Thursday, November 27, 2008

So let me see if I understand the crisis.

Alfred lends money that he doesn't have to Bill, and Charlie lends money that he doesn't have to Drake. The IOUs are written on napkins.

Bill and Drake bet against one another on a coin flip.

As it turns out, Drake wins the bet, but when it is time for him to collect, he is shocked to learn that neither Alfred nor Bill have real money to pay him. So he doesn't try to collect, but books his napkin-asset on his balance-sheet as a "cash or equivalent".

And now that the financial wonderland of fictitious loans and fictitious bets is being unwound, Obama and his team are asking Americans to pay real money -- which is to say, higher taxes -- to compensate Drake, who, as you recall, was never betting real money in the first place. Throughout the last decade, people were making a million dollars a day, but nobody cared, because they were only spending a fraction of it competing for goods and services in the real economy. However, the bailout is turning all those profits into real money, which will compete with wage-earners for the real products in the world.

So if you are a wage earner, and your children will be wage-earners, then
they will not eat as good food, buy as good seats to the orchestra, live in as nice a neighborhood, because, as a direct consequence what is happening right now, they will be competing against the descendants of people who earned tremendous amounts of money.

But will that really happen? The bailout, projected deflation, the low thirty-year note, and all that is probably a stop on the road of the system unwinding itself. They are using more imaginary money to prop up their other imaginary money.

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