Like many Canadians, I muse about the future of the Cdn dollar relative to the USD. Four years ago, Warren Buffet gave his opinion – prescient, per usual. If you haven’t yet read him, this is a wonderful introduction. The reading really gets going when he starts describing Squanderville and Thriftville, as illustrative of economies.
Imagine Thriftville and Squanderville as two islands, he says. They have very simple economies – consuming only exactly what they produce. Each resident works 8 hours a day to produce, and consumes 8 hours/day worth of items.
Years go by, then: innovation! Thriftville residents begins working 16 hours per day, but still consume only8 hours/day worth of the items. What do they do with all the other 8 hours/day worth of goods? They ship it over to Squanderville, in exchange for paper IOUs from Squanderville. Squanderville is ecstatic – they get to stop working altogether, and yet continue to consume the same amount as always!
This carries on swimmingly until both Thriftville and Squanderville get a little uneasy. Thriftville starts to wonder, “will Squanderville pay us back for all our hard work?” and Squanderville, now a couple generations later, starts to think, “Thanks Mom and Dad. Thanks so much — you’re dead and gone, but I’m stuck holding your lousy IOUs! Glad you enjoyed a lifetime of meals on me!”
Tensions rise. Buffet offers a possible solution, but I think the Econ 101 paragraphs are his (more detailed than I gave) descriptions of the two islands.