Wheeler Dealers

Sam mows his neighbor’s lawn all summer long, earning a total of $500.00 dollars, which he saves towards the purchase of a new iPad.

While Sam stands in line at the Apple store, a man dressed in a smart looking pin-striped suit politely introduces himself as a financial consultant and tells Sam he will guarantee him a lower price on the iPad he wants, if he is willing to wait for two weeks to purchase one. He explains that he has an agreement with Apple, that allows him to redeem Apple’s stock when it reaches a soon-to-be-triggered profit margin, if he guarantees to sell 100 iPads a week.

He continues to explain that he gets a volume discount for iPads and would gladly redeem him an iPhone for only $350.00 dollars payment now, on a derivative, and then exchange it for the iPad in two weeks.

Now, Sam is skeptical and understands the offer, but Sam is uncertain of the risks. “How do I know you will really keep your promise,” he asks? The man in the pin-striped suit pulls out an official looking piece of paper with a seal on it that says, “U.S. government guarantee for iPad discount.” It is dated and signed by Timothy Geithner of the U.S. Treasury. The piece of paper that Sam eventually swaps for $350.00 says “iPad Derivative,” in a big script font, in golden letters.

Well, Sam is a patient fellow. He returns to the Apple store in two weeks and tries to redeem his derivative with the big golden letters. The store clerk however, informs him that there has been a run on iPads, and that Apple has been unable to keep up with the demand.

“They should have a new shipment next week,” the clerk declares. Sam feels a little uneasy. He looks down at the derivative and slips it carefully back into his pocket. Since he feels hungry, he goes to a Deli and orders a huge Rueben sandwich and a large coke. He pays out $12.00 for lunch from his remaining $150.00, and spends another $60.00 for gas on his way home. Another week later, Sam returns to the Apple store and hands the derivative to the clerk, fully expecting to come into possession of an iPad. “I’m sorry, but there was a factory recall on this model . . . a few bugs in the screen had to be fixed. We won’t have the newer ones in for at least another week,” explains the clerk.

Sam is upset. He calls the man who sold him the derivative and demands to know if he can get his money back, but the man who answers the phone explains that he is not that man and that he is actually the new holder of the that man’s contracts. He also explains, that there were some irregular issues with the previous man’s business practices and that Sam could not get his cash until the company got paid by the U.S. federal government on its insured holdings.

It seems that the U.S. government has over extended its various guarantees for a large number of derivative transactions. Mortgage-based securities on properties which have been over-leveraged or erroneously represented, currency swaps, speculative technologies, bond backed retirement pensions, etc. have not performed and the U.S. government must step in to rescue a financial system that is now on the verge of collapse.

All these millions of dubious transactions must proceed or nobody will trust the value of their money anymore – and (Heaven forbid), may even try saving their money rather than spending it.

The entire world must come to the rescue (especially China) and since China has very large monetary reserves, it decides to buy more of the U.S. debt at what seems like a reasonable rate – (it actually needs to buy U.S. debt because China wants to keep supporting the American consumer by exporting more i-pads to people like Sam).

Soon China discovers that it does not have enough monetary reserves to exchange for any more US Treasury Notes, (pronounced American debt), and they complain to Timothy Geithner that China must slow down their purchase of treasury notes and that the U.S. should curb their accelerating debt.

In response Timothy brags that the US government can easily pay off its debts and later he calls the Fed Chairman requesting it purchase several billion dollars in treasury notes to cover a ‘shortfall’ in the U.S. treasury auctions for that month. (After all, unlike Geithner, China, Japan and Europe don’t understand how the U.S. can pay its existing debts – let alone trillions more.)

Sam eventually gets his iPad five weeks later. He is happy . . . until he opens his mail. His tax software has arrived. He runs his new TurboTax program for a quick look at April 15th.

It seems the U.S. Treasury is taxing him . . .

. . . for three hundred and fifty dollars.

Milton