If you don’t know what the hell is going on with the economy and only know that it’s kinda majorly fucked, read on. (This article is resposted from HERE)
Economist Kevin Nguyen explains the country’s economic woes to his younger sister, using Pokémon as an analogy. Seriously.
The following is an actual conversation I had with my younger sister, Olivia. She likes to draw, play World of Warcraft, and now, she’s the only fourteen-year-old girl who understands the U.S. economic crisis.
Kevin: Have you been following the news?
Olivia: Yeah, I don’t really get it.
Kevin: Imagine that I let you borrow $50, but in exchange for my generosity, you promise to pay me back the $50 with an extra $10 in interest. To make sure you pay me back, I take your Charizard Pokémon card as collateral.
Olivia: Kevin, I don’t play Pokémon anymore.
Kevin: I’m getting to that. Let’s say that the Charizard is worth $50, so in case you decide to not return my money, at least I’ll have something that’s worth what I loaned out.
Kevin: But one day, people realize that Pokémon is stupid and everyone decides that the cards are overvalued. That’s right—everybody turned twelve on the same day! Now your Charizard is only worth, say, $25.
Kevin: At the same time, you’re having trouble paying back the $60 you owe me. So what would you rather do: try and pay me back the $60 or just default and give me your $25 Charizard?
Olivia: I’d give you the Charizard.
Kevin: Exactly. Who wouldn’t? Now, the bank—I mean me—has lost $25 when I expected to make $10. What’s the lesson here?
Olivia: Pokémon is dumb.
Kevin: True, but keep going.
Olivia: That Pokémon cards might be worth less later than they are now?
Kevin: Close. You just can’t rely on them appreciating in value forever. There’s one other good lesson in this analogy.
Olivia: That you shouldn’t lend me money?
Kevin: A-ha, exactly right! You’re fourteen and have no source of income. What would convince me to lend you money if I’m not sure you can pay it back?
Olivia: Because you could’ve taken my $50 Charizard. So you could have either made $10 or gotten something worth what you gave me. If people didn’t realize Pokémon was dumb, then there was no way for you to lose anything.
Kevin: Now, instead of a loan of $50, imagine that it’s hundreds of thousands of dollars; then instead of a Pokémon card, it’s your house. The U.S.’s prosperity was built on the idea that real estate/Pokémon would never go down. Multiply this wishful thinking by thousands of people in America and you can see the scale of our problem.
Since you couldn’t pay me back, I can’t pay my bills and I can’t loan out any more money. Our country is dependent on the ability to borrow money.
Olivia: That doesn’t make any sense. If I borrow money from you, I’m going to spend it.
Kevin: Well, the idea is that you’ll spend it in a way that will make you more money in the future—like college or starting a business.
Olivia: Oh, okay. I have a question for you: did you use the Pokémon example because you think I’m a nerd?
Kevin: I just wanted to make it easy for you to understand.
Olivia: Fine. But stop telling people I play World of Warcraft. I’m totally over that.
Kevin: Don’t worry, Olivia. I used to be into way nerdier things. Have you heard of Magic: The Gathering?
Olivia: What the hell is that?
A friend of mine said this was only half the picture, so I told him to take a crack at explaining it using the same analogy. This is what he came up with:
After loaning the $50 to his little sister and taking the Pokemon card as collateral, Kevin makes ten similar $50 loans to his sister’s friends, who each give him another Pokemon card as collateral. So, now he’s got $600 owed to him by ten different people, and an expected profit of $100. Kevin would like to make more Pokemon … loans, but he doesn’t have the cash available to do it.
Kevin’s solution is to go to Lyndsey. Lyndsey offers to buy Kevin’s right to collect the Pokemon loans from him for $550 — so that Kevin reduces his profit from $100 to $50, but now has the cash in hand to make more Pokemon loans. Lyndsey is betting that because Kevin has exercised good judgment as a lender and the Pokemon cards are expected to hold their value, she is pretty much assured of a $50 profit…
Meanwhile, Kevin continues to make Pokemon loans, and Lyndsey continues to buy up those loans from him in ten-loan packages. Now that he doesn’t have to bear the risk of the borrowers failing to pay him back, however, Kevin starts giving Pokemon loans to ANYONE. Random 12-year olds walk in off the street and ask him for loans, he hands out … the money, and then quickly turns around to sell the loans to Lyndsey.
Meanwhile, Lyndsey’s loan-buying strategy becomes popular. All of her friends start buying up Pokemon loans as well.
By the time that Lyndsey realizes that these borrowers are far riskier than she’d thought, Pokemons have been devalued. She is forced to shut down her loan securitization business, files for bankruptcy, and defaults on all of her debts to various other friends. But all of those other friends have made the same risky decisions, though, this causes a domino effect of ever-worsening unpaid debts within her entire social circle.