Recession and Debt

The Bamboo-zle

Act I: Savings

Priscilla the Panda lived on the edge of a very long, low hill. This kept her and the other pandas safe from nocturnal predators, but in order to get food, Priscilla had to make a long and difficult climb down the hill, every single day, just so she could reach the bamboo forest on the opposite side of the ravine.

A full day of climbing and foraging yielded twenty pounds of bamboo, just enough to keep Priscilla alive. But Priscilla was ambitious. She realized that if she set out at the break of dawn, risked a few predators, and worked very hard, she could gather twenty-five pounds of bamboo a day. And so she did. For four months, Priscilla worked her little black and white butt off, setting aside the accumulated surplus.

"I now have 600 pounds of bamboo!" thought Priscilla. "That is very nice, because I could relax and take a month-long vacation. But working at this rate, I shall die of exhaustion before I can retire. If only the daily climb were not so difficult!"

So she sat and thought very hard: "Babmoo is good to eat, but it is also sturdy. I think I will build a ladder." And so she did. Priscilla was not really very good at building things, so it took her three weeks to build a ladder. But it was a good ladder, and used only 180 pounds of Priscilla's surplus bamboo. So she was rather surprised to find that all of her savings were gone when she had finished.

"But silly me! I have eaten the other 420 pounds, of course. I have been on the hill building my ladder, instead of gathering food. Well, let's see what it got me."

Priscilla had guessed correctly. The ladder saved so much time that she could now gather twenty-eight pounds of bamboo each day, with no more effort than was previously required to gather twenty. And so each day she ate 20 pounds of bamboo; she set aside 5 pounds to live on when she was old and could not forage; and she put aside 3 pounds each day for replacing parts of the ladder (and to give her something to eat on days when she did repair work).


Act II: Credit

After another three months, Priscilla's neighbor Freddie came over to look at her ladder. "That looks very useful. Could I climb down your ladder, too?"

"I don't think that would be a good idea," said Priscilla. "The ladder would wear out twice as fast, and we would both end out in the same part of the bamboo forest. There would not be enough food! I think you should build your own ladder."

"Oh!" said Freddie. "But I have eaten all of my bamboo. Will you give me yours?"

Priscilla did not like this idea, because she had worked hard, and done some very hard thinking, in order get 450 pounds saved up. But she did not want to be mean. Fortunately, her other neighbor, Oswald, happend to come upon the conversation at that point.

"Shame on you, Freddie!" scolded Oswald. He was older, and very wise. "That is Priscilla's bamboo, and not yours to take. Besides, you have big, clumsy paws. I think it would take you a month to make a ladder, and Priscilla does not have enough saved for that."

"I guess so," said Freddie. Nonetheless, he eyed Priscilla's stash with more than a hint of greed.

"I have another idea," said Oswald. "I am very good with my paws. I could build a ladder in two weeks, using only 460 pounds of bamboo (counting what I eat). If Priscilla will loan me that much, I will pay her back 480 pounds over the next three months out of my surplus."

"You would give me back more than I loaned you?" said Priscilla, quite pleased at the idea. "That is very nice!"

"It is nice for me!" said Oswald. "I will have that much extra because of the ladder, and I will never have to work extra-hard like you did."

They were both very happy. But Freddie was not. "What about me?" he cried. "Can't you save some more, and loan me 740 pounds, if I pay you back a bit more?"

"Um..." said Priscilla, "I think Oswald should go first because he's faster."

"Yes," said Oswald. "And when I am done, I will make another ladder for Freddie, if he pays me 550 pounds of bamboo out of his surplus."

"Okay!" said Freddie. "It would have cost me a lot more to make my own. That is very nice!"

"It is nice for me!" said Oswald. "It will only cost me 480 pounds to make. But you will have to wait until Priscilla has saved up more bamboo. I cannot make a ladder out of wishes."


Act III: Fiat

After a year or so, eight of the twelve pandas on the hill were working with ladders.

The eight pandas with ladders gathered 28 pounds per day each, less what they had to spend on maintenance (3 pounds/day/ladder) for a net total of 200 pounds per day.

