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Hyperinflation
in America-
a true story In Washington a babysitting syndicate was once created that relied on tokens that were given to each parent, so that when each used a babysitter they paid a token, and when each sat for babies they received one. All the parents started with the same number of tokens and the syndicate got off to a flying start - with everyone going out when they wanted to and eagerly offering their services as sitters to replenish their reserves. Unfortunately those who were disposed to work more and play less (or those who dreamt about being able to spend a year going out every night without ever having to sit for the noisy brutes again) ended up accumulating the lot. Within a few short months it was so difficult to earn a token that everyone stopped going out. But this being Washington an economist said they should issue a new tranche of tokens, which they did, and pretty soon everyone was happy again for a while. The business cycleThe babysitters of Washington had discovered for themselves the nature of the business cycle. Now they understand from experience why it is that when money supply is strictly limited economic activity at any level is inherently unstable and volumes of economic activity will tend to oscillate. Paul Krugman's depression economicsThis true story of the babysitters was paraphrased from Paul Krugman's book 'The return of depression economics'. He developed it further into a neat model where a central administrator issued tokens at a given interest rate to people who wanted to go out repeatedly and catch up with their babysitting later. In fact once the syndicate had got started there was always another wrinkle that needed ironing out, and the managers figured they were well up to the task, which maybe they were. But disappointingly in the book we never hear what happened in the end, which rather spoils it and leaves us guessing. An unhappy endingHaving got the hang of issuing further tokens, the technique became the tried and trusted solution to managing GBP [Gross Babysitting Product]. More and more got issued each time babysitting activity started to slacken, and the keen sitters continued to accumulate them until there was a huge differential between the token rich and the rest - who at least were having all the fun. Eventually, looking at the extraordinary number of tokens in issue, and realising that there really wasn't any chance of his using all these tokens (which could only be spent locally, and for the very specific purposes of the babysitting syndicate) one saver chose to sell his stash. Deciding he wanted to use the tokens for any purpose, he exchanged them for dollars. Having bought tokens soon his customers were out on the town, without returning the favour to other babysitters. Armed with their own mini-stash they didn't need to. Indeed they could afford to be unproductive as long as there was someone else prepared to work for tokens. Before long lots of members had spare tokens and fewer people felt the need to earn them. They had become asset rich - and lazy. So the demand for babysitting services increased but the supply of willing sitters dried up. Quickly the token price of babysitting rose, and on Saturday evenings people had to spend two tokens rather than one. This sucked in out-of-town sitters to work Saturdays and accumulate the tokens themselves, even though they weren't proper Washington residents. But then other savers - and a few of the out-of-towners - started to sell their tokens too, and the accumulation of years of token injections poured out into circulation. The administrators realised the problem of all the tokens flooding on to the market so they pulled a clever confidence trick. They measured the rate at which all these tokens were changing hands (which was formidable, even if few people were actually doing any babysitting) and published the numbers as evidence that their system was in spectacularly good health. It persuaded the diminishing number of productive sitters to continue accepting tokens for their efforts. But even though those faithful workers were still accepting them, all transactions converting them into dollars were being done at worse and worse prices - which of course appeared as ever more activity in those statistics. There were just too many. They had been issued like magic, when the value of them was unchallenged and each could easily be converted into babysitting. So now liquidations continued, getting ever-lower dollar prices until people took to wandering the streets with carts full of tokens, hoping to trade them for something worth having. Even then the managers were out there - carefully weighing the cartloads and proudly publishing the statistics. The lucky sitter who got out first was the only one who really did well. Unfortunately even he later made one small mistake. He started to mix with the rich set, and one day one of his friends came to visit him in his fine house. The visitor was so impressed with the house he offered $250,000 over and above an estimate which, by co-incidence, the man had received from an experienced and trusted valuing agent only that morning. So he accepted immediately and went to live in a hotel for a while. By the time he'd thought about it long enough to appreciate the irony it was too late. He later bought a secondhand bicycle. The real token systemOver $7,000,000,000,000 of debt has now been issued by the US government to pay for the injections of demand into the American economy over recent years. That is about $65,000 of hidden borrowings for every household in America. You can watch the debt grow daily at the official debt counting site http://www.publicdebt.treas.gov/opd/opdpenny.htm Here is one week’s progress: 12
Nov 2002 -$6,270,943,936,131.68 In the ten years between 1950 and 1960 the US national debt rose $33 billion. In 2001 it rose by $360 billion, and in 2002, in one lousy November week, put on about $60 billion. Every cent is injected to retain the high velocity of money which keeps loyal Americans working to assimilate ever more of them. Like Paul Krugman's readers you too will have to guess the ending. Paul Tustain - www.galmarley.com Articles in the series include:
©
2004 Paul Tustain Contact Info
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Paul
Tustain