Thursday, August 7, 2008

Consumer Spending - Part 1 (Farmer Bob and Farmer Joe)

I rarely get inspired to write at night but this subject is something that has been marinating in my head for a few days now and it seems like it all needs to burst out now.

America has been successful for many reasons but the most troubling also seems the most important. It seems the success we put on for the world is truly just a mirage.

It's all a facade(pronounced Fa sod [a showy misrepresentation intended to conceal something unpleasant ]). Who says you can't learn new words on this blog!!!! :D

Farmer Bob and Farmer Joe

Before we get into all the facts and figures, I wanted to make sure everyone had a clear grasp of the problem so a small analogy like story should do.

So farmer bob is a hard worker, he makes enough money to get by his day to day life and he lives pretty comfortably. But farmer bob has a new baby on the way and really needs that extra income.

So farmer bob devises a plan. He has plenty of extra seeds and land for which to grow a new cash crop on but he lacks gasoline to power his tracker the extra 2 acres. :(

He doesn't have any spare money either, so he can't just go out and buy the extra gasoline he needs.

Farmer bob becomes very sad until one day he meets farmer Joe in a grocery store. He overhears him saying that he has extra gasoline and he doesn't know what to do with it and no one will buy it from him.

Farmer bob later decides to talk to farmer Joe and they settle on an agreement to give farmer bob the extra gasoline for free as long as farmer Joe gets paid after the harvest of the new 2 acres of land.

The problem arises - A debt unpaid

After half a year the crop is ready and sold and farmer bob gets the extra profits from the new land he had planted.

He makes more than enough to pay farmer Joe, and take good care of his new infant, and pay for next years gasoline.

But Farmer bob gets kinda greedy though and spends most of the extra money he gets, leaving him not having enough to pay for farmer Joe's gasoline.

He talks the problem over with farmer Joe and Joe tells bob he forgives him and that the gasoline he gave him was extra anyways.

So they devise a new system, Joe will give farmer bob the gasoline he needs again this year so he can make a new cash crop again, and next harvest farmer bob will pay farmer Joe back in full.

All farmer bob has to do now is pay farmer Joe 10% of the money he owed to farmer Joe this year, as interest, and next year he can use the money he gets to pay last years, this years, and next years gasoline.

The plan seems simple and Farmer bob has more than enough to pay Joe's small 10% interest fee and help take care of his new infant.

The never ending cycle begins

A year passes again and the new crop is harvested again and farmer bob receives his money.

He gets kind of tempted at the new farming equipment and is sadly tricked into buying it by the salesmen.

Again he goes to his friend Joe, not able to pay and Joe says the same thing he said last year.

"Don't worry my friend, it was extra gasoline as well, just pay me 10% and you can pay the last two seasons gasoline next year. You make more than enough in one harvest to pay 10 gasoline load fulls. "

Farmer bob feels delighted and again can take care of his now 1 year old infant, using the money he saved on her, and now having NEW farming equipment!

His life is really looking up and none of the other farmers can understand how he afforded all that shiny new equipment!!

The period of fake happiness begins

This cycle continues and this is the result:

Joes actual gasoline cost is 100 dollars for 2 acres, but farmer bob only pays 10%
Farmer bob makes 1000 dollars extra per each harvest.
His infant needs 500 dollars the rest he uses to buy things, such as a new car, farming equipment, etc.

10% interest of $100 subtract 500 for infant

Harvests Joes gasoline cost Extra money gained New amount owed

1st harvest 10 490 100
1 year 2nd harvest 20 480 200

3rd harvest 30 470 300
2 years 4th harvest 40 460 400

5th harvest 50 450 500
3 years 6th harvest 60 440 600

7th harvest 70 430 700
4 years 8th harvest 80 420 800

9th harvest 90 410 900
5 years 10th harvest 100 400 1000

Money injected into the economy(Money bob wastes, total of extra money gained column): $4,450

So farmer bob now pays interest equal to the amount of gasoline he pays per year, but that's better than paying 1000 dollars and being left with nothing for his new child!!! :(

There's a catch now though... his infant is all grown up now, and 500 dollars just won't do.

