Financial Sense

Island Economics

Game Show Edition

by Eric Andrews | December 30, 2008


Island Economics Now it's time for everyone's favorite game show: Gilligan's Island! And, as our special contestants, please give a welcome to: Gilligan! The Skipper too! The Millionaire and his wife! Also including: the Movie Star, Professor and Mary Ann. Here on Gilligan's Island!

Our show opens predictably with our intrepid castaways stranded on the Island. They have thatched huts, a picnic table, and a modest economy of hut-building, guano mining, and coconut ranching. The economy is growing, but at a mere 3%--same as the long-term average of mature countries. It's hard to safely grow economies more than this, but everyone wishes things would happen faster. Life may be good, but it's very, very boring.

One day, Mr. Howell finds a deck of cards on the beach. A godsend! And that evening they sit down the Island's first poker game. ...Or rather, the boys do. This is 1964 and the girls are not invited.

After a few hands, the boys soon realize that there's one thing you can't play poker without: money! Unfortunately, they don't have any money, and coconuts are so messy to use: have you ever seen an all-in pot of 22,000 coconuts? Palm Promises—the Island's coconut and cooperation counter--circulate as money on the Island, but they the girls won't let them use all of theirs, and if they used their own, the economy outside of the poker table would shut down for lack of currency.

They make a compromise: in casino tradition, they use not real money but poker chips, little shells of Barnacle Shrimp, or BS for short. Each assembles a large pile of BS for the game, and they set to work. Just to make sure there's real skin in the game, each backs their BS with their “company”: the real work they do and the production they create. The Game has now become the Island's first Stock Market.

For a while, the game goes well. As they win and lose and the same BS shifts hands between them. The next morning they get up and go to work. Nothing is added or removed from the “Market” of their game— the counters simply move around. That's because the Island is really only one Pie: it can be divided many ways, but there's still only one Island, one Pie to draw from. And that Island only grows at 3% a year. This is speculation. Speculation is when the same Pie is traded around, but nothing is created. It is not Capitalism. Capitalism is when people work to create more Pie.

But the Poker game isn't growing. After a few weeks of trading the same BS around the table, the boys get bored. How many times can you win and lose the same pie? They need bigger stakes. So they devise a way to increase the BS around the table. Don't ask me how—it's very, very complicated, much too complicated for simple minds like ours to comprehend. Just rest assured that there are strict rules about this sort of thing, and people can't just bring BS to the table willy-nilly. No sir. This is a Gentleman's Game played by Gentlemen. This is also the earliest beginnings of the “Shadow Banking” system—a new way of creating “money” outside of a Treasury or bank. Notice that without the addition of new trading media—money—it is impossible for prices to rise. Without this addition, the rising price of one thing would simply mean the falling price of something else: or put another way, “inflation is always and everywhere a monetary event.”

And as new BS is slowly added, Lo! the pot gets bigger! What's more, the game is now such a staple of Island life that the BS begins to have currency outside the game. MaryAnn accepts them from the Professor for wasubi berry jam knowing that these tokens will safely trade back to Mr. Howell and the Skipper. Seeing that they can pay for real goods with nothing but BS, the Boys slowly begin to neglect their work and focus entirely on playing cards. Thus the addition of BS inflates the prices of first the game, then real life, just as happens with inflation in the Shadow Banking system as it leaks out into the general economy. In the same way cash, promises, debt, and credit begin to be seen as fully interchangeable with “money”. Work dwindles, and gaming increases.

As all this new BS leaks out, the Girls are getting suspicious. They don't know why prices are rising but they know it has something to do with that poker game. The casino needs to be reined in. Seeing the danger, on Christmas Eve when most of the Islanders aren’t paying attention, the Skipper and Mr. Howell pass the “Island Reserve Act” creating an official Island-sanctioned Bank for the Game with full oversight to investigate the players. The players can't bring their own BS to the table anymore: they now have to borrow all their BS from the Island Reserve—with interest. Of course the Island Reserve is actually owned by Professor, Inc; Skipper Trips, LLC; and Howell National Bank—the same 3 Boys who were issuing the BS that was causing inflation to begin with, but Mr. Howell assures the Girls this will put an end to it! In his new capacity as Island Reserve Chair, Mr. Howell fully investigates the Skipper and the Professor and gives them a clean bill of health. As Island Chairman, he then investigates himself in his capacity as CEO of Howell National Bank, and says he is sure he's done nothing untoward. The game goes on, but with the addition of interest on the game now that all BS is borrowed from the Island Reserve. Rather than reining in inflation, this injects an additional 3% BS into the Game, payable in more inflation. That interest accrues directly to the Boys.

