Too much gambling on return ON money has put them to begging for return OF money.
Dear All,
As you know that we facing a severe phase of global recession, markets are tanking, corporate jars have sleepless nights and the purchasing power of the common people is going down day by day.
What exactly has happened to our economy?
Let’s understand it.
A friend of mine forwarded this mail to me on what is an asset bubble or an inflated market. I thought it would be worth sharing. It will help you understand the reality of recession and functioning of the market economy.
Story Begins…
Once there was a little island country. The total money in circulation was 2 dollar as there were only two pieces of 1 dollar coins circulating around.
1) There were 3 citizens living on this island country. A owned the land. B and C each owned 1 dollar.
2) B decided to purchase the land from A for 1 dollar. So, A and C now each own 1 dollar while B owned a piece of land that is worth 1 dollar.
The net asset of the country = 3 dollar.
3) C thought that since here is only one piece of land in the country and land is non produce able asset, its value must definitely go up. So, he borrowed 1 dollar from A and together with his own 1 dollar, he bought the land from B for 2 dollar.
A has a loan to C of 1 dollar, so his net asset is 1 dollar.
B sold his land to C of 1 dollar, so his net asset is 2 dollar.
C owned the piece of land worth 2 dollar but with his 1 dollar debt to A, his net asset is 1 dollar.
The net asset of the country = 4 dollar.
4) A saw that the land he once owned has risen in value. He regretted selling it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollar from B and acquired the land back from C for 3 dollar. The payment is by 2 dollar cash (which he borrowed) and cancellation of the 1 dollar loan to C. as a result, A now owned a piece of land that is worth 3 dollar. But since he owned B 2 dollar, his net asset is 1 dollar.
B loaned 2 dollar to A. So his net asset is 2 dollar.
C now has the 2 coins. His net asset is also 2 dollar.
The net asset of the country = 5 dollar. A bubble is building up.
5) B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for 4 dollar. The payment is by borrowing 2 dollar from C and cancellation of his 2 dollar loan to A.
As a result, A has got his debt cleared and he got the 2 coins. His net asset is 2 dollar.
B owned a piece of land that is worth 4 dollar but since he has a debt of 2 dollar with C, his net asset is 2 dollar.
C loaned 2 dollar to B, so his net asset is 2 dollar.
The net asset of the country = 6 dollar. Even though, the country has only one piece of land and 2 Dollar in circulation.
6) Everybody has made money and everybody felt happy and prosperous.
7) One day an evil wind blowed. An evil thought came to C’s mind. “Hey, what if the land price stop going up, how could B repay my loan. There is only 2 dollar in circulation, I think after all the land that B owns is worth at most 1 dollar only.”
A also thought the same.
8) Nobody wanted to buy land anymore. In the end, A owns the 2 dollar coins, his net asset is 2 dollar. B owed C 2 dollar and the land he owned which he thought worth 4 dollar is now 1 dollar. His net asset become – 1 dollar.
C has a loan of 2 dollar to B. But it is a bad debt. Although his net asset is still 2 dollar, his Heart is palpitating.
The net asset of the country = 3 dollar again.
Who has stolen the 3 dollar from the country ?
Of course, before the bubble burst B thought his land worth 4 dollar.
Actually, right before the collapse, the net asset of the country was 6 dollar in paper. His net asset is still 2 dollar, his heart is palpitating.
The net asset of the country = 3 dollar again.
9) B had no choice but to declare bankruptcy. C as to relinquish his 2 dollar bad debt to B but in return he acquired the land which is worth 1 dollar now.
A owns the 2 coins, his net asset is 2 dollar. B is bankrupt, his net asset is 0 dollar. (B lost everything) C got no choice but end up with a land worth only 1 dollar (C lost one dollar) The net asset of the country = 3 dollar.
There is a however a redistribution of wealth.
A is the winner, B is the loser, C is lucky that he is spared.
***End of story***
Now I don’t want to preach anymore….I would love to know your observation of the current global recession.
Regards,
Sanjay Nirupam
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fantastic!!! hilarious!!!
ReplyDeleteUnchecked Capitalist GREED is the main reason for a recession.
ReplyDeleteYour story depicts notional increase in value, like in Stock Market, which is a type of manifestation of the GREED.
India's SOCIAL credentials allows Capitalism with a leash of Social repsonsibilities, checks and balances.
Although India is SOLID within, we will be affected to the tune of our external exposure, in that such businesses will slow down.
I personally think we will scrap through this phase with a little skirmishes here and there.
Nevertheless your story makes an important point about STOCKS, never calculate NOTIONAL value as your ASSET.
It's mind bobbling to learn how the inflated scenario take place and the reverse side for the same..... A request to keep us updating on such kind of different scenario world wide
ReplyDeleteVery lucidely esplained the phenomena of price bubble. But the real world has few more parties to the transactions - as we live in "THE SO CALLED CIVILIZED WORLD", having rules and regulations - WHICH, TO OUR MISERY, ACTS ONLY FOR THOSE WHO CAN PURCHASE THEM. These parties are the bankers, advisors, market regulators, trade facilatators, etc. - make a list and they would be in plenty. But where all of these parties were when the price of land on the island, in our story, was rising without there being any substance to back it. Is'nt it very suspicious that they appear from nowhere, only after all the wrongs are done with, and the guilties have fled - just to give false comfort to those who have been trapped (the general public at large). Commissions and Commities are established, the inquiries goes on for years - and the public becomes busy once more dragging the burden of inflationery life style. And after some time again there is Mr. A, B & C in different appearance, and the same land in some other form...and the story continues...
ReplyDeletethe big questions therefore is, what can we do about it!
ReplyDeleteis your campaign addressing this issue? are you the one giving the solutions or are we just going to debate bout this till the elections & beyond?!
thats fine. where r the solutions. we r affected as said before by the external exposure. time has proved theat our external boundaries are limitless as globalisation is spreading its wings.recession or no recession we need to have strong financial discipline so that our recent recession of Satyam will not occur again.
ReplyDeleteThe parable (if I may call it so) well simplifies economics in layman's terms.
ReplyDeleteAnyone interested in further exploring the root-causes of economic crisis should read John Ruskin's Unto This Last, written in 1860. Incidentally, Mahatma Gandhi's views were influenced by Ruskin's writings.