Interesting 
A simplified version of the complexities in today’s economy - The hazards of speculation in market
> Once there was a little island country. The land of this
> country was the tiny island itself. The total money in
> circulation was 2 dollars as there were only two pieces of 1
> dollar coins circulating around.
>
> 1) There were 3 citizens living on this island country. A
> owned the land. B and C each owned 1 dollar.
>
> 2) B decided to purchase the land from A for 1 dollar. So,
> now A and C own 1 dollar each while B owned a piece of land
> that is worth 1 dollar.
>
> * The net asset of the country now = 3 dollars.
>
> 3) Now C thought that since there is only one piece of land
> in the country, and land is non producible asset, its value
> must definitely go up. So, he borrowed 1 dollar from A, and
> together with his own 1 dollar, he bought the land from B
> for 2 dollars.
>
> *A has a loan to C of 1 dollar, so his net asset is 1
> dollar.
> * B sold his land and got 2 dollars, so his net asset is 2
> dollars.
> * C owned the piece of land worth 2 dollars but with his 1
> dollar debt to A, his net residual asset is 1 dollar.
> * Thus, the net asset of the country = 4 dollars.
>
> 4) A saw that the land he once owned has risen in value. He
> regretted having sold it. Luckily, he has a 1 dollar loan to
> C. He then borrowed 2 dollars from B and acquired the land
> back from C for 3 dollars. The payment is by 2 dollars cash
> (which he borrowed) and cancellation of the 1 dollar loan to
> C. As a result, A now owned a piece of land that is worth 3
> dollars. But since he owed B 2 dollars, his net asset is 1
> dollar.
>
> * B loaned 2 dollars to A. So his net asset is 2 dollars.
> * C now has the 2 coins. His net asset is also 2 dollars.
> * The net asset of the country = 5 dollars. A bubble is
> building up.
>
> (5) B saw that the value of land kept rising. He also
> wanted to own the land. So he bought the land from A for 4
> dollars. The payment is by borrowing 2 dollars from C, and
> cancellation of his 2 dollars loan to A.
>
> * As a result, A has got his debt cleared and he got the 2
> coins. His net asset is 2 dollars.
> * B owned a piece of land that is worth 4 dollars, but
> since he has a debt of 2 dollars with C, his net Asset is 2
> dollars.
> * C loaned 2 dollars to B, so his net asset is 2 dollars.
>
> * The net asset of the country = 6 dollars; even though,
> the country has only one piece of land and 2 Dollars in
> circulation.
>
> (6) Everybody has made money and everybody felt happy and
> prosperous.
>
> (7) One day an evil wind blew, and an evil thought came to
> C's mind. 'Hey, what if the land price stop going
> up, how could B repay my loan. There is only 2 dollars in
> circulation, and, I think after all the land that B owns is
> worth at most only 1 dollar, and no more.'
>
> (
A also thought the same way.
>
> (9) Nobody wanted to buy land anymore.
>
> * So, in the end, A owns the 2 dollar coins, his net asset
> is 2 dollars.
> * B owed C 2 dollars and the land he owned which he thought
> worth 4 dollars is now 1 dollar. So his net asset is only 1
> dollar.
> * C has a loan of 2 dollars to B. But it is a bad debt.
> Although his net asset is still 2 dollars, his heart is
> palpitating.
> * The net asset of the country = 3 dollars again.
>
> (10) So, who stole the 3 dollars from the country? Of
> course, before the bubble burst B thought his land was worth
> 4 dollars. Actually, right before the collapse, the net
> asset of the country was 6 dollars on paper. B's net
> asset is still 2 dollars, his and heart is palpitating.
>
> (11) B had no choice but to declare bankruptcy. C as to
> relinquish his 2 dollars bad debt to B, but in return he
> acquired the land which is worth 1 dollar now.
>
> * A owns the 2 coins, his net asset is 2 dollars.
> * B is bankrupt, his net asset is 0 dollar. ( he lost
> everything )
> * C got no choice but end up with a land worth only 1
> dollar
>
> * The net asset of the country = 3 dollars.
>
>
>
>
>
> End of the story; BUT …..
>
> There is however a redistribution of wealth.
> A is the winner, B is the loser, C is lucky that he is
> spared.
>
>
> A few points worth noting -
>
> (1) When a bubble is building up, the debt of individuals
> to one another in a country is also building up.
> (2) This story of the island is a closed system whereby
> there is no other country and hence no foreign debt. The
> worth of the asset can only be calculated using the
> island's own currency. Hence, there is no net loss.
> (3) An over-damped system is assumed when the bubble burst,
> meaning the land's value did not go down to below 1
> dollar.
> (4) When the bubble burst, the fellow with cash is the
> winner. The fellows having the land or extending loan to
> others are the losers. The asset could shrink or in worst
> case, they go bankrupt.
> (5) If there is another citizen D either holding a dollar
> or another piece of land but refrains from taking part in
> the game, he will neither win nor lose. But he will see the
> value of his money or land go up and down like a see saw.
> (6) When the bubble was in the growing phase, everybody
> made money.
> (7) If you are smart and know that you are living in a
> growing bubble, it is worthwhile to borrow money (like A )
> and take part in the game. But you must know when you should
> change everything back to cash.
> ( As in the case of land, the above phenomenon applies to
> stocks as well.
> (9) The actual worth of land or stocks depend largely on
> psychology.
CAclubindia
