FT Alphaville " The parable of water Presenting an economic journey in felt, looking at whether the system's ails have more to do with an abundance of goods than a shortage of credit because of the system's technological advances and efficiencies. Move ahead to slide 20 for a snapshot of where we *think* we are today. For water, read goods. For receptacles, read money. For receptacle production, read bonds. For receptacle loans, read credit. For ultimate receptacle authority, read government/central bank. 1) The water source. Whilst the water flows, those who live nearest or those who have exclusive access to the water source are richest. 2) The water source stops. When the water stops flowing all are equally unhappy. No one has an advantage. 3) Stores of water - receptacles - are invented. While the water flows, those closest or with exclusive access are still richest. 4) Receptacles have value. When the water stops flowing - in a scarcity environment - the man with the receptacles becomes richest and most powerful. He obtains his power and riches from having everything at a time when others have nothing. 5) Receptacles, receptacles, receptacles... Those who live close to the water source, copy him and make their own receptacles. While the water flows, everyone near the source is equally happy. 6) My kingdom for a receptacle... When the water stops, those with receptacles have an advantage over those who don't. Those with the most receptacles (including our original receptacle man) are the richest and most powerful. 7) The receptacle business When everyone's receptacles run dry, only the man with the most receptacles is left in a position of power through his ownership of water. While the water has true value, the receptacles also develop value in their own right. Those with empty receptacles believe they are better off than those with no receptacles, since they can store water if and when it comes back. Those with surplus receptacles or the ability to create receptacles, meanwhile, induce demand for their own receptacles. Receptacle growth. Those with the ability to create receptacles can lend new receptacles to those prepared to return a portion of the water back when it is needed. Since there is a limited source of water, it makes sense for those who have water, and the means to create receptacles, to lend existing water only to those who can invest successfully in the production of more water. The job of the receptacle creators thus becomes identification of those who will help restore production of water most quickly, but in a way that ensures they will get a share of the future flow of water. Those with access to receptacles at no cost can choose whether or not to lend them out to people with no receptacles for a return. 9) Receptacle investment pays off. When the water flows all are equally happy. All can participate in the collection of water. However, there is a caveat. Not all participants are equal. There are those who have their own receptacles (blue) and there are those who are using receptacles they have borrowed (green). 10) More receptacle growth, more happiness. Because the man who has ability to create receptacles is not constrained in his ability to do so, he can keep lending receptacles to new participants. While the water flows everyone is happy. 11) Uh oh, not enough water - we have inflation! If the man creates too many receptacles, he begins to threaten the water source. Since there are too many receptacles battling over the same water source, the flow of water becomes insufficient to fill all the receptacles to the top. Receptacle capacity isn't fully utilised. The receptacle maker notices, and starts to think about ways he can forgo receptacles and control the water source directly for himself. Everyone, meanwhile, consumes as much as they can. There is a rush on the water source. The most powerful man diverts more flow towards himself, (possibly via an investment in a GSCI water fund that claims to have bought a reservoir.) 12) Receptacle debasement. Everyone is less happy than when they had the ability to fill all receptacles to the top. As more and more water is cordoned off by "smart investors" there is even less water to go round, and ever emptier receptacles. The receptacles are debased. Even if you have a receptacle you can't fill it like you could before. Your receptacle will not be as useful to you as it was before. 12) Receptacle intervention! In order to stop a receptacle crisis, the ultimate receptacle authority - empowered by the people - comes in to regulate affairs. He sees there are too many receptacles around the water source. He buys them to stop them being used. He encourages people to sell them to him by offering a return in water which is better than their current return. Those who have lent receptacles thus call in these receptacles. They then lend them or sell them to the ultimate receptacle authority for a better return. This is an attractive offer because the flow of water is much smaller now than it was before. They believe they will thus benefit from the claim to extra water in the future, since it will compensate for their inability to fill their receptacles to the top today. This leaves those with receptacles happier. Their receptacles are getting fuller because less receptacles are competing over the same water source. They are also getting a better return on their investment than before. Those without receptacles and without direct access to the water are very unhappy. The gap between those who have and those who have not widens. 13) Investment in water flow. When the water stops those with receptacles are happy. Those without receptacles once again look to borrow receptacles. Because there is no water the receptacle maker is encouraged to lend receptacles again in order for the water source to be revived. 14) The cycle repeats. As the cycle repeats, more and more receptacles enter the system. They either circulate through the economy or sit unused at the ultimate receptacle authority. Either way the amount of water which is stored for when the source dries up increases. Collectively, there is a lot more access to water in the event that scarcity returns. 15) Collecting receptacle return. While the water flows everyone is happy, especially those with their own receptacles. If the water stops, those with their own receptacles are happiest, since those who borrowed receptacles now owe them part of the water in their own receptacles. 16) The lower the rate of water, the greater the divide. When the water rate falls, those with borrowed water receptacles will be left with nothing sooner than those with their own receptacles, since they owe a portion of their water to others. 17) Water returns. Cycle repeats again. Even more receptacles enter the system. Every time they are created they allow more people to participate in the water source, and have the water for longer after it runs out. Those with their own receptacles get more and more powerful. As long as the number of receptacles is the system is managed in line with the water rate, the value of the receptacles remains a constant. There is equilibrium. 18) Water development beyond borders. Soon enough others want to develop their own separate water sources, because they don't live near to the original water source. Since a lot of spare water and receptacles have been accumulated by the wealthy they are happy to lend beyond their borders for the prospect of greater returns, and the chance to diversify their water sources, to protect them in the event that their original source stops. Also since the recipients are poorer, and have no receptacles or water at all, they are prepared to forgo more of their water in return for the investment than local recipients. Since this act depletes the number of receptacles and spare water in the original system, the ultimate receptacle authority steps in, releasing its own receptacles to the system, to keep that system in equilibrium. 