New clothes almost every year because he's growing, and school supplies, inflation of the economy, and a bigger mouth to feed are all adding up.

And rather than saving up his money, farmer bob used it all every year, to buy new things he probably didn't need.

Now he needs to make 1,000 dollars for his growing child.

He sits down and speaks to Farmer Joe again, and farmer Joe agrees to give him double the amount of gasoline he gave him before, so farmer bob can use the 2 acres of land he has left to try and take care of his new child.


The fake happiness widens

Lets see what happens:

He makes 2000 dollars extra now, but he looses 1,000 because of his child.

farmer Joe payment
subtract 1000 for child New amount due

11th harvest 120 880 1200
6 years 12th harvest 140 860 1400

13th 160 840 1600
7 years 14th 180 820 1800

15th 200 800 2000
8 years 16th 220 780 2200

17th 240 760 2400
9 years 18th 260 740 2600

19th 280 720 2800
10 years 20th 300 700 3000

Farmer bob is really happy now, he doesn't care that he's paying 300 dollars now for 200 dollars of fuel.

He makes an extra 700+ dollars a year!!!

His new child is well fed, he uses ALL that extra money to buy stuff (DOUBLE what he was getting before), and he's living happier than all the other farmers.

Money injected into the economy(Money bob wastes, total of extra money gained column continued): $4,450 + 7900 = $12,350

The point of no return

This cycle continues for another 5 years, all the while the child grows up in the most comfortable house you could ever imagine, especially for a farmer.

21st 320 680 3200
11 years 22nd 340 660 3400

23rd 360 640 3600
12 years 24th 380 620 3800

25th 400 600 4000
13 years 26th 420 580 4200

27th 440 560 4400
14 years 28th 460 540 4600

29th 480 520 4800
15 years 30th 500 500 5000

There is one catch though with teenagers, and that's the fact that at 15 they are going to need more than what they needed at 10.

It seems farmer bob now needs to make 1500 dollars for his new teenage son. Sadly that leaves him with no extra money. He has a small savings, he owns his house now, and he has no idea how he can make the 10% payment to Farmer Joe.

Money injected into the economy(Money bob wastes, total of extra money gained column continued): $4,450 + 7900 = $12,350 + 5900 = $18,250

As you can see, farmer bob is in a big problem.
He owes Farmer Joe 5,000 dollars, he can't pay him for next years gasoline, and therefore can't pay for his extra son to live in his own home.

What is he to do?

While talking to a few neighbors and just thinking in his home, he discovers a grim secret.
He finds out that Farmer Joe has been handing out extra gasoline to other farmers, after they saw Farmer Bob making huge amounts of money and buying lots of items.
That was 5 years after farmer bob started.

They too wanted a great home, with all the extra money to use, and the fake happiness that came with it, so they arranged similar deals with Farmer Joe.

But because they had higher interest rates and they didn't have too much extra land like farmer bob had, the vast majority of them are in the same boat as farmer bob.

The local economy crumbles

That year, the local economy suffered.
The group of farmers had to take out a loan to buy time to think out another course of action.

But since there was no extra money left, none of the farmers went on a shopping spree and they didn't spend the big amounts of money they used to.

Since they had no extra money, they didn't buy anything extra at all.

Of the 30 some stores in that small and booming city, 20 of them went into bankruptcy, some of them unique stores with no competition that the city needed.

But what can a business do if it has hardly any money and not even 1/10th the customers it used to?

The fate of the city remains unknown, but the skies were getting darker, and it seemed like the sun might never rise again.

Wait for part 2 of the consumer spending series to see how this story reflects our current crisis and to finally get into all those facts and figures.


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