Saturday, April 24, 2010


Imagine an isolated town way, way out in the middle of nowhere. In this town are three companies: United Service Associates, Consolidated Hickory National, Edge United. USA, CHN, EU. The largest of these is USA, which is also the most solid, diversified, and very well-run. EU is smaller, significantly less dynamic, and slow growing. It is helped out a great deal by its past history and has some solid niche markets. CHN is smaller, but fast growing.

Each company pays its workers in their own currency: dollars, euros, and yuan. There are small stores serving people from each company located near the company itself and each store accepts the currency of its own company. USA is so large and stable that everyone in the town uses dollars when doing large scale business.

The management of each company is very different. USA elects its senior management from among its common workers every couple of years. This makes the company overall very quirky and unpredictable. The company strategy changes constantly and deals get set up and then cancelled very often. However, because it's solid, diversified, very decentralized, and very well-run, the randomness doesn't harm it all that much. But it's annoying to EU and CHN people.

The management of EU is a permanent elite group. They're quite good, but their company is bureaucratic, with political fiefdoms everywhere. Growth is anemic.

The management of CHN is also a permanent elite group which is also quite good. However, most of their vast sea of mostly aging workers are poorly educated. Some are very well educated. They survive by working hard and living on low wages.

The employees of USA are well-educated and amazingly productive, but their success has made many of them somewhat lazy, with a growing sense of entitlement. This led them to live beyond their means for a while. Individual employees borrowed heavily and the company itself is borrowing massive amounts to pay for gold plated toilets and things that don't have any return on investment. However, the company still remains extremely dynamic, entrepreneurial, and productive, thanks to a large portion of the workers who still have these traits.

USA's size and unique nature allows it to borrow from other companies using its own dollars! USA prints IOUs and then pays out dollars. It has never failed to pay out dollars and probably never will. Yes, they own the printing press that makes dollars, but they've always been very careful about not printing dollars wildly.

A string of financial problems among all the companies has caused them to take various measures to remain healthy, including printing out more of their own currency than they'd like. The management of each company watches constantly for signs that they're printing too many dollars/euros/yuan. Despite flooding the town with money, the prices in the stores have remained low. This is actually because competition has gotten fierce all the way along the chain of production and supply, and productivity has remained very high. No one can raise prices, but no one needs to.

People took all those dollars/euros/yuan and simply bought the stock of the three companies, causing the stock prices to rise to ridiculous levels before crashing back down again. This caused financial problems so the companies continued to print money to keep things from falling apart.

Next, the residents of the town started bidding wars for town real estate using excess money that banks were desperate to utilize. Banks competed for home buyers and offered stupid loans that buyers couldn't even pay. Before long, housing prices crashed and now the mess was even worse. Bad loans were everywhere, people were desperately clawing their way out of debt or walking away from their obligations.

The companies now had real problems so they continue printing even more money. USA went wild with IOUs, paying CHN partly in IOUs instead of money. Instead of funding unproductive things like gold toilets, now they started doing counterproductive things that gave workers incentives to be less productive. The flowing dollars had already created a sense of entitlement among USA workers, but now they were causing rampant corruption. People were going wild harvesting huge piles of dollars using their connections to company managers who directed the cash.

Everything felt like it was OK because prices stayed low at the stores and lots of dollars were flowing around. But those dollars were no longer well-anchored to the creation of goods and services. USA management started quietly buying IOUs with extra dollars they started printing. But with all the sloshing money, no one noticed much or cared much.

CHN management had been accepting these IOUs instead of dollars. They could see what was happening, but they relied very heavily on USA for their own business. A huge amount of what CHN sold was bought by USA. CHN workers were underpaid and restless and the top priority of CHN management was keeping them happy and preventing them from taking over management and causing enormous chaos. This had happened in the past with disasterous results that everyone remembers.

A story for another time is the one about how EU started paying people in services and promises of future services instead of money by taxing them, taking their money and giving them stuff in return that they might not actually want. They "took care" of their employees from cradle to grave in ways that USA workers would never tolerate. But anyway....

Ok, so what's going to happen in this faraway place as these USA IOUs pile up in CHN vaults? USA is telling itself that it's not just printing money, that IOUs for future dollars are better than just printing dollars now.

USA workers were living beyond their means. When they slowed down their spending to more realistic levels, the management simply started spending in their place, but it was a much uglier and more counterproductive spending.

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