Oracles, their Parables and the future of American "Basicland"

Last updated on: March 31, 2010 at 6:53 pm by Desh Kapoor

Oracles, their Parables and the future of American "Basicland" 2010-03-31T18:53:09-05:00 Desh Kapoor

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Charles Munger is the Vice-Chairman of Berkshire Hathaway, the legendary company led by the "Oracle of Omaha", Warren Buffett. Both Munger and Buffett are perhaps two of the greatest investors that the world has known and are renowned for their discipline. They are also fiercely patriotic Americans. I have read several of Buffett’s essays where he has often written parables and stories to bring home the point of fiscal thrift and increase in export-led and wealth generating productive economy.

Way back in 2003, Buffett had written a story of "Squanderville vs Thriftville". There, using a parable, he argued the case for fiscal conservatism. Unsuccessfully.

These following lines presents his case very well:

Eventually, though, the industrious citizens of Thriftville decide to do some serious saving and investing, and they start to work 16 hours a day. In this mode they continue to live off the food they produce in eight hours of work but begin exporting an equal amount to their one and only trading outlet, Squanderville.

The citizens of Squanderville are ecstatic about this turn of events, since they can now live their lives free from toil but eat as well as ever. Oh, yes, there’s a quid pro quo — but to the Squanders, it seems harmless: All that the Thrifts want in exchange for their food is Squanderbonds (which are denominated, naturally, in Squanderbucks).

Over time Thriftville accumulates an enormous amount of these bonds, which at their core represent claim checks on the future output of Squanderville. A few pundits in Squanderville smell trouble coming. They foresee that for the Squanders both to eat and to pay off — or simply service — the debt they’re piling up will eventually require them to work more than eight hours a day. But the residents of Squanderville are in no mood to listen to such doomsaying.

Meanwhile, the citizens of Thriftville begin to get nervous. Just how good, they ask, are the IOUs of a shiftless island? So the Thrifts change strategy: Though they continue to hold some bonds, they sell most of them to Squanderville residents for Squanderbucks and use the proceeds to buy Squanderville land. And eventually the Thrifts own all of Squanderville.

At that point, the Squanders are forced to deal with an ugly equation: They must now not only return to working eight hours a day in order to eat — they have nothing left to trade — but must also work additional hours to service their debt and pay Thriftville rent on the land so imprudently sold. In effect, Squanderville has been colonized by purchase rather than conquest.

Now, Munger has written another parable, titled "Basically, It’s Over" which is on widespread use of Financial Derivatives and the ruin it can bring to the US economy in particular. It centers around "Basicland", a temperate island in Pacific Ocean.

Understood, that these parables are very simplistic in their construction. Their import, however, is profound. Very much like the Panchtantra.

After laying out the issues, he has a character, Good Father give advice to the Government on how to handle the issue now.

First, he suggested that Basicland change its laws. It should strongly discourage casino gambling, partly through a complete ban on the trading in financial derivatives, and it should encourage former casino employees—and former casino patrons—to produce and sell items that foreigners were willing to buy. Second, as this change was sure to be painful, he suggested that Basicland’s citizens cheerfully embrace their fate. After all, he observed, a man diagnosed with lung cancer is willing to quit smoking and undergo surgery because it is likely to prolong his life. (emphasis added)

I believe that his advice is genuine and useful, as was Buffett’s. But a society that is drunk on self-confidence and a belief that nothing can go wrong for them, talk on conservative living is almost blasphemous! So, both Munger and Buffett, have not found many fans, as Munger lays out in context of the Good father.

I feel its going to be tough in the days ahead for the world and the US. But as I say always, – Either you put a Cost to your Failure and Act, or the Failure will put a Cost to you and you will have to act.

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