Prices are rising faster than ever and the girls demand an explanation. But it’s simple: when the Island added 9% more BS, they still had only one Pie—The Island. It could only be divided up across more currency, as both the BS and the Palms are now in use as “money”. At 3% inflation the Girls didn't notice because prices didn't actually rise, they just no longer fell at the 3% rate of Island productivity. At 9% total BS, prices started to rise at 6% per annum. What's worse, the Boys are steadily getting richer than the Girls, because they are the ones introducing the BS!

The Girls demand their fair share. They too list their companies on the Island Exchange (I-Ex) and start introducing some BS of their own. To help with this, the rules are expanded to make the issuance of BS easier for everyone. This is an example of how the first holders of inflation prosper, invisibly stealing Pie from the last holders. More insidiously, very few notice the theft of the un-measurable increasing efficiency inherent in the Free Market, focusing only on the nominal increase over last year's prices. Lastly, this is how instead of reforming the system and ending the Game, a method is found to get everyone to buy-in and become complicit, to support the Game despite its injustice and mathematically impossible promise of wealth.

Being added to the Game works as far as it goes, but the Girls' hearts are not in it. They don't always show up to the game and often mail in their hands, using one of the Boys as their agent. This is like the 401k/IRA Market-retirement system. Although everyone can sit at the table, there is still only one Pie. And although the Girls have won a seat at the game, they have only won the right to lose by playing day after day against professional gamblers. Because they’re not actually at the table, if temptation rises or honor dwindles, the Boys could look at their cards. They could pass cards to each other. They could change the house rules or create new ones at their convenience. They could charge little fees. They could bet against the Girls and just SAY who won or lost. No one's looking. This is similar to the near-total regulatory failure of the SEC and CFTC to stop even the most rudimentary frauds and thefts: the sale of non-existing shares, Ponzi schemes, insider trading, and price manipulation. I need not give figures here as the multi-Billions—now multi-Trillions—they are stealing and continue to steal is now daily news. This is only reinforced by the complicity of having a Wall Street CEO run the treasury, another from the same firm oversee the bailouts, then appoint another Wall Street CEO and the head of the NY Fed to replace them. If these people worked tirelessly for decades to create today's non-functional rules and saw nothing wrong with it then, why would we expect them to change anything or enforce the rules now?

And still the Pot gets bigger and bigger.

When the Girls see the game is no longer working for them, they begin to take their money out. This deflates the Pot, and as they convert the BS into Palm Promises, the price of BS plummets, while the price of Palm Promises—Island Cash and I-Bills—rises, just as we saw during the Stock market withdrawals of 2001 and again starting in 2007. The Boys cannot have this: The game was going so well! They were winning every hand and making buckets of money! …Except for one thing: whenever they were “winning”--and arguably winning by cheating--by definition somebody else was losing. Remember, there is only one Pie, one Island to divide among themselves. Outside of real work—the 3% baseline growth--every dollar of “winnings” caused by the introduction of BS is merely a new claim on existing goods. What to do? The Boys swing into action. First they investigate themselves again and categorically deny any shenanigans. Second, they shut down every withdrawal they can manage, often by promising to cover all losses if the Girls keep their money in the Game. Then, Mr. Howell's Island Reserve swings into action.

He releases a blizzard of BS directly into the poker game to bail out the Boys. Then he injects more BS into Howell National Bank, so it can remain solvent despite his having lost the Game to the Girls. Then he swaps the Professor Hedge Co.'s and Howell Bank's BS with the Island Reserve BS, so that the...well, it's far, far too complicated for people like us to understand. Just feel confident that with a blizzard of BS in the air, everything has to be A-Ok.

Problem is, there's still only one Pie. We're still only talking about how to cut up that same Pie—who gets more, and who gets less. What's more, by neglecting real work in favor of cards for so long, the Pie is actually getting smaller at the same time the appearance of Pie is getting larger. This is similar to the near-total destruction of American mining, manufacturing, and physical production since this stage of inflation began in 1971. Speculation—the Poker Game--become the Island's Economy just as F.I.R.E.—Finance, Insurance, and Real Estate--became the whole economy of America. What happened? It's simple:

“Everyone loves an early inflation. The effects at the beginning of inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle.