Two more pandas were still working the old-fashioned way, gathering 20 pounds per day, and another panda was working extra-hard like Priscilla did, gathering 25 per day without a ladder, so she could be first to buy the next ladder.

Oswald spent most of his time making ladders (he was very good at it). So the eleven foraging pandas gathered an aggregate of 265 pounds of bamboo, and the twelve total pandas had to eat 240 pounds. Because of all the ladder-making, they'd only saved up-- at that point-- 400 pounds. But that was just enough for Oswald to start on the next ladder, thanks to the fact that the surplus-producing pandas had pooled their extra bamboo into a kind of "bank" so they could all earn interest like Priscilla.


But on that day, a stranger arrived in the forest. He looked like a skinny, mostly hairless panda, and called himself a "Maynard". He talked really, really smart, and was very good at math, and promised the pandas that they could be a whole lot better off if they'd stimulate their economy with central banking.

"You have the right idea," said Maynard. "You're investing in ladders. But you should invest a lot more!"

"Okay," said the pandas eagerly. "How do we do that?"

"Your investment funds are artificially restricted by the supply of bamboo," said Maynard loftily. "So the first thing you need to do is agree to stop using bamboo for making loans. You have to put all of that surplus bamboo into a central bank, and then let me hand out paper counters that we'll call 'shoots'. That will be your money."

The pandas were very confused, but Maynard seemed so very nice and smart. So they promised to use Shoots for money. Priscilla had 100 pounds of bamboo saved, which she was about to loan to Oswald. But she dutifully deposited this in exchange for 100 slips of paper Shoots. It all seemed very much the same to her. How would Maynard make them all rich?

"Your interest rates are ridiculously high," explained Maynard. "I calculate over 4% per quarter-- no wonder you have so little investment! Henceforth, then, I will issue loans of Shoots for a 6% annual interest rate. If you borrow 200 Shoots, your monthly interest will be only one Shoot."


Priscilla, who had been earning good interest making ladder loans, wasn't sure exactly what that meant. She thought about it all night long, and then went to see Mayanard in the morning. "Mr. Maynard?" she asked, "what do I do with these Shoots now? Does my bamboo earn interest?"

"Oh no, my dear," said Maynard effusively. "We don't want capital funds sitting idle! Those Shoots are your money now-- you need to invest those."

"And we have just the thing!" said Willy and Billy, arriving on the scene. They were two of the last pandas without ladders. "Maynard has taught us to think big. Take those ladders, for instance-- they're nice, but they'll never be worth more than an extra five pounds per day."

"But we've figured out that we can build a network of bridges," said Billy excitedly. "Just one bridge can allow four pandas to cross the ravine, because it's so quick you can split up when you get to the other side. With the added speed, and the fact that it's easier to carry stuff back, an average panda can forage thirty pounds of bamboo each day!"

"With minimal maintenance," added Willy. "We're going to compress the bamboo as we build, to give it more strength. Then when everything's in place, we'll coat it in oil to prevent decay."

"Wow," said Priscilla. "How long will that take?"

"Not too long," said Billy quickly. "Maybe three months."

"And, er... 6000 pounds of bamboo," added Willy. "So 10600 pounds altogether, with what we'll have to eat while working. But in the long run, it's worth it."

In the long run...

Their new central bank could loan them all the Shoots they needed, but Maynard seemed to think it important that Billy and Willy had a least a token 'private investment'. So, with his encouragement, Priscilla gave her Shoots to the bridge-builders in exchange for a share of the eventual profits.


Work began immediately, and so did the problems.

Oswald wanted to build another ladder, but all he had was paper Shoots and no bamboo. Maynard told him to buy the bamboo 'on the market.' After all, there were still eight pandas each producing 5 pounds surplus every day. But Billy and Willy had to buy every last pound to feed themselves and construct their bridge, and so-- armed with Shoots issued by Maynard-- they bid up the price of bamboo. By the end of the first day, one pound of bamboo cost two Shoots.

Oswald refused to take out a loan, and went back to foraging the hard way.

Meanwhile, Maynard promised to gradually "sell down" the central bank's bamboo reserves to ease inflation.

After one week, the central bank had "sold down" 100 pounds of bamboo, which represented the entirety of bridge construction. The aggregate surplus from ladder-using pandas was just enough to feed Billy and Willy.

