Hypothetical Economic Crashes due to Hyperbolic Fund Procurement

[Originally published March 8, 2005] Gwen Stefani’s song, If I was a rich girl is both catchy and popular. Taken from an original score from the play, Fiddler on the Roof, it provides a contemporary view of greed and celebrity ambition with relation to today’s society. However, this song makes several grievous errors as it not only is grammatically incorrect, but it fails to take into account very basic economic principles of supply and demand. “I’d have all the money in the world” may sound nice, but in reality would provide the complete opposite effect of possessing wealth. For example, below is a simple illustration of a supply-demand chart for the value of money. The total value of any object can only be determined by the demand for that particular object. For illustrative purposes, the Value is on a scale of 0-2^ (supreme value) and Quantity is set on a scale of 0-*, which will represent “all the money in the world.”

Figure 1

Notice that the value of $1.00 is set at $1.00 and is in equilibrium with the quantity supplied of money in the world, w. Since everyone demands money, it is evened out and is set at $1.00. Notice also, when the value of a dollar is raised (w1), it slides higher on the demand curve, meaning that more people demand it, but a shortage has been created, as there is now less quantity, forcing lower-income people to find alternative sources of wealth. Conversely, when the dollar value is lowered (w2), it slides down the demand scale. People demand it less, and therefore are more willing to part with it and they spend more. Now we will take a look at what happens as Ms. Stefani begins to become a rich girl and starts to accumulate more wealth.

Figure 2

Notice that she, as one consumer, has taken a large amount of money out of general circulation for her own private stash. This will shift the supply curve left (S2). The new equilibrium point has now raised the value to approximately 1.5, while lowering the total quantity. People value the dollar more, and therefore spend less, as there is a lower quantity. The basic postulate of Keynesian Economics states that money must circulate throughout the entire economy in order for an economy to grow. For example, a rich guy buys a boat. The boatmaker then has extra cash and buys a car. Now the car salesman has extra cash so he buys his wife a necklace, etc, etc. until it permeates throughout the society. People make more, therefore spend more, therefore make more. In essence, you MUST spend money to make money. This free-spending keeps the economy at the equilibrium point. However, due to Ms. Stefani’s hoarding of all her money, and the subsequent shift of supply curve, people are valuing money more and spending less. This will stagnant the economy and cause it to freeze up. Now we take a look at what happens when she advances her plan even further.

Figure 3

Ms. Stefani now has “all the money in the world.” The supply line has shifted to the point where it only intersects with demand at the absolute precipice of the curve (S3). This makes the money valuable to the point that all spending is now completely frozen. Quantity is at an all-time low. Nobody has any money to spend, therefore nobody can make any money. Poverty has skyrocketed and shortages abound. The society has been forced to rely completely on other forms of wealth now, as trading of goods and bartering have become the only way to procure goods and services. So Ms. Stefani, in her all-consuming greed to possess all the money in the world has crashed the economy and doomed our entire society, Ms. Stefani included, to revert to pre-medieval forms of social commerce. It’s also a stupid song.

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Hal

Aside from being a champion yo-yoer, I am the full-time computer geek at the American Society of Nephrology. I recently completed my MBA from George Washington University which I am hoping will enable me to finally afford my own bad habits. I also do freelance design, specializing in Flash, PHP, and ASP/ASP.NET.

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