Wednesday, May 2, 2012

Monetary policy, inflation, and tax: a love story

"In a small, peaceful town there once lived three people: Abbie, Baker and Carlie.
Abbie was a very wealthy aristocrat, and also a philanthropist. Her fortune and position in the town were the fruit of the hard work of her ancestors, but her life was dedicated now only to managing that fortune. She lived to make the common people of the town happy, especially Carlie, who was her personal favorite.
Baker was much more selfish, and looked out for his own interests. He wasn't terrible and mean, just obstinately self-interested. It seems he was born that way; it was in his DNA.
Abbie frequently lent money to Baker, and Baker frequently lent money to Carlie. But in accordance with the ancient and venerable laws of the town, enacted to maintain a decorous distance between the aristocrats and common people, Abbie was forbidden from loaning money directly to Carlie. Nevertheless, Abbie was usually able to help out Carlie indirectly when necessary. She found that when she lent money to Baker, Baker was sometimes more willing than before to lend money to Carlie. And if Abbie loaned the money to Baker at lower rates of interest than previously, Baker would usually reduce the rate of interest he charged Carlie in turn."
By Dan Kervik and posted at naked capitalism, go and read the whole thing.  It's long but it builds in complexity gradually and is thoroughly absorbing.

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