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drbubb

Shell Island, the development of an economy

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I think this question- of cash-on-the-Sidelines- deserves a thread of its own.

 

I will start with an example:

An island with two stocks:

+ One representing ownership in the fishing boat, and

+ The second representing ownership in the coconut tree

 

The island also has a currency consisting of 1000 conch shells

 

islandpicturespl4.jpg..empire-helmet-conch-florida-keys.jpg.JPG

 

Island Wealth

=========

One Fishing Boat : Not priced, but worth maybe 100 shells

Coconut Tree..... : Not priced, but worth maybe 200 shells

Cash held.......... : S$1000 (1000 shells at S$1)

 

Island Wealth.... : S$1,000 Priced (+ S$100 Boat + S$ 200 CC-tree) : S$1,300

 

The fishing boat and the coconut tree provide all the resources needed to keep the Islanders happy, in a sustainable way, but with no improvements over the years. They live at a near subsistence level.

 

On DAY 1 of the capitalist experiment:

The fishing boat owner sells 50 shares in the fishing boat company for one conch shell per share and retains the remaining 50 shares (representing 50%) for himself. After the sale, there are still only 1,000 shells on the island, but the ownership of 5% of the shells has changed.

 

The Fishing boat sets off on a one week fishing voyage, with the boat owner's son as Captain. The boat owner talks up the prospects of the voyage, and everyone gets excited. The next day, he sells another 5 shares in the boat company for two shells per share. So at the day's end, the Island balance sheet looks like this:

 

Original Boat Owner

=============

 

Shells Held : .... S$ 60 (60 shells at S$1 per shell)

Boat shares : ... S$ 90 (45 shares at S$2 per share)

Net Wealth..: ... S$150 (12.5% of the Island's wealth)

 

Rest of Island

=========

Shells Held : .... S$940 (940 shells at S$1 per shell)

Boat shares : ... S$110 (55 shares at S$2 per share)

Net Wealth..: ... S$1050

Coconut Tree..... : Not priced

 

Island Wealth.... : S$1,200 Priced (+ S$ 200 CC-tree) : S$1,400

 

The Islanders may feel more wealthy, but there is no net increase in wealth

 

I CAN DEVELOP this example more- would people find this worthwhile ??

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Can you explain what I'm missing.

It seems that on day 1 your axioms are that you can have 100% 'cash on the sidelines' and that it can, at least in part, be invested in stocks. Surely an attempt to demonstrate that selling stocks doesn't result in increased 'cash on the sidelines' would contradict the axioms.

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Can you explain what I'm missing.

It seems that on day 1 your axioms are that you can have 100% 'cash on the sidelines' and that it can, at least in part, be invested in stocks. Surely an attempt to demonstrate that selling stocks doesn't result in increased 'cash on the sidelines' would contradict the axioms.

 

 

I understand what you're trying to prove now, I can answer my own question. The IPO or bankrupcty would decrease or increase 'cash on the sidelines' but not buying or selling stocks in an exsiting company.

 

So on this island, at least, total wealth is constant, individual wealth represents nothing more than power over others.

If the fishing boat returns with more fish than usual, then the value of fish has decreased relative to the currency, representing deflation, hence increased productivity is deflationary and decreased productivity is inflationary.

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On day 1 of their capitalist experiment, the fishing boat owner sells 50 shares in the fishing boat company for one conch shell per share and retains the remaining 50 shares (representing 50%) for himself. After the sale, there are still only 1,000 shells on the island, but the ownership of 5% of the shells has changed.

 

The Fishing boat sets off on a one week fishing voyage, with the boat owners son as Captain. The boat owner talks up the prospects of the voyage, and everyone gets excited. The next day, he sells another 5 shares in the boat company for two shells per share. So at the day's end, the Island balance sheet looks like this:

 

If I understand right, your saying that the small number of shares selling for S$2 a share could make the people owning the rest of the shares feel that their shares are now also worth S$2 resulting in a huge wealth effect. But this is fictitious wealth because there isn't enough money in the system to support the price, and when the wealth effect disappears the share values go back to S$1 unless there is some kind of bail out to support the S$2 price.

