it had huge trade debts and was printing more and more money to pay for them. The act of printing money to pay for debt didn’t make sense to the rest of the building and they grew fearful that the US would never pay them back.
One of the largest tenants, China, had lent the US a lot of money in addition to giving it many goods in exchange for American dollars. It had done this because like some other apartments it had a huge crush on the US and believed almost anything it said about money and trade. This crush blinded China to reality. Suddenly one day China lost its crush and was appalled by the truth. It didn’t want any more American dollars and started to sell them for other things. China had very little gold and along with India and other countries decided to buy more which caused the price to go up. China tried to be quiet about this for fear more apartments would do the same and dump dollars resulting in a greater loss of value in the ones they still owned.
The US on the other hand continued to print money and the dollar continued to lose value. China faced a big write-off and had to decide when to take it.
In the end the devaluation of the dollar continued to spark concern about all of the fiat currencies. Gold along with other commodities continued to increase in value. The US responded by printing more money and the spiral continued. The US faced a total loss of faith in its currency. The tenants of the world apartments faced the same loss of faith with their own paper money. The end of fiat currencies was approaching but when that would happen was not clear. What was clear is that pretending to have money by printing it is a bad idea. It was an idea that never made any sense.
The tenants of the world apartments knew they had to return to a hard currency like gold in order to trust each other again. The new currency didn’t have to be gold but since it had been used successfully for thousands of years it was the likely choice. While we wait for the end of this crazy time make sure your own apartment is in order, take care of your investments and be careful of fiat currencies.