Tuesday, January 18, 2011

A Financial Allegory

Debt is a zero sum game where the debtor's liability is equal to the lender's asset.  

This makes debt akin to a game of musical chairs.  

Musical chairs can be a fun and exciting game to play if the number of chairs keeps increasing over time -- yes, there may still be those crazy moments where everyone scrambles for a chair, and in the fear and uncertainty some may even irrationally grab two or three at once, just to be on the safe side.  But in general, with more chairs, things will work themselves out pretty quickly even if the music stops.  Capitalism can be fun for the whole family!

Musical chairs is a lot less fun to play when people keep removing the chairs.

The following charts are taken from a recent Bank for International Settlements report on the interaction between balance sheet recession and demographic trends.  Looks like Chuck Prince is going to need to dance a lot faster in the future.

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