 

 

 

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I CAN DEVELOP this example more- would people find this worthwhile

Yes, it would be interesting to see this model example developed more fully.

 

If the fishing boats are powered by coconut oil and there's a banking-government complex which can "print" shells, this could get ugly.

http://www.gold-eagle.com/editorials_08/ob...ster101708.html

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I understand what you're trying to prove now, I can answer my own question. The IPO or bankrupcty would decrease or increase 'cash on the sidelines' but not buying or selling stocks in an exsiting company.

 

Nope, I'm still wrong, the shells that the boat owner holds from the IPO is indistinguishable from the shells that he/she holds from the second round of stock sales. So the question of whether shells on the sidelines is constant, depends upon whether the shells that the boat owner holds is considered on the sidelines.

 

If we presume, from the real world, that investors would expect that the shells that the boat owner holds be invested or distributed as dividends, then Mish is correct about cash on the sidelines being constant, but wrong about differentiating IPO and bankruptcy from other trading in stocks, in this respect.

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The Islanders may feel more wealthy, but there is no net increase in wealth

 

I CAN DEVELOP this example more- would people find this worthwhile

 

I'm not sure I follow the logic of this example at all.

 

For a start, surely the islanders who feel more wealthy are the specific ones who bought shares at $1 and now see them as worth $2. If they cash those shares in by selling them on, the net wealth doesn't change but they have increased their proportionate wealth and thus their claim on resources.

 

Secondly, you don't value the boat to start with, but then it is assumed to be worth $100 (100 shares at $1). So in a sense the net wealth starts out at $1100. Then it increases to $1200 when the shares go up in value. This doesn't increase the 'real wealth' of the island. Instead it creates at wealth transfer. The boat owner starts out with $100 (ignoring any shells he might have). Now he has 60 shells and 45 $2 shares (= $150). So he is more wealthy in relative terms and so is anyone who bought a share at $1. (He only gets all this if he sells up at this stage, but the point remains).

 

The boat owner and those particular share owners now have a greater claim on resources and since those resources haven't increased, the price is likely to increase to reflect the increased money supply, which implies that these people have become enriched to the cost of the remaining islanders.

 

So the change has been in relative wealth of individuals. Which is surely what the concept of cash on the sidelines is also about? Maybe I'm misunderstanding your intention, but I don't really see what the exampl proves - can you explain a bit more?

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Maybe I'm misunderstanding your intention, but I don't really see what the exampl proves - can you explain a bit more?

 

In case you missed it, this discussion began here:

http://commoditywatch.podbean.com/2008/10/...-mike-are-back/

and is about whether the recent fall in asset prices has resulted in increased cash available for investment.

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Can you explain what I'm missing.

It seems that on day 1 your axioms are that you can have 100% 'cash on the sidelines' and that it can, at least in part, be invested in stocks. Surely an attempt to demonstrate that selling stocks doesn't result in increased 'cash on the sidelines' would contradict the axioms.

 

I have only begun to develop this example.

 

In fact, the next step would be:

 

DAY 2: The Storm

 

There is a bad storm. Some of the islanders fear the boat has been destroyed, and so they go to the Boat company founder and ask them to buy back their shares. He buys 40 shares, paying only 1/2 a shell per share. So we have:

 

Original Boat Owner

=============

 

Shells Held : .... S$ 40 (40 shells at S$1 per shell)

Boat shares : ... S$ 37.5 (75 shares at S$0.50 per share)

Net Wealth..: ... S$ 77.5 ( 7.4% of the Island's wealth)

 

Rest of Island

=========

Shells Held : .... S$960 (960 shells at S$1 per shell)

Boat shares : ... S$ 7.5 (15 shares at S$0.50 per share)

Net Wealth..: ... S$967.5

Coconut Tree..... : Not priced

 

Island Wealth.... : S$1,045 Priced (+ S$ 200 CC-tree) : S$1,245

 

The islanders feel poorer. One of their main assets may be lost. On the other hand, there is now plenty of "sideline cash"

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If I understand right, your saying that the small number of shares selling for S$2 a share could make the people owning the rest of the shares feel that their shares are now also worth S$2 resulting in a huge wealth effect. But this is fictitious wealth because there isn't enough money in the system to support the price, and when the wealth effect disappears the share values go back to S$1 unless there is some kind of bail out to support the S$2 price.

