Friday, May 16, 2014

$2 Undecillion Lawsuit - An alternative solution

XKCD What-ifs are a pleasure to read. This week Lord Randall wrote about a $2 Undecillion Lawsuit. This what-if got me thinking in an alternative direction, and here is an alternative What-If to the same question.

If you have not read the XKCD article - in the $2 Undecillion Lawsuit a man called Anton Purisima has filed a lawsuit against Au Bon Pain Store, which if he wins will fetch him 2 Undecillion Dollars which is ($ 2 x 1036). Everything in the world can be purchased for $ 7.7 x 1012 so that is significantly more than all the money in the world.

As the xkcd article suggests, 2 undecillion dollars is comfortably higher by magnitudes to the sum total of the money that exists in the world. In modern times though, the sum total of money in the world is not such a clear concept. This is because day by day the world is becoming more of a credit based system than a cash based one. When you have a cash based system the sum total of money in the world is a finite. While things are more flexible when it comes to credit -

In case the Au Bon Pain Store did lose this lawsuit to Anton Purisima - in a cash based system Au Bon Pain simply could not pay. The best they can do is surrender all the cash that they have and everything that they own to Anton. Anton would be rich but not be the undecillionaire which he hopes to be with this lawsuit. However, in the credit based system there is still hope for Anton. All he has to do is convince a bank to loan 2 undecillion dollars to Au Bon Pain so that Au Bon Pain can pay him.

Why would a bank sanction such a sub-prime loan? For a bank to make such a loan, it must see a profit. The bank takes on risk when it gives out a loan and they like to bundle in the cost associated with this risk into the loan agreement via the interest rate or insurance. To offset the risk associated with a 2 undecillion dollar loan, there needs to be a massive payment as an incentive to make the loan. There is not enough money to make this payment but the bank knows that soon there will be one person who will be rich enough to pay. We are talking about Anton here. Anton is not going to be rich if the bank does not make a loan and the bank is not going to make a loan if Anton is not going to make the bank rich.

They strike a deal. Bank will make the loan to Au Bon Pain (with everything Au Bon Pain owns as mortgage), the court will send the money to Anton. In return, Anton must become a 'hyper-premiere' customer of the bank for which the bank will charge a modest one-time fee of 1.9 undecillion dollars. Anton will agree because it's better than nothing and still he will have more money than he can possibly spend.

This leaves 2 ridiculously rich entities in the world - the bank and Anton. They can buy anything and still have almost the same amount of money left over. Anton can do what he pleases with the money. The bank has an agenda though; it still has to make the other 0.1 undecillion dollars to balance its sheets. It made a loan against everything that Au Bon Pain has which is worthless compared to the loaned amount. It must raise the value of everything Au Bon Pain owns in that case, it has more than all the money in the world to do this.

If Au Bon Pain owned all its stores, then the bank can buy property around the stores at ridiculously high pricing driving the price of the property up. Not only has the price of the property gone up but the neighbours of the store are now suddenly ridiculously rich and Au Bon Pain can start charging astronomical prices because people don't know where to spend. This will not only happen to Au Bon Pain but to everything.

People will spend because everyone suddenly has a lot of money and the value of this money is falling fast. As more people have access to preposterous sums of money other people want some of it as well and prices will go up. Moreover, the government will be collecting huge taxes on all these transactions which means that the government will get spending and the inflation will spread like wild fire. The bank and Anton will have a gala time for a short while when they can buy anything they want. If they are fast enough, they can be the 'king / corporate entity of the world'. This will not really happen because people can refuse to sell but they can capture a significant portion of the world's stuff.

Something similar has actually happened before. This is the inflation chart of the Zimbabwean Dollar (If that looks steep then look again and find the logarithmic scale) -
When the Zimbabwean dollar was introduced, it was arbitrarily valued greater than the American Dollar, which was highly optimistic. The Zimbabwean economy was not in good shape and the exchange rate immediately went into freefall. People lost complete faith in the currency and dumped all the Zimbabwean dollars they had, making the fall worse. What eventually happened was that the country moved to using foreign currencies and cell phone talk-time as trading units.

So Anton and the bank will plunge the value of the American Dollar and the country will be forced to move to a foreign currency like the British Pound? Hold on. The banks would have thought of this, they will quickly realise that the USD will fall and will invest in a foreign currency. They will buy out all of it and take the foreign currency down with the dollar. This will go on until a new steady state is reached and the new crazy sum of money is significantly distributed. The world will temporarily move to barter before a new cash based (or limited credit) economy is set up.

The people who were opportunistic during this turmoil will become the new rich and the people who went on a tech detox vacation in the middle of a desert will be the new poor. There will be a complete redistribution reshuffling of the world's wealth. There is a good chance Anton and the bank will end up on the rich side of the new world. If you were a bank would you sanction this loan? I bet some bank would.

Side-note: The bank as per law will have to maintain minimum reserve, but it has to do that only at the end of the day. It can do this in two ways - act so fast that all the turmoil will happen in one day and they own enough barter at the end of it or they can also meet the minimum reserve with a deposit at the central bank, which can make the central bank panic and look for reserve.

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