In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the latter effects, but the latter effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of all traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation." - Jens O. Parsons

What Parsons doesn't draw attention to is that declining morality is also part of every inflation. When speculation is easier and more profitable than work, people speculate rather than work. When savings is stolen via inflation, then not only people who work but people who save are considered suckers. Whether quickly, in the case of Wiemar, or slowly, in the case of America, people stop working, stop saving, and then stop planning altogether and live frivolously without thought of tomorrow. Why work when your work is stolen from you? Why save when savings are made worthless through inflation? It’s common sense. Savings are being stolen from savers and given to borrowers so people borrow as much as they can. At first only small warnings arise which can be quickly tamped down with fair-seeming actions such as the Island Reserve; later the dangers grow increasingly larger and must be forestalled with ever-increasing central control and the corruption that goes with such control. Finally the tremors and the corruption threaten the very existence of the game and the disproportional power the Game grants its favored participants.

What has happened to the Game now? Because the early warnings were not heeded, the amount of BS in the Game has reached critical levels. There are now more promises for Pie in the Game than there is actual Pie to go around. There is only one Island. This is similar to how at the top of Japan's housing bubble, the land underneath the Imperial Palace in Tokyo was worth more than all of California, the world's 5th largest economy. If faith is lost in the Game it will cause people to leave it; and if they leave the game and try to apply the outrageous claims of value to the one Pie, prices for Pie will skyrocket. This is a hyperinflation, and it is caused not by issuing BS, but by a destruction of faith, be it in a particular market, such as real estate, or the competency of a government, such as Argentina or Zimbabwe. With hard work and mild discomfort, the Game could be repaired and faith could be restored at any time, but as John Kenneth Galbraith said, "People of privilege will always risk their complete destruction rather than surrender any material part of their advantage."

Hyperinflation is caused not by facts but by an intangible: the sudden realization of what had been there all along but hadn't been recognized. For the reality is that the Pie only grew at 3% a year, while the Game grew at 10%. In 16 years—from 1913 to 1929, or from 1985 to 2001—the real Island grew only 60% while claims on the Island grew 459%-- matching the Dow 60 in 1913 and 300 in 1929; or the Dow 2,000 in 1985 and 10,000 in 2001. Like the BS in the Island's Game, the previous issuance cannot be taken back out of the system. Once issued those claims are a reality. The monetary consequence of those claims are only being recognized as a reality where it had been previously ignored. "Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works." --- John Stuart Mill. What is 3% real growth since 1985 in today's Dow? Depending on the time spent correcting, between 4,000 and 6,000; the long-term trendline easily seen on any log chart:

THAT is the reality.

So what to do? The BS is no longer working. People are not accepting it anymore and the game is falling apart. “In for a penny, in for a pound” says Mr. Howell. What the Boys need is a plan, or more precisely, an escape plan.

With its ability to issue limitless BS, the Island Reserve is very powerful. In his capacity as Chair of the Reserve, Mr. Howell issues $8.8Trillion in BS to Howell National Bank. --Sorry Skipper Trips, LLC, there's no money left for you. In fact, there's suddenly no money for ANYONE. In his position as CEO of Howell Bank, Mr. Howell is not issuing either BS tokens or Palm Promises to anyone. ...Times are troubled, don't you know. It wouldn't be prudent—not at this juncture—to hand out BS which the Reserve creates for free.

Loans throughout the Island dry up. The Game crashes. Prices fall. And when prices fall, out in the real economy, people cut back. Skipper Trips freezes up and nearly goes bankrupt. Gilligan finds coconut oil plummets from $147 to $32 in 6 months. Ginger's Huts-R-Us finds that without access to loans, sales are all but frozen. Such violent price gyrations are sure signs that Speculation is running the economy, not Capitalism. Trading Pie instead of making Pie. The Traders are in control, not the Makers.

Eventually, the prices drop to the level of real need in the real economy—the cash price absent all loans or leverage. The market is safe now, but is at fire sale prices after a 40-90% plunge.

But in this environment who has money to take advantage of these Island-wide discounts? No one--that's why prices are low. one except the Island Reserve and Howell National Bank. They now have ALL the money. And now that the bottom is here, it's safe to loan again. But they don't loan to just anyone, oh no: only to people they trust, to true Gentlemen; in short, they loan only to the Boys. The Boys then borrow from the Banks to buy up the Island—the one Pie—at a 90% discount. As they begin to buy, the price rises. The money which had been restricted to Howell National Bank during the “deflation” now leaks out, re-igniting inflation. Having lost everything, the Girls can now set about the slow, hard work of buying the Island back from the Boys again. This is also the cycle of every inflation. Clearly the Boys have won the game. --And all because this BS is allowed.

Will Skipper Trips go bankrupt? Will Gilligan Coco-Oils survive? Will anyone be able to rein in the Boys and stop the BS?

Tune in next week for another exciting episode of: Island Economics.

Copyright © 2008 Eric Andrews
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