 

Yes.

As you will see, I am headed that way.

The REAL WEALTH on the island hasnt increased, but the claims on the wealth are being shifted around.

Later, I will consider decisions that impact on real wealth, and also the problem of malinvestments

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Yes.

As you will see, I am headed that way.

The REAL WEALTH on the island hasnt increased, but the claims on the wealth are being shifted around.

Later, I will consider decisions that impact on real wealth, and also the problem of malinvestments

 

That makes sense.

 

Also, this is an interesting state because one tends to think of money supply as a unitary item, but here you can see it in two different segments. The boat owner now has a high amount of money, while the islanders have a reduced amount. When the same effect is created in a larger society one might expect to see inflation in 'luxury goods' that are bought by those with a lot of money, and stable or falling prices in the basic goods bought by ordinary people.

 

Also, one could now inject an amount of money equivalent to the money that has been reallocated to the boat owner without getting a net inflationary effect on basic goods. Sounds a bit like the last decade, where basic goods stay at fairly stable level in spite of spiralling money supply, while the inflation shows up in assets, luxury goods and so on.

 

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DAY 3: The boat returns

 

The boat returns from its voyage, undamaged with a good catch. No trades, but it is clear that the shares could trade around S$1.50, if there was going to be any trading.

 

One coconut tree!! Blimey, how much does a coconut cost?

 

DAY 4: Another company is floated

The coconut tree is owned by the Island. And having seen that capitalism can work on the Island, the Island chief decides to "privatise" the coconut tree, selling half the shares (50 shares, or 50%) at S$2.00 per share. Shareholders are promised a dividend, in pieces of coconut, whihc previously they would have had to pay for.

 

The Boat owner decides to buy 10% of the new coconut company, since he has limited uses for his cash. And the boat owner's son has returned from his voyage with a small coconut tree- to your for producing fruit, but if it can be raised successfully, it will bear fruit one day.

 

Original Boat Owner

=============

 

Shells Held : .... S$ 20 (20 shells at S$1 per shell)

Boat shares : ... S$112.5 (75 shares at S$1.50 per share)

CC-Tree shs: ... S$ 20 (10 shares at S$2.00 per share)

Net Wealth..: ... S$157.5 (11.7% of the Island's wealth)

 

Rest of Island

=========

Shells Held : .... S$980 (980 shells at S$1 per shell)

Boat shares : ... S$ 37.5 (25 shares at S$1.50 per share)

CC-Tree shs: ... S$180 (90 shares at S$2.00 per share)

Net Wealth..: ... S$1,197.5

Coconut sapling: Not priced

 

Island Wealth.... : S$1350 Priced (+ S$30 CC-sapling)

 

Now this is interesting. Thanks to the arrival of the new Coconut sapling on the island, there has been the first real increase in wealth. It is not producing coconuts yet, so I value it at only S$30

 

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DAY 5: HAPPY TIMES on the Island

 

This is a day more than a year later. The Boat Owner's son has proven a capable fishing boat captain, partly because he has worked hard to push the value of his shares higher. He has continued to find good places to fish, and the boat has brought back many good catches. In fact, so plentiful are the fish, that the price has fallen somewhat and people are eating better. Some new families have been started, and people on the island feel like they are getting above a pure subsistence level. Those who own shares in the Boat company have benefitted from the fishing success by getting their share of a rising catch. This has brought confidence to boat co. shareholders, and so in the year between the original voyage and day 5, the share price of the boat company has risen steadily, reaching S$4.00 per share.