"Invest!" encouraged Maynard. During the second week, the ladder-using pandas stopped setting aside bamboo for maintenance. After all, the ladders would be obsolete before long. This freed another 168 pounds of bamboo for construction, which added 250 pounds during that second week (with another "sell down").


"Opportunity!" screamed Maynard. During the third week, all of the foraging pandas (ladder or not) kicked into high gear, adding another 50 pounds total each day through sheer effort, just as Priscilla had long ago done to build her initial ladder. It was difficult, but it seemed like a smart move. On the one hand, their ladders would not last long, so the bridge had to be a priority. Furthermore, the money was just too good to pass up-- Billy and Willy had raised the price of bamboo to 3 Shoots per pound. A record 518 pounds of bridge were added.


In the fourth week of construction, Priscilla's ladder-- the oldest of the bunch-- broke from lack of maintenance. Oswald-- the oldest of the pandas-- fell back to sustenance level, having exhausted his physical reserves. With a small sell down, 450 pounds of bridge were added.

As the second month began, the price of bamboo soared to 4 Shoots per pound. Two of the pandas who were still producing surplus stopped selling and began hoarding, invoking threats of legal action from Maynard. Then another ladder broke, dropping the weekly surplus to 245 pounds.

By the end of the second month, a mere three pandas were selling bamboo to supply the bridge, and only one of these had a ladder. The central bank's reserves were exhausted and the bridge was less than half complete. Billy and Willy were forced to abandon the project, unable to purchase enough bamboo to feed themselves.

The bridge material, smashed down for construction, was unsuitable for consumption or ladder-making. Nor could the project be resumed at a later date, because the oils had never been applied.

Oswald died a week later; he was already too old to forage every single day, and had hoped to survive by spending half his time reparing ladders. The pandas had lost their best ladder-maker, and the likes of Billy and Willy did not learn the trade because they were busy building a bridge.

"Stupid bears," said Maynard, as he drifted away from the forest. "Serves 'em right for not consuming enough."


What happened, in a nutshell

The pandas interest rates were not "too high". They reflected the market reality, namely, the shortage of surplus bamboo which could be dedicated to future projects. By creating fiat money, Maynard induced misallocation of those scarce resources, which caused crippling damage to the panda economy.

What we're more likely to see in our world is something like this: The Federal Reserve lowers interests rates, which creates a dramatic rise in housing prices. The margins double, and consequently, so does the number of realtors. So Mr. Jack Stone, a clever entrepreneur, starts a business which creates virtual home tours with high-tech software. He operates at a loss for several years, which can be perfectly acceptable even in a stable monetary climate, but the long-term projection says he'll make a profit once his business expands, streamlines, and enjoys better economy of scale.

But of course, that never happens. The housing bubble bursts and Jack Stone's little tech startup goes bankrupt. Think about the nature of what is "invested" in this sort of scenario: Organization, legal fees, startup costs, advertising, marketing, specialized software, video of selected houses, more advertising, and more marketing. These "investments" are pure dead weight. If the company's product is not of value, then it's all gone to waste. It cannot be transferred to a more productive industry, nor can it be realistically "picked up" where it left off several years down the road. A bamboo bridge seems sane by comparison.


And there's your recession. Savings accounts are indirectly plundered; retirement pensions are devalued; maintenance of second-order goods (like the ladder) is neglected; bad investments suck up resources; physical stocks and real savings are depleted; and workers are mis-trained, mis-educated, and sucked into dead-end industries.[1]


Anticipating one final question: If this is all true about the effects of fiat money, wouldn't investors, stockbrokers, and big corporations figure it out and avoid the downfalls?

Some of them certainly would, if they could. But in the real world, we don't have bamboo. You must use federal dollars because it's the law. Holding and spending gold as money is difficult and generally illegal, precisely to make sure the Fed can plunder your savings through inflation. If you try to be frugal and hold onto cash while avoiding debt, then you're the sucker who gets plundered, and the boom will just go on longer thanks to your unpaid contribution. And, above all, the Fed is not a predictable force of nature. If the market doesn't jump like it wants it too, the Fed can lower interest rates even further, and when it shall raise them again, nobody knows.



