How to sell $20.00 for far more than $20.00

First of all he demonstrates the $20 note to whole class and says that he will give it to the student who will give him back the highest sum. But there is one condition. The student whose sum will follow the winner’s sum must give his sum to the professor too. For instance, let’s suppose that two leading bids are $15 and $16. So, the winner will obtain $20 in exchange for his $16 and the second student will give his $15 to the Professor.

Auction starts with $1 bid and very fast reaches $12-$16. At this point most students stop bidding and there’re left only two students with highest bids. Slowly they reach $20 bid. Obviously from this point to win in sum is impossible but to lose own money and get nothing back none wants.
As soon as the auction gets passed the $21 bid, class rolls with laughter. So smart MBA students are ready to give more money then the face-value is. Indeed, that’s rather comic. However the auction goes on and reaches $50 bid; then – $100; sometimes – $200 or more.
I assume this has something to do with the current bailout. The Fed keeps printing money and throwing it away in order to make sure the economy doesn't "stall." And since the economy keeps threatening to stall, they keep printing more money, and "injecting" it into the economy. Because in the game of cash manipulation, to come in second is to lose horribly. And yet, once things get out of control, coming in first is also horrible loss. The only way to win, as they said in "War Games", is not to play.

In real life, with the Fed printing money, there is no way to "not play" except to be broke. If you ignore the whole thing you lose money due to inflation. If you are in stocks there is huge variability. If you are in bonds you also lose money due to inflation - just less. If you're hugely in debt, you can sort of win, because you end up paying off your loan in inflated dollars, although then you're in debt and at risk.

Basically, if you have money of any kind, and someone else has the power to print more of it, you are screwed. I don't see a real way to win at that except to make sure you get the freshly printed money before someone else does. So in that sense, the winners of the current bailout are the financial firms. Everyone else loses.

It's not good.

Happy Thanksgiving.

Heh - Andrew J. Galambos used to tell a story, which I have not been able to confirm, about the origins of Thanksgiving. The way he describes Thanksgiving is different from the version you learned in grade school. In grade school, you learned that the Puritans were dying right and left until the kind Indians taught them about corn and such like things; eventually they had a bountiful harvest which was celebrated with Thanksgiving. (Never mind that celebrations of bountiful harvests go back to the beginning of time.)

In Galambos' story, the Puritans set up a socialist system were each person was given a hunk of land to farm and then everyone contributed to the global storehouse. For two years, nearly everyone starved, because nobody wanted to work hard to give all their food away. Eventually, the governor threw his hands up and said, "You're all on your own!" and the result was the best harvest the Puritans had ever had. Capitalism FTW.

I wish I could confirm that story. I tried to read Of Plymouth Plantation by Governor William Bradford, but it was too tedious and I gave up.

Anyway, it's fun to think of Thanksgiving as "Happy Capitalism Day" except, well, things are pretty screwed up, and there is a shortage of happiness. I maintain the lack of happiness has little to do with Capitalism and much to do with a consistent policy of inflation, but there you go.

BTW, the reason the government likes inflation is this: it makes people spend money. The idea is that if you know prices are generally going up, you won't hesitate to buy what you want in order to get a bargain. (I keep hearing this justification on the Planet Money podcast.)

If this was true, however, no computers would ever have been sold after the first one. Clearly something like a billion computers have been sold in a market where it is a near certainty that prices are going down and performance is going up.

So, it's all a lot of crap. I think the guys in charge just like to print money. It feels good and people are happy until the big crash.

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