Basically, It’s Over: A Parable About How One Nation Came To Financial Ruin

Charlie Munger, Warren Buffett’s less famous but no less capable colleague at the helm of Berkshire Hathaway, makes some ominous predictions for 2012 (albeit in the form of a modern-day parable), and this time there’s nothing sketchy about the science. Be afraid, people. His parable appears in Slate:

In the early 1700s, Europeans discovered in the Pacific Ocean a large, unpopulated island with a temperate climate, rich in all nature’s bounty except coal, oil, and natural gas. Reflecting its lack of civilization, they named this island “Basicland.”

The Europeans rapidly repopulated Basicland, creating a new nation. They installed a system of government like that of the early United States. There was much encouragement of trade, and no internal tariff or other impediment to such trade. Property rights were greatly respected and strongly enforced. The banking system was simple. It adapted to a national ethos that sought to provide a sound currency, efficient trade, and ample loans for credit-worthy businesses while strongly discouraging loans to the incompetent or for ordinary daily purchases.

Moreover, almost no debt was used to purchase or carry securities or other investments, including real estate and tangible personal property. The one exception was the widespread presence of secured, high-down-payment, fully amortizing, fixed-rate loans on sound houses, other real estate, vehicles, and appliances, to be used by industrious persons who lived within their means. Speculation in Basicland’s security and commodity markets was always rigorously discouraged and remained small. There was no trading in options on securities or in derivatives other than “plain vanilla” commodity contracts cleared through responsible exchanges under laws that greatly limited use of financial leverage.

In its first 150 years, the government of Basicland spent no more than 7 percent of its gross domestic product in providing its citizens with essential services such as fire protection, water, sewage and garbage removal, some education, defense forces, courts, and immigration control. A strong family-oriented culture emphasizing duty to relatives, plus considerable private charity, provided the only social safety net.

The tax system was also simple. In the early years, governmental revenues came almost entirely from import duties, and taxes received matched government expenditures. There was never much debt outstanding in the form of government bonds.

As Adam Smith would have expected, GDP per person grew steadily…

[Be sure to read the rest in Slate]


Majestic is gadfly emeritus.

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2 Comments on "Basically, It’s Over: A Parable About How One Nation Came To Financial Ruin"

  1. tonyviner | Feb 26, 2010 at 2:53 pm |

    How long have people been saying it is over? How long will they continue to do so?

  2. Anonymous | Feb 26, 2010 at 7:53 pm |

    How long have people been saying it is over? How long will they continue to do so?

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