The U.S. Financial Crisis as Explained to a 14 Year Old
This is all over the news, billion dollar companies in the U.S. going bankrupt, houses being bought for $20…. and I never really understood what the heck is going on – but now I ‘kind of’ get it. If economics is not your cup of tea, but you are curious to what exactly all the buzz is about, then this article is for you!
Kevin Nguyen at The Bygone Bureau wrote this amazing article that explains the current U.S. economic and financial crisis to his 14 year old sister using Pokemon as an analogy.
Hit the jump to read the article.
Kevin: Have you been following the news?
Olivia: Yeah, I don’t really get it.
Kevin: Imagine that I let you borrow $50, but in exchange for my generosity, you promise to pay me back the $50 with an extra $10 in interest. To make sure you pay me back, I take your Charizard Pokémon card as collateral.
Olivia: Kevin, I don’t play Pokémon anymore.
Kevin: I’m getting to that. Let’s say that the Charizard is worth $50, so in case you decide to not return my money, at least I’ll have something that’s worth what I loaned out.
Kevin: But one day, people realize that Pokémon is stupid and everyone decides that the cards are overvalued. That’s right—everybody turned twelve on the same day! Now your Charizard is only worth, say, $25.
Kevin: At the same time, you’re having trouble paying back the $60 you owe me. So what would you rather do: try and pay me back the $60 or just default and give me your $25 Charizard?
Olivia: I’d give you the Charizard.
Kevin: Exactly. Who wouldn’t? Now, the bank—I mean me—has lost $25 when I expected to make $10. What’s the lesson here?
Olivia: Pokémon is dumb.
Kevin: True, but keep going.
Olivia: That Pokémon cards might be worth less later than they are now?
Kevin: Close. You just can’t rely on them appreciating in value forever. There’s one other good lesson in this analogy.
Olivia: That you shouldn’t lend me money?
Kevin: A-ha, exactly right! You’re fourteen and have no source of income. What would convince me to lend you money if I’m not sure you can pay it back?
Olivia: Because you could’ve taken my $50 Charizard. So you could have either made $10 or gotten something worth what you gave me. If people didn’t realize Pokémon was dumb, then there was no way for you to lose anything.
Kevin: Now, instead of a loan of $50, imagine that it’s hundreds of thousands of dollars; then instead of a Pokémon card, it’s your house. The U.S.’s prosperity was built on the idea that real estate/Pokémon would never go down. Multiply this wishful thinking by thousands of people in America and you can see the scale of our problem.
Since you couldn’t pay me back, I can’t pay my bills and I can’t loan out any more money. Our country is dependent on the ability to borrow money.
Olivia: That doesn’t make any sense. If I borrow money from you, I’m going to spend it.
Kevin: Well, the idea is that you’ll spend it in a way that will make you more money in the future—like college or starting a business.
Olivia: Oh, okay. I have a question for you: did you use the Pokémon example because you think I’m a nerd?
Kevin: I just wanted to make it easy for you to understand.
Olivia: Fine. But stop telling people I play World of Warcraft. I’m totally over that.
Kevin: Don’t worry, Olivia. I used to be into way nerdier things. Have you heard of Magic: The Gathering?
Olivia: What the hell is that?