A Bailout Fairy Tale

Once upon a time there was a tropical island in the South Pacific in which the natives polished nice shiny marbles made out of the exotic pebbles that sometimes washed up on their shores. In the evenings the tribesfolk would gather around a bonfire and exchange tales and songs. Sometimes they would also exchange the pretty marbles among themselves.

One day a whaling ship was blown off course and anchored in the lagoon of the island. The captain decided to investigate the island civilization. It was discovered that the islanders were all enormously happy and satisfied with their lives, largely because they were so wealthy. "Every single one of us is richer than even the richest whaling captain in your lands," they explained. "You see, each of these shining marbles is worth 100,000 gold nuggets in our economy. We trade them actively among ourselves. Any of us can convert a single marble into cash or real assets at that rate any time we want."

Sure enough, the going rate for domestic trading in the shining marbles was 100,000 gold nuggets each! The marbles could be used to purchase huts, fields, canoes, harpoons, or anything else. "A paradise on earth," observed the captain in his log.

Two years later, the same whaling ship with the same captain made a stop at the same island to take on provisions. But this time the atmosphere there was different. "We are all so depressed," explained the tribesfolk. "Our entire economy has been collapsing for many months. The pretty shiny marbles that were worth 100,000 gold nuggets two years ago have been dropping in value. They are now trading in our local marble exchange for a mere 5000 nuggets each."

Sure enough, the marbles could still be used to purchase mangos, huts, and wives, but at a far less favorable rate of conversion.

"I am a little confused," said the whaling captain. "Help me to understand. The marbles are trading at a lower conversion value, but what has happened to the total number of marbles in the possession of the residents of the island?"

"Oh, that has not decreased," answered the tribal witch doctor. "In fact we have a bit more of them than we had when you were last here, thanks to some new coral pebbles being washed up onto the beaches."

"Ok, so what about the fields and the huts and the canoes?" asked the captain.

"They are all still intact. We have at least the same number of each sort of real asset as we had the last time you anchored here. We have even more marbles and gold nuggets than before."

"But then you are not really any worse off than you were back then," observed the captain.

"You are forgetting about the value of our marbles," sighed the tribal chief.  "Our tribesfolk are unwilling to accept marbles in exchange for real goods at a rate of conversion no more than 5% of the old rate."

"Yes, but that is because the islanders living here have subjectively re-evaluated the pretty marbles and assigned to them a new lower trading value."  The captain added:  "The current value is no less authentic than the previous high value we observed when we were last requisitioning things here two years ago."

"But you misjudge the mood of our islanders," objected the chief. "Because of the massive losses in their wealth from the drop in marble prices, we are observing family breakups, increasing drunkenness and consumption of rum, outbreaks of shingles, and a few people even jumping to their demise out of coconut trees."

"That is sad," observed the whaler's first mate, "but something here is still wrong. Nothing in the real sector of island life has changed.  You have as much food, housing, and clothing as you had last time we were here, more in fact.  So why are the islanders convinced they have been impoverished?"

The crew of the whaling ship scratched their heads in wonder. They decided to extend their stay on the island to investigate what was happening.

Meanwhile, the tribal witch doctor came up with a new plan. "We have got to rescue the islanders and save our standard of living," he insisted in between partaking of traditional dances around the bonfire.  "Here is what I suggest. Let us restore the value of pretty shiny marbles at close to their previous exchange value. We will collect all the gold nuggets and half the fields from our tribesfolk and we will then use these to buy up pretty marbles from our islanders at the conversion rate of 90,000 gold nuggets per marble. This will restore the wealth of our people to close to the levels that they enjoyed before the collapse in marble prices.  We will restore their confidence in our leadership and in the economy."

When the rescue plan was announced, cries of joy came from the huts of the fishermen and the farmers. "At last our chiefs are taking real action to rescue us!  Our wealth is now safe!"

But the whaling captain was still skeptical.  "All you are doing is inflating the conversion value of the marbles," he objected. "But there is no new real wealth being added to your island.  You do not have any more fields, huts, or pineapples than you did before."

"Not only that," chimed in the first mate, "but what you are really doing is taking gold nuggets and fields away from the islanders, to be used to buy marbles back from those same islanders.  When you are done, the islanders as a group will have the same number of gold nuggets and fields as they did before your rescue plan.  In fact, the island will also have the same number of shiny marbles.   At most, you are redistributing marbles, nuggets, fields, and spears among your tribespeople."

At that point the whaling shift lifted anchor.  But a year later it did return to the island for one last visit before whaling was outlawed by the world council.  This time, things really had changed on the island.  Over the past year, the islanders had finally figured out that it was they who were being required to supply the resources to be used to rescue the value of the marbles and to finance those repurchases from themselves at the higher marble conversion rates.

Because of the massive requisition of nuggets and fields needed to finance the rescue plan, many of the farmers and fishermen had decided to stay home sipping tropical juices rather than produce. After all, the taxes they were forced to pay to finance the rescue plan convinced many that effort and labor were not worthwhile. Others decided to take early retirement.  "After all," explained one ex-fisherman, "the government has promised to keep the value of our marbles high."  In other cases, tribesmen concluded that diving for reef fish and other dangerous activities no longer paid enough after taxes to make them worthwhile.  Still others stopped sweating in the plantain fields because they figured the tribal chiefs would take care of them and make sure they had enough purchasing power as retirees. After all, just think of all those valuable marbles the chiefs had bought up and were holding, which could be used to support those who stopped working.

Overall, food production was down, the fleet of fishing canoes had decreased sharply, and huts were being allowed to deteriorate.  Social cohesion was being undercut, as fewer islanders had enough real assets to purchase brides, and the fertility rate had decreased.

"Now what will you do?" asked the whaling captain.  "Simple," replied the island chief. "We will increase the tax rates on our islanders so that we will have more resources to expand the rescue plan and so we will help the economy to an even greater extent."

As the whaling ship lifted anchor and sailed off into the sunset, the captain made an entry into his log that read, "The islanders have lost their marbles."