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The Parable of the Tulips

Thursday September 19th, 2013   •   Posted by Burt Abrams at 12:19pm PDT   •  
@wikimedia Commons

@wikimedia Commons

Once upon a time in a far off land, a beautiful flower was discovered. Its bulbs became highly prized and their prices rose steadily. Word of the rising prices for the bulbs spread across the land and virtually everyone, rich and poor, began to buy bulbs for investment. The price of bulbs soared adding to the buying frenzy. People became rich from owning bulbs and soon spent their other savings. “Why not? We are rich from the bulbs, so why not live a little,” they reasoned.

One day the unthinkable occurred. A wealthy owner of bulbs sold her large collection at auction and bulb prices actually fell. Word of the price drop spread rapidly and nearly everyone rushed to sell their bulbs. As the price of bulbs plummeted, many people were left penniless having spent all their other savings. Some people even had borrowed money to invest in bulbs and now were bankrupt. Worse yet, the loss of wealth in the Kingdom triggered a reduction in spending on other goods. Unemployment rose and the economy fell into depression.

The King called his economic advisor to his chambers and asked what might be done to help the economy. “We should buy tulip bulbs,” replied the economist. “We shall print money and buy bulbs to boost their prices.”

“Go forth and buy bulbs,” commanded the King.

Soon the price of bulbs once again soared and happiness returned to the Kingdom (except for those who had sold all their bulbs). But the King was troubled and recalled his economist. “What are we to do with all the tulips bulbs we are buying? Won’t the paper money that is flooding the land cause problems?” asked the worried monarch.

“These may be long-run problems,” responded the economist “but we live in the short run. Someone else can deal with those problems later.” This answer satisfied the King. So, more bulb warehouses and money printing presses were built.

Post script: On Wednesday, September 18, 2013, Chairman Ben Bernanke announced the Fed would continue its $85 billion in monthly purchases of Treasury bonds and mortgage backed securities.

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September 2013