[1] Time published this list of good jobs in a recession. There are lots of government jobs, naturally (why should they suffer?). But the actual marketable skills include auto repair, general maintenance and repair, and-- above all-- human repair (medical).

Even more telling is this article on the higher education bubble.

Hypocritical much?

I'm well aware that Japan and the devastating March 11 earthquake and tsunami is out of international news by now. It's been long replaced with other stories, such as Libya, Syria, other countries that end with -ia, and politicians tweeting their wieners. If covered at all, chances are that what you hear from Japan has the word "Fukushima" in it, since that seems to be the preferable way news desks worldwide see the potential for scaring people into buying papers.

That might sound cynical, but I've been monitoring foreign coverage of Japan lately, and it's not encouraging. If you have spotted Japan in the news recently, there's a good chance you think the entire country is a wasteland. If you haven't, though, there is an equally good chance you think everything is back to normal.

Neither is particularly close to the truth.

First of all, there are areas where the tsunami left entire societies in pieces, many of which are still not rebuilt, some of which it will take years to fix. Many of the people - those who survived - previously living in these societies, have not been able to return yet. Some are still living in shelters - high schools and sports centers and whatnot - while others have moved to temporary housing of the slightly more permanent kind. But even here there are problems. Some of these houses do not have tap water, or if they do, it might not be drinkable. Some of them are located far away from shops and other facilities, which is unfortunate since many of the residents are elderly and/or without cars (a substantial number of cars were washed away or destroyed in the disaster).

Then there is Fukushima. It is still very much a topic - both because it is ongoing, even though the reports of new developments are few and less spectacular now than they were in the beginning. But there remain unanswered questions. How much radiation was actually released, and can we trust the measuring now? What sort of impact does this, and the still heightened levels surrounding the defunct power plant, have on the people living there, the food produced close by, or the fish in the surrounding sea?

In addition, there is a political crisis in the country. The Prime Minister is sitting on a bit of a catapult seat (the details of which you can find in a rant from yours truly, here). While it seems to me that the Japanese population isn't particularly happy about changing the head of the government right in the middle of a crisis, the members of the parliament seem intent to do so. Further, the political crisis might have direct influence on the general crisis, since passing of laws and bills (such as the reconstruction budgets, for instance) requires political agreement.

And let's not forget the economic crisis while we're at it. The disaster sent Japan into its first trade deficit for more than a decade. That alone isn't necessarily a bad thing, but the fact that exports have gone down - more or less the only thing that was pulling the already sluggish Japanese economy - is not good. However, by now a lot of the production in Japan is nearing its pre-crisis level. That opens for exports again, and thus there might be light at the end of the tunnel. But Japan already faced tremendous economic challenges before the crisis, and so far it's looking like the impact of the crisis has been all bad (without even the small benefit of inflation, as some economists hoped for).

Apart from this, however, most of Japan is functioning as usual. It's not dangerous to travel here - unless you insist on going to the no-go zone around the Fukushima-power plant... Same goes for food produced in Japan - I don't worry about that anymore. I trust that the tests the authorities in cooperation with international organizations such as WHO perform are as good as they can get, and that the food here probably will not kill me anymore than food produced elsewhere would (e.coli in Europe, anyone?). And despite all the bad things I said about the Japanese economy in the previous paragraph, I do think it's safe and wise to invest here again. The tsunami did not wash away the Japanese innovative spirit. They *will* recover, and foreign investments will be much needed (and probably much rewarded, with time).

As for quakes? Yes, there is still the occasional aftershock, but by now they are mostly down to the pre-disaster levels. Japan has always been, and will always be, a seismically active country. Those of us who have spent some time here know this, and by now I'm not even as edgy about them as I was. I had the following conversation with a friend from back home the other day:

"Are you okay?"
"Yeah, my cold is getting better..."
"I meant the earthquake..."
"Earthquake? Oh, you mean the 6,7 we had this morning? Yeah, didn't feel it. Don't think it did any damage. No biggie."

So that's not so much an issue anymore.

What IS an issue, though, is the energy supply, and what will happen with it during summer.

