There is a very poor quaint little town where everyone is in a huge debt with someone but with no money to pay for it.
There is hotel which is hardly seeing any business anymore. They are to soon shut it down.
One day a very wealthy guest shows up and he wants to spend a night there. However before he confirms he asks for a tour of the hotel.
The receptionist asks for a security deposit which the guest can take back in case he doesn't like the rooms. The guest obliges.
It turns out by matter of luck this is the exact amount that the hotel owed to the chef as salary for three months which they hadn't been able to pay. They gave the cash to the chef.
The chef saw that this was the exact amount of cash he owed the grocer for months of groceries he hadn't been able to pay for. He paid the grocer.
The grocer realized it was the exact amount he owed the doctor for treating his wife's arthritis.
The doctor paid the money to the nurse for two months of service he couldn't pay for.
The nurse was new to the town so she had been staying in the hotel for a few days before she found a house to rent. She too was poor and couldn't pay the hotel at that time. The money she received from the doctor was exactly what she owed the hotel so she paid.
Now the hotel had got back the exact amount it had paid the chef. Now the guest has finished his tour of the rooms. Turns out he doesn't like it. He takes back his security deposit from the hotel and leaves, never to be seen again.
So everyone's debt has been paid, but nothing is different from before.
No one has earned anything. But now everyone is happy.
Before the guest showed up, everyone in town was stressed out because they couldn't pay what they owed. But after the guest came and left, all those debts got cleared without anyone actually making any extra money.
Sure, the debts were real as everyone owed someone. But since the debts were all interconnected and balanced, that one-time cash flow allowed everyone to pay off their debts.
The paradox shows that sometimes, the stress of being in debt can be solved with just a bit of temporary cash, even if it doesn't make anyone richer. It also highlights how everyone in a small community is financially connected.
So, the debts were real, but they stuck around because there wasn't enough money moving around. The guest's cash provided the necessary push to reset everything, proving that sometimes debt is more about cash flow than a lack of actual resources.
This also shows how if you pay in cash, and don't have to pay taxes, you can keep more money circulating in the system. If a credit card processor gets 3% of every transaction, and the government takes 6% of every sale, eventually the amount of money in this closed loop would vanish.
So pay cash if you can to local small businesses.
I, unfortunately, have an online business where 100% of my money gets whacked with credit card fees and taxes. So... I guess I'm just screwed. LOL.
I've heard that paradox a few times, and thought about it dozens more, as a trained accountant and finance guy, it still boggles my mind. Economists tell us that's how our whole banking systems works. A bank borrows from the Fed, loans it to some guy, who pays another, goes into their bank to make another loan and on and on it goes. Only ten percent or so stays in "reserves" on each transaction.
Yeah, I just recently learned about that 10% Reserve rule, so essentially if I deposit $1,000 into a bank, the bank can loan out $900 to someone else, who can deposit that in their bank which can loan out $810 to another person who deposits that in their bank, and so on, meaning that the first thousand dollars can create literally tens of thousands of dollars of transactions. It's a crazy system.
Sami Shamma
@Reply 2 years ago
The same crazy system operates in the insurance and reinsurance market. When an oil company like Shell takes out insurance on an oil platform, the insurance company will reinsure with another insurance company that will reinsure with a third, and so forth. When that platform blows up, the original, say, hundred million policy, by the time it's all said and done, billions of dollars would have exchanged hands because of the reinsurance.
Kevin Yip
@Reply 2 years ago
That's called compounding, and it's the most powerful money-making phenomenon. Average folk like us can get some compounding by investing.
I started investing in Vanguard 500 in the mid-90s. It is the very first index fund, created in the 70s by Vanguard. It mirrors the S&P 500 index. It cost $60 a share when I bought it. Early this year, it hit $500 a share for the first time, an eightfold increase in 30 years.
Yeah, I always knew about compound interest when I was younger, but I never fully appreciated it until I was well into my forties. My answer to making money when I was younger was just, "Well, I'll work more and make more money." I always knew about interest and compounding and all that stuff because I've been teaching Excel since I was 19 years old, but it wasn't until I firmly grasped the beauty of it - and what it could do for me - that I realized how wonderful it is.
Of course, it's a tool that the rich use to get richer and to keep the poor where they are. LOL. Money makes more money, and once you've got it, it's easy to make more, but it's hard to break in there if you're young, broke, and struggling. It's easy for people with money to say, "Well, just put aside 10% for retirement or 20% for investments or savings," but when you literally have to spend every dollar that you make just to survive and pay the rent and put food on the table, you don't have any money left for investing.
Thomas Gonder
@Reply 2 years ago
In the 80s, I "invested" in a Fidelity Growth Fund. They advertised 8% interest, at the time when rates were still very high (house loans around 13%). For a few months I got my statements, claiming I had made 8% a year. But something looked odd. I got out the calculator and did the math. They were actually only increasing my account each month by 2% per annum. I called. Not one idiot I talked to could explain the discrepancy, all they could say was that I must have done the calculation wrong (even though I knew from economics and finances classes exactly how to do the calculation, with or without a finance calculator). That's when I lost all trust in Wall Street.
Thomas Gonder
@Reply 2 years ago
@Richard The rich bankers use the Federal Reserve to print money (actually, they don't print it, they delegate that task to the mints, which we pay for), then they loan the funny money to us because we don't want to pay taxes for all the stuff we want government to give us today. Tomorrow, we taxpayers pay interest on that funny money that they just made an accounting entry for. It's a wonderful scam. Even worse if you've been a sucker and put your money in a savings/investment account where inflation eats about two-thirds of your pre-tax "return".
