This wonderful allegory courtesy of:
the Forbidden Truth about History and Economics
Play begins and we realize that trading tomatoes during our bets is awkward. I suggest that we utilize paper notes to represent our tomatoes instead. Because I hold a degree from Harvard, all agree that I should act as "Central Banker".
As you might expect, due our newly found "wealth", the size of each player's bets increased in direct proportion to the growth in the supply of Tomato Notes. (Price inflation).
Because we are getting so "rich" from the game, I propose that instead of ending the game, we leave everything as is and resume play the following month.
As I expected, my friends have no intention of cashing in any of their "winnings" because the returns from the game are so high. They each hold 100 notes and really believe that their original 10 tomatoes have yielded a 10 to 1 return from playing the game (Bull Market, Irrational Exuberance).
The local bank manager also trusts that the Tomato Note income of the borrowers represents true wealth, so he honestly believes that he is not engaged in risky lending when he lends out his depositors tomatoes to the successful poker winners. (Sub Prime mortgages, No Money Down Mortgages)
As the new "prosperity" makes its way through the town, the prices of goods and services also begin to rise - exactly like the size of the bets in the poker game had risen, and exactly for the same reason!Everyone thinks they are getting "richer", but their new wealth is artificial and temporary.
"Well gentlemen, there are three underlying causes behind the price inflation you are seeing at the town stores. First, when the town merchants learned of your new prosperity, they increased their prices because they knew you could now afford to pay more. That's typical capitalist price-gouging."
"Yes. Greed is a main factor. But our shopkeepers aren't the only greedy businessmen. The second reason for this inflation is that the folks over in Oilville have got us over a barrel. They too have increased their oil prices. Because all of the goods we buy have to be shipped by train and truck, the increase in transportation costs gets passed on to you the consumer."
"The third reason isn't related to greed. It is due to the prosperity of the people over in Potatoville. As Potatoville develops its economy, they grow and sell more potatoes. This increases their own demand for oil. That increased demand pushes oil prices up. Again, because our economy runs on energy, Potatoville's prosperity is contributing to the inflation you are seeing here in Tomatoville."
"I just want to lock in some of my winnings now. You never know if fortunes may turn." I replied.
I have now "earned" a total of 40 of the original 50 tomatoes from the table, quadrupling my initial investment. Whereas my scam was not obvious before, my victims now clearly see that the true value of the tomato jackpot has diminished (Recession, Bear Market). They each started with 10 tomatoes. So how come they hold hundreds of notes when there are only 10 tomatoes left for the four of them to divide?
"Damn! I was afraid this might happen. Because we were doing so well, the game "overheated". The Tomato Note fell against the tomato. When that happens, the cost of playing goes up (Inflation) and then a contraction occurs (Recession). It's a natural cycle."
"Simple." I replied. "It's called currency devaluation. You four each have 200 notes in hand, and I have 160. That's a total of 960 notes in circulation (Money Supply). There are 10 tomatoes remaining. Divide the 960 notes by the remaining 10 tomatoes and the new cost of a tomato is therefore 96 notes (Hyper-Inflation). That means that your 200 notes can buy back 2 of the remaining 10 tomatoes for each of you."
That car Bill bought for his wife?
Franks new restaurant?
Mike's credit card bills?
John's new home?
I explain to them that we are in a liquidity crisis:
"Friends! This is part of the natural business cycle. Sure, you have suffered a short term loss, but in the long term we all come out OK as the markets recover. You 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 its depositors tomatoes out so carelessly. (Blaming the Symptoms, Instead Of The Cause) This is the problem with free market capitalism sometimes.""I will advise Mayor Bulshitz to institute new legislation, a huge stimulus package, and more regulation over private enterprise (New Deal). We shall create a social safety net in order to protect you from future naturally occurring business cycles." (Great Society, War On Poverty)"Greedy Corporations, town shopkeepers, and employers big & small created this mess and it must never happen again. (Class Warfare) We will impose strict price controls to fight the inflation that the greedy, price-gouging shopkeepers caused.""We will tax the rich! (Federal Income Tax, established in 1913) Free health care! Free education! (Socialism) 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!""Don't worry about the town's Constitution. It's an outdated document written by a bunch of dead white guys. If we are to fix this mess, then we must ignore its limitations on progressive government action."
If you give me power, I will take care of you.""The tomato must no longer serve as the backing for our currency. To meet the liquidity needs of our new system, it is imperative that we get this town off of that antiquated, "barbaric fruit" Standard (Hard Money) and transition to my expertly managed paper currency." (Fiat Money)"As far as the poker markets go, now is the time to play even more aggressively (Buy Low). We'll meet again next month. In the meantime, work harder and bring more tomatoes to the next game, I'll print more notes to increase liquidity and induce the banks to loosen up credit once again. (Pump priming, quantitative easing)"If the local banks need to make more loans, I'll lower their reserve requirements so that they can lend (create) money that they don't have. As long as too many depositors don't make withdrawals all at the same time, like you fellows did in our poker game, they'll be none the wiser." (Fractional Reserve Banking)Even if there is a bank run, or if the bank's loan demand exceeds it's reserve requirement, I'll act as the "lender of last resort" (Federal Reserve, established in 1913) and lend (create money for) to the local bank at interest (Bank Takeover, Discount Window).I will also lend to (create money for) the Mayor's office (Open Market Operations, Purchase Of T-Bills, Stimulus), and bail out (create money for) the Tomato Street Brokerage houses that I deem to be "too big to fail" (Goldman Sachs, JP Morgan Bailout Package).
"Finally, I will organize an emergency meeting of the Mayors, Finance Ministers, and Note Printers of the European towns (G-20, "World Stage"). Now is not the time for isolationism. (Independence, sovereignty) Global problems demand global solutions! (IMF, World Bank, WTO, UN)."
"We will recover. So keep spending, secure in the knowledge that the best and the brightest of the world community are on the job. We have nothing to fear but fear itself!"
The simple townsfolk never stop to think that were it not for us, they would have the income and capital to take care of themselves!
All, except for John ~ the critical thinker of T-ville. He figures it all out and embarks upon a one man Internet crusade to expose me, calling me a "counterfeiter", "usurer", "insider trader", "warmonger", and "The Shadow Mayor."
But Mayor Bulshitz, as well as his rivals from the other Party, are all very easy to get along with. Most politicians are just ambitious liars who only care about getting re-elected. My printer helps cover the huge budget deficits generated by their vote-buying welfare schemes and their endless foreign wars. One hand washes the other. It doesn't serve the insatiable ambitions of the local politicians to alienate a well connected "bi-partisan" donor like me.
So you see, this debt based currency system is actually nothing but a massive pyramid scheme. We international banking and media kingpins sit on the top. Our wholly owned politicians, professors, & reporters sit on the levels below. While you worker bees are stuck on the bottom levels ~ toiling away to perpetually support the crushing weight of our fraudulent structure.
It's simple. It's because I do not respect you. I know that no matter how badly I screw you ~ no matter how much I steal from your kids' mouths ~ you won't do a damn thing about it.