The current economic crisis - simply explained

I got a very nice explantion of the current crisis that I thought that I should share with you:

Phajja is the proprietor of a Siri-Paya and Nehari Shop in Lahore. Sales are low and, in order to increase them, he comes up with a plan to allow his customers to eat now and pay later. He keeps track of the meals consumed on a ledger.

Word gets around and as a result increasing numbers of customers flock to P hajja's shop. Phajja's suppliers are delighted and are very willing to sell more and more raw materials for the meals he prepares. Phajja shows them his ledger of receivables and they extend him credit.

A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and gives Phajja a credit line and then increases Phajja's borrowing limit.

Taking advantage of his customers' freedom from immediate payment constraints, Phajja jacks up the prices of his Nehari and Siri-Paye.

Customers dont mind as they are not required to pay on the spot. Sales volume increases massively; Banks and suppliers lend more; Phajja opens more outlets. He sees no reason for undue concern since he has the debts of the customers as collateral.

At the bank's corporate headquarters, expert bankers recognize Phajja's customer loans as assets and transform these customer assets into BONDS.

These negotiable instruments are given exotic names such as SIRIBOND, PAYABOND, MAGHAZBOND AND BONGBOND. These securities are then listed on the Stock Exchange and traded on markets worldwide. No one really understands what the names mean and how the securities are guaranteed but, nevertheless, as their prices continuously climb, the securities become top-selling items.

One day, although the prices are still climbing, a credit risk manager of the bank decides that the time has come to demand payment of one of the debts incurred by Phajja. Phajja in turn asks his clients to pay up.

One by one they refuse; the clients cannot pay back the debts. Phajja refuses to serve them any more. The clients stop coming.

Phajja is really screwed now. He cannot fulfill his loan obligations and therefore claims bankruptcy. All Bonds drop in price by between 80 to 95%.

The suppliers of Phajja, having granted generous payment due dates and having invested in the securities are faced with similar problems. The meat supplier defaults on payment to the sheep and cattle supplier and claims bankruptcy. The atta supplier is taken over by a competitor; Pajja lays off the cook and staff. Bankruptcies soar, unemployment mushrooms.

The bank that lent the money in the first place is set to collapse. It is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties with Phajja commuting back and forth in his Executive jet and Mercedes 500SEL, brokering the deal.

The funds required to save the economic collapse are obtained by a tax levied on the citizens, most of whom do not eat Nehari or Siri-paye.

Now substitute Phajja with USA or GM/FORD or any US Bank.......

lol

wow!! awesome piece of content :)

its fantastic bro , great explanation

Funny but correct. Whole economic system works similarly.

my two cents;if u replace phajja with some building society,those who provide mortgages for home-loans and give the securities a generic name like MBS(mortgage-backed securities),there u have full financial crunch explained.Just to add the role of credit-rating agencies giving the bonds ratings like A,A++ etc,giving investors illusion of the NO or very little credit risk on these asset-backed securities.

BTW,great and simple theory KOOL.good work.

lol if Phajja also visits this forum, then what would he do? Will work on your story or go opposite to it?

Phajja should have thought for a back door to run away :D

Who is phajja?

^ Phajja the properitor of sri payaa shop :P lol

Impressive and creative way of explaining in our local terminology :D

economic crisis is because USA spending money on wars

I'd like to learn how we got to the point of our government bailing out Wall Street. Can someone guide me to 'Government Bailout 101'? I know it had to do with Freddie Mac and Fannie Mae but I'd like to go further back and get an elementary explanation of capitalism and markets and how it evolved to our current economic crisis. I know I'm asking alot but there must be something online that gives the history with explanations.

banking deals

The real reason for

US financial crisis leads the world to Global crisis because US is the world power purchaser from the world different countries. US is the world biggest customer and every country is eager to sell its products to USA.

In return to its services and products they get US$, which is consider the agreed and most reliable reward.

The root of global crisis got start in 1997, when US corporation start moving for production to under developed countries who got organized, educated and cheaper labor force like South Korea, Taiwan, China and recently India. The reason for this big decision was the lack of cheaper and shortfall of labor force in USA. The exercise paid off and the consumer in US start getting happy as they were getting cheaper products. This migration resulted in transfer of technology, raw materials production, jobs etc and above all capital migration as well.

In coming years of this migration US trade deficit started rising and the pressure start coming on US economy, job losses and above all on US$. Meanwhile, the ambitious plans of US to kick Al-Qaida butt pulled them in Iraq and in Afghanistan. They anticipated the war will cost 100 Billion US$ annually, but in reality it was a 500 Billion US$ annually war. This put immense pressure on the economy and US$.

In 1940's when IMF was formed USA was the biggest lender in the world, and by 2008 it was the biggest debtor. The power start shifting. New players like EURO, China, Russia, Oil and other things are on the economic front page.

Greed has led the banks and financial institution in USA to invest alot in derivatives, and when the selling pressure came, everything is gone.

Latest update is Citibank and GM are off the Dow Jones index and their share prices are $1.3 and $.79 respectively.

The financial system is crumbling as the deep foundation of the financial system moved from Gold to Paper currency in last 70 years. In 1930s Gold was 22% of the world wealth and in 2009 its is 5% of the world worth. Technically speaking the value of Gold has appreciated because of high supply of paper currency.

Many surprises are anticipated in coming 2 months, my prediction is US will loose atleast 10% more of its value against GOLD, OIL, British Pound, Euro etc. The fate of the world will be quite different once KHALEJI (Middles East new currency backed by Gold) and Chinese RMB (backed by gold) will come up in 2010 as international currencies.

If you seek any further assistance regarding GOLD, US$, Financial Crisis, US$ fate please contact me through my email.

Hope my view help you.

ya its a very old story first published by a newspaper years ago

I saw da same thing in a documentry of nat geo only names were changed..