19) Water, water everywhere. As more and more receptacles are distributed through the system by the ultimate authority, and more and more water sources are developed, more people are able to participate in the flow of water when it comes on. More people are happier than ever before, as they all stand near to a potential water source and have a receptacle. 20) Depression Those holding their own receptacles are less happy, because their advantage becomes less pronounced as more and more people get access to receptacles and a chance to participate in the water flow. They try to restore that advantage by buying up as many receptacles as possible, since it's all about who has most receptacles now. This prevents those people who worked on the water source from participating to its full capacity when it comes on. The water capacity has been created but is not maximised because of a lack of receptacles. 21) Shortage of receptacles. No matter how quickly the ultimate authority adds receptacles, the wealthy buy them up from the system just as quickly. As more and more full receptacles are hoarded by the wealthy for when the water runs out, their power increases. Those who stand near the water source with fewer receptacles, meanwhile, become increasingly less powerful. Instead of two receptacles per head, they now have to share two receptacles among six, which means some have everything, and some have nothing when it comes to satisfying needs at a time of scarcity. Yet, for now the shortage of receptacles doesn't really matter because the water is still flowing. Everyone still has access to the water. 22) Fear of scarcity. For as long as the water runs, it is the fear of scarcity in the future that drives those who have the means to collect and hoard as many receptacles as possible. Those who have previously lent receptacles call them back for fear they might not get them back otherwise. This contracts receptacle supply even more. 23) Things get complicated. Since there is more than enough water flowing, no one with receptacles has an interest in developing yet more water sources, as this just dis-empowers their receptacles. They do, however, have an interest in more receptacles coming into the system, but only if they can be directed straight to them, rather than to those without. Everyone is miserable because they think they won't have any receptacles for when the water runs out. The ultimate receptacle authority, meanwhile, cannot create receptacles quickly enough to compensate for those who contract and hoard supply. Fewer people near a water source have the means to store water. As the flow of water picks up, more and more water is uncollected. More and more water goes to waste. 24) Abundance of water. The problem for the receptacle holders is that the policy only works for as long as there is a fear of scarcity in the future. If it becomes clear that the water source is not going to be depleted anytime soon, the cost of storing receptacles starts to increase, as they become increasingly irrelevant and less desirable. In fact, because there is so much water, receptacle holders resort to creating artificial scarcity to restore the value of their receptacles. They begin to block access to water sources in the mistaken belief that withholding supply will make their own receptacles more powerful when scarcity eventually arrives. 25) Austerity. Eventually these endeavors manage to artificially contract the water supply enough to make the holders of receptacles appear very wealthy. The system prepares to reset, and new receptacle loans are called upon. But those with the ability to lend receptacles know that there is no incentive to invest in new water sources, because there is more than enough. The problem becomes an abundance of water. They decline to make loans. More people go without. More people live directly from the source and learn not to depend on a store of water at all. The ultimate receptacle authority tries to appease by pumping in new receptacles. But this threatens the value of the hoarded receptacles - a.k.a debasement of the full receptacles. Receptacle holders attempt to disempower the authority. They call for it to stop making new receptacles on the basis that there is a scarcity of water and that borrowers will never pay back the premium they owe. The authority cuts the premium and continues to pump receptacles. The receptacle holders can no longer depend on a yield from their own receptacles, while the implied value of their receptacles goes down, even though there is no real scarcity. They begin to support the value of their receptacles by releasing or contracting water supply. For this manipulation to be effective, the number of receptacles in the system must stay constant. They encourage the authority to stop manufacturing receptacles. On that basis the authority runs out of receptacles to lend to the system. 26) Time depreciation of receptacles. All this time, however, the water keeps flowing. Water sources become ever more abundant and plentiful. It becomes increasingly difficult for the receptacle holders to constrain water supply and make it appear there is a water shortage. With no water shortage, people depend on fewer receptacles. They begin to realise they don't need them. Holding receptacles itself becomes a burden. Not only do you get no return, you have to invest heavily in manipulating the water source to make it appear that the receptacles have value. This cost gets greater and greater as the abundance of water increases. This cost is worth it, only if the water one day runs dry. Inducing artificial scarcity becomes the order of the day. In a last attempt to retain power, receptacle hoarders divert flows, create dams, destroy capacity, all the while encouraging as much water to go to waste as possible. They even start wars so as to encourage water to be redirected elsewhere, restoring genuine scarcity. For a while people are duped by the false scarcity that's created, and the value of the water and the receptacles increases. Equilibrium is restored. A few become extremely wealthy. 27) Post-scarcity environment. Yet if water abundance is great enough people will look around and see there is no scarcity. They will see they are better off than they have ever been. Eventually, they will understand all the scarcity is artificial. They will also realise they have no need for receptacles, because receptacles have no value. You can live directly off the source. As those with receptacles adjust to the realisation that they have no advantage over those with no receptacles, there is a crisis in the old system. Ultimately, however, more people are provided with access to a constant supply of water than ever before, and on equal terms. The crisis is only for those who used to have an advantage in the system. Related links: Space opera, beyond-finance edition - FT Alphaville Debt jubilee for one and all - love, the Queen - FT Alphaville Post scarcity economy - FT Alphaville This entry was posted by Izabella Kaminska on Thursday, June 7th, 2012 at 12:44 and is filed under Capital markets, Commodities. Tagged with abundance of goods, artificial scarcity, Deflation, inflation, post-scarcity, technology.