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Finally, an explanation of the economy I understand.
16 years ago
Heidi is the proprietor of a bar in Detroit.
In order to increase sales, she decides to allow her loyal customers -- most of whom are unemployed alcoholics --
to drink now but pay later.
She keeps track of the drinks consumed on a ledger (thereby granting the customers loans). Word gets around
about Heidi's drink now pay later marketing strategy and as a result, increasing numbers of customers flood into
Heidi's bar and soon she has the largest sale volume for any bar in Detroit.
By providing her customers freedom from immediate payment demands, Heidi gets no resistance when she
substantially increases her prices for wine and beer, the most consumed beverages. Her sales volume increases
massively.
A young and dynamic vice-president at the local bank recognizes these customer debts as valuable future assets
and increases Heidi's borrowing limit. He sees no reason for undue concern since he has the debts of the alcoholics
as collateral.
At the bank's corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS
and PUKEBONDS. These securities are then traded on security markets worldwide. Naive investors don't really
understand the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics.
Nevertheless, their prices continuously climb, and the securities become the top-selling items for some of the
nation's leading brokerage houses.
One day, although the bond prices are still climbing, a risk manager at the bank (subsequently fired due to his
negativity), decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi's
bar. Heidi demands payment from her alcoholic patrons, but being unemployed, they cannot pay back their
drinking debts. Therefore, Heidi cannot fulfil her loan obligations and claims bankruptcy.
DRINKBOND and ALKIBOND drop in price by 90 %. PUKEBOND performs better, stabilizing in price after dropping by
80%. The decreased bond asset value destroys the banks liquidity and prevents it from issuing new loans.
The suppliers of Heidi's bar, having granted her generous payment extensions and having invested in the securities
are faced with writing off her debt and losing over 80% on her bonds. Her wine supplier claims bankruptcy, her beer
supplier is taken over by a competitor, who immediately closes the local plant and lays off 50 workers.
The bank and brokerage houses are saved by the Government following dramatic round-the-clock negotiations by
leaders from both political parties.
The funds required for this bailout are obtained by a tax levied on employed middle-class non-drinkers.
Finally, I understand.
In order to increase sales, she decides to allow her loyal customers -- most of whom are unemployed alcoholics --
to drink now but pay later.
She keeps track of the drinks consumed on a ledger (thereby granting the customers loans). Word gets around
about Heidi's drink now pay later marketing strategy and as a result, increasing numbers of customers flood into
Heidi's bar and soon she has the largest sale volume for any bar in Detroit.
By providing her customers freedom from immediate payment demands, Heidi gets no resistance when she
substantially increases her prices for wine and beer, the most consumed beverages. Her sales volume increases
massively.
A young and dynamic vice-president at the local bank recognizes these customer debts as valuable future assets
and increases Heidi's borrowing limit. He sees no reason for undue concern since he has the debts of the alcoholics
as collateral.
At the bank's corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS
and PUKEBONDS. These securities are then traded on security markets worldwide. Naive investors don't really
understand the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics.
Nevertheless, their prices continuously climb, and the securities become the top-selling items for some of the
nation's leading brokerage houses.
One day, although the bond prices are still climbing, a risk manager at the bank (subsequently fired due to his
negativity), decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi's
bar. Heidi demands payment from her alcoholic patrons, but being unemployed, they cannot pay back their
drinking debts. Therefore, Heidi cannot fulfil her loan obligations and claims bankruptcy.
DRINKBOND and ALKIBOND drop in price by 90 %. PUKEBOND performs better, stabilizing in price after dropping by
80%. The decreased bond asset value destroys the banks liquidity and prevents it from issuing new loans.
The suppliers of Heidi's bar, having granted her generous payment extensions and having invested in the securities
are faced with writing off her debt and losing over 80% on her bonds. Her wine supplier claims bankruptcy, her beer
supplier is taken over by a competitor, who immediately closes the local plant and lays off 50 workers.
The bank and brokerage houses are saved by the Government following dramatic round-the-clock negotiations by
leaders from both political parties.
The funds required for this bailout are obtained by a tax levied on employed middle-class non-drinkers.
Finally, I understand.
It's also interesting how these issues complicate nice simple things like 'Did I make a profit?'
So, when he got a bill last month from the IRS claiming his tax burden on what he "made" was 75,000 plus dollars - you better believe he got to humping and got his taxes done for that year.
What sucks, the cash value of his portfolio is only a bit above 150,000 - the taxes wanted by the gov apparently mean hes going to pay about 50 percent of his stocks to them if he sold them. And he votes Democrat - go figure... And no, I didnt want or will get into a political think here, Im just pointing out reality.