You probably knew that the Fukushima plants are now closed (or as closed as they get, since they are still struggling to cool them down). But did you also know that a good 30 others of Japan's total 54 reactors are closed for the time being? Due to interruptions of regular security checks after 3/11, many plants were shut down as a safety measure. Japan has relied quite heavily on nuclear power, and thus this is putting a severe strain on the energy supply. During the summer, when the sweltering heat makes living and working without air-conditioning seem almost impossible, it is feared that the country will face blackouts. This coincides with industries trying their best to make up for lost production by running the assembly lines at top speed. And at a time when fossil fuels are running at an all-time high cost precisely due to the incidents in Japan, and those in the Middle East.

Japan is trying. The Prime Minister - from his catapult seat - is promoting renewable energies. It's a good cause, and an important one if Japan is to find economically and environmentally affordable energy sources in the future. But "future" is a keyword here. You cannot exchange nuclear for solar, geothermic, wind and hydro power overnight. The time frame Prime Minister Kan has set is "20% by early 2020s". It's commendable, ambitious and perhaps even possible. But it doesn't solve the problem right now, this summer.

People living here are also trying to save energy. They turn off their AC, or at least set the temperatures higher. In order to make this more feasible, the "Super Cool Biz" campaign  (a intensification of the regular "Cool Biz", where people are encouraged to loosen [or remove] their ties and jackets to better cope with the summer temperatures) is running. I haven't seen many Hawaii-shirts in Tokyo streets yet, but who knows - perhaps this will be the end of the traditional Japanese salaryman "uniform" - black suit, white shirts and ties?

It's difficult, though. Have you tried working in an office environment where the temperatures rise above 25, 30, 35 degrees (celcius)? It doesn't really matter if your shirt is white or Hawaiian, I can assure you. And the same ting goes for my house. Lately I've been sleeping poorly, waking up every hour or so, guiltily letting the AC run for a few minutes. I can't open the window - since the mosquitoes here seem intent to eat me alive - and it wouldn't do me much good anyway with the still hot night air flowing in with the bugs. It's not comfortable, and it's not healthy. And this is just the start. Summer in Tokyo is hot and humid, and June is nowhere near as bad as July or August. The worst is yet to come. Some claim that the nuclear lobby - a considerable force in this country - are keeping a low profile until the worst commotion has settled down. Then, when summer sets in for real, they might remind people how one again can afford using cooling systems. It might be a conspiracy strategy, but it really sounds quite effective...

The Ministry for Economy, Trade and Industry is saying that it is safe to turn the nuclear reactors closed due to the security check interruptions back on. Prime Minister Kan admits that a (near) future without nuclear power in Japan is hard to imagine. The population, I don't know... As often is the case here, they generally don't speak up much. We've had some demonstrations, but we're talking a few hundred people. Out of 127 million. The newspaper Asahi Shimbun recently published an interesting survey, however. 74 percent said that they supported a gradual termination of nuclear power. I think this is probably the closest to the truth you get. Japanese people are pragmatic. They understand that shutting down all reactors tomorrow is impossible. But they also don't want another Fukushima.

Personally I see a lot of problems with nuclear power plants. If it were up to me, we'd have nothing of them. We'd go all the way for renewable energy (and when I say renewable, I mean that, and not pseudo-renewable as nuclear is, since it leaves HUGE infrastructural and logistic problems once the reactors are too old. They will continue to demand attention [and potentially costs] for centuries or millennia after they stop producing values). I'd like solar panels on every rooftop, windmills, and every other environmentally friendly energy form there is to dominate the market.

But for now it is an illusion. Maybe Japan will manage 20 by 2020. In the meantime, however, it's difficult not feeling like a hypocrite. I don't want them to turn the reactors back on, but I also don't want to live through the summer feeling like a raisin-zombie. I'll be leaving mid-July, so probably I'm not even going to see the worst of it. Which makes me an even bigger hypocrite.

But there you go. The world works as it always does. We all want too much. I want my cake, and I want to eat it too. And since I will leave the cake soon (stretching the metaphor here now, I know...), I feel that my nibbling at its edges won't make that big a difference. I'm good at turning off the light when I'm not in the room, after all... But of course it does, if we all think that way. Thus, I can only hope for Japan's sake that the rest of the people living here are not as big hypocrites as I am...