One of my favorite shows is American Greed. If you haven't seen it, it's all about scammers and swindlers. They go to people and try to sell them investments and promise a 20% or 25% return, and like idiots, people fall for it. If something is too good to be true, it usually is'actually, it almost always is.
I don't feel bad for these people at all because they're actually the greedy ones. You're going to give me a 25% return on my investment? Sure, take all my money. Then they cry foul because they got suckered. Yeah! You got suckered! You're a SUCKER!
Kevin Yip
@Reply 2 years ago
Those investments that promise you N% return but give you (much) less are likely run by managers who charge substantial commission and/or make poor decisions on managing the funds. These scammy practices are what index funds like Vanguard 500 are supposed to combat, because index funds require no active management, since they mirror the major indices like Dow and S&P. With no active management, you pay much lower commission, and take nearly all the returns. If S&P gains 13% YTD, that is basically what you gain on your Vanguard 500 investment as well.
PBS made a documentary called "Retirement Gamble" (which you can watch for free on YouTube) that explains some of these gotchas that investment firms don't want you to know.
Regarding inflation that Thomas mentioned above, yes, inflation can definitely eat up your returns if your returns aren't high enough. If inflation is 2% a year, and you need to withdraw 4% a year (as is usually the case, since many retirees adopt the "4% rule"), then your investment needs to return at least 6% a year just to break even, and 7% or more if you want your money to keep growing. You can only get such high return rate consistently by investing in stocks, which are riskier. That is the stark reality of investing today.
Yeah... tell me about it... I bought a bunch of Boeing stock right before doors started falling off their planes... Needless to say I'm down almost 4% on a decent sized investment. But big companies (and the market as a whole) almost always rebound. You just gotta let that money sit there long enough. In my case I won't be able to dump this stock for probably a few years. LOL.
Thomas Gonder
@Reply 2 years ago
@Richard Imagine you worked for McDonnell Douglas, where your retirement stock was. Then MDC got bought by Boeing. Now you know why I'm working on the ADS and not martinis.
Kevin Yip
@Reply 2 years ago
I almost never buy stocks from an individual company because it is less preferable to buying a diversified stock fund that includes hundreds of companies, so that if one company doesn't do well, it doesn't drag your returns down. This is another reason to buy index funds like Vanguard 500 or Fidelity 500, which includes stocks from the top 500 companies in the S&P 500. As a whole, the S&P 500 has gained 13% so far this year, and 88% in the last five years. When you invest in the market indices, you can almost be sure they will go (way) up in 10-20 years. When you invest in individual companies, however, you are a lot less certain of what they will become in 10-20 years.
Thomas Gonder
@Reply 2 years ago
@Richard Only 4%? Here's some of my bigger losers (besides Boeing): Revlon (a client), Mattel (family owned), Hawaiian Electric (family owned), Dole (family owned). All publicly owned and raided by robber baron MBAs. The SEC just sits back and lets it happen. My business partner inherited Berkshire Hathaway in the 80s at around $2,000 a share. I thought that was a crazy price for a share of stock. Dumb me.
Yeah I've got my IRA in an index fund (SPY based on S&P) but I've also got my "gamblin' fund" where I bet on stocks for fun. I was up huge before Boeing's fiasco. I'm patient. I don't think there's a danger of them going belly up but it could take a while to get back to zero.
Thomas Gonder
@Reply 2 years ago
@Richard Hold your tongue! Investing in Wall Street isn't gambling. At least with gambling, you have a chance to win.
Thomas Gonder
@Reply 2 years ago
https://youtu.be/eNo9HLgbax0?si=TyrLfeS7gmChr87p
If you think they won't do it again, just remember the Lincoln Savings and Loan Debacle was just a trial run for 2008.
Wall Street gets craftier each decade with the hireling politicians that pass more and more laws to allow the outright theft of your $. Read any stories lately of funds in people's checking accounts just disappearing, and not by the work of some scammer?
Yeah... finance guys are probably 10x slimier than lawyers.
I'm happy because yesterday afternoon Boeing has JUST enough of a peak for my limit order to kick in and sell it at a small profit. LOL. Love those limit orders. :)
Thomas Gonder
@Reply 2 years ago
@Richard On these bad "investments" I hear the words of professors past screaming "sunk cost!". Meaning, often it's better to get out at a loss and move the money to a more productive resource. I learned it, know it, but still can't take a loss and be happy with it, or more often I just can't bite the bullet.
Yeah... that's not bad advice... but I'm in no hurry. I have two halves of my stock portfolio... my IRA which is in the S&P index, so that's just gonna sit there forever anyways... and my "play money" that I day trade with and if I have to sit on it until it turns a profit, so be it. I never NEED to sell it.
Timothy Smith
@Reply 2 years ago
Thanks for all the information of the money scams. Fortunately for me I am now to poor to invest in anything. I lost a large part of my wife's retirement and all my retirement jumping into an ISP for FedEx. So now we are rebuilding our retirement. I at least have my VA disability to live on.
So basically I have learned not to invest in anything now.
Thomas Gonder
@Reply 2 years ago
As a trained accountant and CPA, I know how to read a financial statement. What I learned after working a few years in the financial arena...you can't trust even an "audited" GAAP financial statement. Time and time again over 50 years, half my investments go up, the other half down. The problem is those that go up only go up 15% or so in a good year. The bad investments go down 50% (or more) in a day.
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