 

The Boat Co. Founder, who I will now call Mr. Begg, has responded to requests that he let others buy into the boat company, and so he has sold down his interest in the company by 50 shares, at an average price of S$3.00. He is now left with only 25 boat co. shares. Coconut Tree company shares have stayed stable at S$2.00.

 

Original Boat Owner

=============

 

Shells Held : .... S$170 (170 shells at S$1 per shell)

Boat shares : ... S$100 (25 shares at S$4.00 per share)

CC-Tree shs: ... S$ 20 (10 shares at S$2.00 per share)

Net Wealth..: ... S$290 (18.1% of the Island's wealth)

 

Rest of Island

=========

Shells Held : .... S$830 (830 shells at S$1 per shell)

Boat shares : ... S$300 (75 shares at S$4.00 per share)

CC-Tree shs: ... S$180 (90 shares at S$2.00 per share)

Net Wealth..: ... S$1,310

Coconut sapling: Not priced

 

Island Wealth.... : S$1600 Priced (+ S$50 CC-sapling)

 

I put the price of the sapling up, because it has grown in a healthy way

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The island has a stock market. Will you be developing the economy to include other important markets especially the house/hut market and the bond market?

 

Possibly.

At this stage, I am assuming that they all live in simple huts, with no power to run appliances.

They can store dried fish, coconuts, and other simple foodstuffs to get through rough patches

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Do the shells have intrinsic value? So far it seems that this is the assumption.

 

What if the intrinsic value of the shells is actually very small, and a higher value is imposed on them by the central shell authority and the island tax authority?

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Do the shells have intrinsic value? So far it seems that this is the assumption.

 

What if the intrinsic value of the shells is actually very small, and a higher value is imposed on them by the central shell authority and the island tax authority?

 

Their main value would be as a medium of exchange, although they may have some value as jewelry

 

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Their main value would be as a medium of exchange, although they may have some value as jewelry

 

Are you also going to have a thieving class of parasites on the island? You know the ones that debase the currency and end up with all the shells?

 

Ohh and then they stamp all the shells with their serial numbers, so that if you suddenly found a batch of equivalent shells then they will be confiscated from you? Also setup a shop called the Royal Mint or something that then resells at inflated prices the shells in nice boxes...

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DAY 6: THE ARRIVAL OF HIGH TECH

 

A crate was found by a teenager on the island. In it were saws, hammers, nails, and sealant. The Boat Owner was one of the first told, and he bought the crate and everything in it for S$10 (10 shells), and asked the boyt not to reveal it had been sold. Quietly, he sold 15 of his remaining boat shares at S$3.50, the new prevailing price.

 

Original Boat Owner

=============

 

Shells Held : .... S$195 (195 shells at S$1 per shell)

Boat shares : ... S$ 52.5 (15 shares at S$3.50 per share)

CC-Tree shs: ... S$ 20 (10 shares at S$2.00 per share)

Tools, etc....: ... S$ 10 (saws, hammers, nails, sealant)

Net Wealth..: ... S$277.5 (xx% of the Island's wealth)

 

Rest of Island

=========

Shells Held : .... S$805 (805 shells at S$1 per shell)

Boat shares : ... S$297.5 (85 shares at S$3.50 per share)

CC-Tree shs: ... S$180 (90 shares at S$2.00 per share)

Net Wealth..: ... S$1,282.5

Coconut sapling: Not priced

 

Island Wealth.... : S$1560 Priced (+ S$50 CC-sapling)

 

Rumors of some tools being on the island leak out, and people wonderto what use they will be put.

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I know you're trying to keep this simple, but you only seem

to considering the capital side of the equation.

Surely there should be a labour component.

The boat owner is exchanging his labour (catch)

essentially for free, and the other islanders seem

to do nothing in return for their food or shells

(other than eat and reproduce).

