Funny Economics

5th December, 2011

Jerry Wellington, Independent Financial Advisor and Director with Financial Planning Concepts, Truro, gives us permission recreate his latest email newsletter.  Whilst the world of finance and banking is complicated and beyond many of us for much of the time, this article takes a slightly different approach of explaining how the worldwide debt crisis came about.

Just like analysing the results of your latest customer survey, sometimes we just need to hear things as they really are!

 

Dear Robert

My thanks today to one of our clients, we’ll call him ‘S’ for the sake of anonymity, for his contribution explaining the current economic situation as far as he sees it.  Enjoy J

…I always enjoy your newsletters and have decided that there is an opening for more communications of that style.  The following anonymous contribution is my first attempt to keep people informed…

SMART FINANCE!!

Gordon was the proprietor of a bar in Glasgow.  He realises that virtually all of his customers are unemployed alcoholics and as such can no longer afford to patronise his bar.  To solve this problem, he comes up with a new marketing plan that allows his customers to drink now, but pay later.  Gordon keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around about Gordon’s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into his bar.  Soon he has the largest sales volume for any bar in Glasgow.  By providing his customers freedom from immediate payment demands, Gordon gets no resistance when, at regular intervals, he substantially increases his prices for wine and beer, the most consumed beverages.  Consequently, Gordon’s gross sales volume increases massively.

A young and dynamic president at the local bank recognises that these customer debts constitute valuable future assets and increases Gordon’s borrowing limit.  He sees no reason for any undue concern because he has the debts of the unemployed alcoholics as collateral!

At the bank’s corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS.  These ‘securities’ are then bundled and traded on international securities markets.  Naive investors don’t really understand that the securities being sold to them as “AAA Secured Bonds” really are debts of unemployed alcoholics.  Nevertheless, the bond prices continuously climb – and the securities soon become the hottest-selling items for some of the nation’s leading brokerage houses.

One day, even though the bond prices still are climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Gordon’s bar.  He so informs Gordon.  Gordon then demands payment from his alcoholic patrons.  But, being unemployed alcoholics – they cannot pay back their drinking debts.  Since Gordon cannot fulfil his loan obligations he is forced into bankruptcy.  The bar closes and Gordon’s 11 employees lose their jobs.  Overnight, DRINKBOND prices drop by 90%.

The collapsed bond asset value destroys the bank’s liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.  The suppliers of Gordon’s bar had granted him generous payment extensions and had invested their firms’ pension funds in the BOND securities.  They find they are now faced with having to write off his bad debt and with losing over 90% of the presumed value of the bonds.

His wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, his beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multibillion pound no-strings attached cash infusion from the government.  The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who have never even been in Gordon’s bar.

Now do you understand?

Best wishes

Jerry Wellington

Independent Financial Advisor and Director

 

Recreated with kind permission of Financial Planning Concepts Limited, 4 Walsingham Place, Truro, TR1 2RP, Tel. 01872 278588