 

Does not the increase in popultation increase

the wealth generating potential of the island -

more hands to do labour, as well as that of

the fisherman who can then sell more fish....?

 

Maybe I'm getting ahead of you, but surely labour comes first,

assets follow as a result of their ability to enable labour

to seek new sources of food etc, which can be exchanged

against the labour of others, via the medium of money.

 

ABB

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I know you're trying to keep this simple, but you only seem

to considering the capital side of the equation.

Surely there should be a labour component.

 

You are right: I am focussed mainly on assets and capital.

Yes, The assets and capital are worthless without the labor to "energise" them.

 

empire-helmet-conch-florida-keys.jpg.JPG

 

To simplify this exercise, I have assumed that labor on its own, can provide a subsistence living for

the islanders. I am trying to show what types of things add to the asset wealth of the island.

Eventually, I will be looking at issues like malinvestment, the existence of not of "cash on the sidelines",

wealth destruction, wealth creation, planning, etc,

 

If you want to throw in you own examples of "alternative days", please feel free to do so.

 

== == ==

 

DAY 7 : GREY TUESDAY

 

At an island feast, Beeg, the boat company founder reveals that he has acquired some tools, and he will put them to work building critical projects for the island. Everyone gets excited when he reveals that his first project will be to build a second boat.

 

He reminded everyone of his own history. He arrived on the island on the boat with his wife, Merta, and his teenaged son, Botti. They were only survivors of a long voyage from a neighboring island. It took years to repair the boat, and make the fishing nets that have now made it so successful, under the leadership of a grown-up Botti.

 

A new boat, would help to increase the catch, and would also mean that the island would have greater security in the future, since they would not be reliant on a single boat.

 

On Monday, a few people decide to sell their shares in the boat company, realising that if there are two boats out fishing, then the catch would be bigger, but value of fish would decline. There is already enough fish on the island, and a fish glut would mean the value of the catch would decline. Boat company shares are trading at S$2.50 by the end of the day.

 

On Tuesday, the only buyers of boat shares are prepared to pay S$1.00, and there are many sellers at S$1.50. Beeg is approached by many islanders, saying, "You cannot build that boat. It will ruin us."

 

Beeg says, "But we agreed on Sunday. Everyone agreed that we need a second boat, just in case we lose the first one."

 

Eventually, Beeg agreed to buy back any shares for sale at S$1.50, and that the new boat would only be used, when needed. Most of the time, one boat would be held in reserve as a sort of insurance policy."

 

To further reassure people, he agreed that the second boat would be built and owned by the original boat company. This way, they could avoid ruinous competition between rival boat companies.

 

By the end of Grey Tuesday, he had repurchased 34 Boat company shares at S$1.50 (S$51):

 

Original Boat Owner ("Beeg")

===================

 

Shells Held : .... S$144 (144 shells at S$1 per shell) was S$195

Boat shares : ... S$ 73.5 (49 shares at S$1.50 per share) was 15

CC-Tree shs: ... S$ 20 (10 shares at S$2.00 per share)

Tools, etc....: ... S$ 10 (saws, hammers, nails, sealant)

Net Wealth..: ... S$247.5 (xx% of the Island's wealth)

 

Rest of Island

=========

Shells Held : .... S$856 (856 shells at S$1 per shell)

Boat shares : ... S$76.5 (51 shares at S$1.50 per share) was 85

CC-Tree shs: ... S$180 (90 shares at S$2.00 per share)

Net Wealth..: ... S$1,112.5

Coconut sapling: Not priced

 

Island Wealth.... : S$1360 Priced (+ S$50 CC-sapling)

 

Some who lost money on buying and selling Boat Co. shares are beginning to grumble that Beeg is "too rich".

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I'm sure I'd quickly tie myself in knots even attempting that. :)

Keep going...

ABB

 

Bubb, do you have any updates to the shell island economy? I think this thread is fascinating, as it helps to simplify basic market economy concepts.

 

Thanks :)

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