Guest editorial: A financial market fairy tale story about two boys, a horse and a cow


by Antony Mueller

Antony Mueller teaches economics at the University of Caxias do Sul (UCS) in Brazil. He is an adjunct scholar of the Ludwig von Mises Institute and serves at the program “International Political Economy” of the Universidad Francisco Marroquin (UFM). He presented at the recent Austrian Economics and Financial Markets conference in Las Vegas, and will be presenting at the upcoming Austrian Scholars Conference in Auburn.

Once upon a time, two farm boys were sent to the market: one of them to sell the family’s cow and buy a horse, and the other boy to sell his family’s horse and buy a cow.

When the two boys came to the market, one of them cried. “One million for my cow – horse wanted!” The other boy, who wanted to sell the horse, heard the call not too far away from him, and thought: “One million – that sounds good!”, and so he cried: “One million for my horse!”

When the two boys came together, they said to each other “One million for me – one million for you!” – “Deal done!” both of them screamed almost at the same time, and the boy who had the cow exchanged it for a horse, and the boy who had a horse exchange it for the cow.

Proudly they went home, and each of their parents were quite satisfied, because the boys had done what they were told, with the one boy selling a cow and buying a horse, and the other boy selling a horse and buying a cow. None of the boys said anything about a million for they did not really know what that meant. After all, they knew a lot about horses and cows, but very little about money.

It was different at the market place. Here, the news spread like wildfire: “Horses are valued at one million a piece!” people said to each other in awe. Yet some doubt remained.

But the other day the headlines at the Cow Street Journal (CSJ) and The International Horse Times (IHT) made the rest of the doubters keep their doubts for themselves. In the Cow Street Journal the headline read “Cow Prices Hit One Million”, and in The International Horse Time the headline announced “Horse Prices Set New Record”.

So the doubters shut their mouths and kept silent, particularly after the evening news show had already brought a “special” on the market event the night before, with academic pundits explaining that you can’t second guess the market because it is efficient, and horse and cow market experts said that the prices for cows and horses had just begun to recover from a long period of depressed valuations, and that now was the best time to buy.

After the evening news, and after the message appeared in the local news, it was also heard at the home places of our two boys what a magnificent deal they had done. The village folks turned exuberant. “Have you heard?”, they asked, “Bill’s boy sold his father’s cow for a million!”, and in the other village, the farmers exclaimed in astonishment: “One million for a horse – wow!”, and in their minds, the horse farmers multiplied the number of their horses by a million, and the cow farmers did the same with the number of their cows. They all were very rich now; even the poor farmers who owned just one horse or one cow.

Right the next day, after reading the news in the Cow Street Journal and in the International Horse Times, the bankers smelled a business. They sent their sales force to the cow farmers and to the horse farmers across the country to explain them a deal. “We’ve come to help you to raise some cash,” they said. This message did not fall on deaf ears, particularly after the bankers’ salesmen continued to say: “As the price of your livestock will rise in price, your loan will get paid by itself.”

Some of the farmers took the loan to buy a new car or a nice gift for their wives, but almost every farmer across the country got into cow and horse dealing and borrowed money to buy more horses and cows, and the prices of the horses and cows were rising more and more. Prices that once appeared absurdly high, now seemed quite normal, and those who earlier had claimed that prices were “insane”, now thought they themselves were insane, and silently said to themselves “I better keep quiet or they will put me away.”

Prosperity came to the countryside, and soon the word spread around the world that there is a country, where they trade horses for five million and horses for six million with the prices soon going further through the roof. Foreign lenders poured in, and the interest rate fell, and while those who did not borrow felt poor and incompetent, the borrowers thought they were very smart as they got richer and richer. For the cow and horse farmers, the world was like magic: the more they borrowed, the richer they got. Some time ago, they had already stopped breeding horses or cows, as dealing with horses and cows had become much more profitable than raising them.

Soon the bankers smelled another business as they noticed that trading with real horses and real cows is an awkward business. They found out that it would be much more convenient to trade certified cow papers (which the named CCP) and certified horse papers (which they named CHP). This would be their business, so they decided, and in short time, trading CCPs and CHPs indeed became big business for them, and it became a business that they would control and profit from.

After a while it became common to call a horse paper simply “one horse”, and a cow paper simply “one cow”. When a trader in horse and cow papers got home for the weekend he would say to his wife and kids, for example: “We’ve made half a horse and two cows this week”. Only once in a while it was heard that “the market” was down by “a quarter of one horse” or “a fifth of one cow”. When that happened, the central bank quickly jumped in to inject new money into the banking system because the economy had become highly dependent on the horse and cow papers trading business by now.

After some time, as the country became ever wealthier as shown by the profits with horse and cow papers trading, its people felt less and less the necessity to save and to invest in production at home. Real horses and real cows had lost their meaning anyway in the meanwhile. Now, it was all about horse shares and cow shares, and even when kids heard the name “one cow” or “one horse” – they did not think of a real cow or a real horse anymore, but of a kind of money that was much better than the old money and definitely much better than money savings.

Even our two farm boys learned to think that way. After all, as they had grown older, they had only vague memories left about what a real cow and real horse was. They had long left the farm and in order to make a fortune as horse and cow papers brokers.

The country’s “National Horse and Cow Papers Exchange” had grown into the largest papers exchange market of the world, and the news of prosperity spread around the globe, and everywhere in the wide world, the prices of cows and horses were rising – at least on paper. Even in countries where there were no cows or horses at all or just a few, people began to trade paper horses and paper cows. In these places, the evening news pundits explained that the less real horses or real cows “we have”, the more valuable they would be – and that this would fully justify current prices at the exchanges – no doubt about it, they affirmed.

While the paper horse and paper cow trade was in full swing, some bankers thought: “Why just trade in paper cows and paper horses? Houses are as good as cows and horses!”, and they put ads into the papers and had clips run on TV saying “Easy loans for everybody! Mortgage rate at record lows!”

Soon, those people who had no horse stocks or cow stocks wanted their share, too, and stood in line to get loans in order to buy their first home or apartment, and the richer people, those who had horse stocks and cow stocks, took out jumbo loans to get bigger houses and larger apartments. Prosperity began to trickle down to the poorest of the poor, and reached even those who had neither stocks nor houses, and indeed, never before in the history of mankind had there been a nation that was so united by the common bond of shopping.

Yet with all the imports coming in, the domestic industry was getting weaker. While the horse and cow papers trading business was getting ever more frenzied, there were less and less real horses and real cows in the countryside. However, there were many service jobs around, particularly in banking and finance, and there were a lot of jobs for the immigrants who swept into the country, attracted by its wealth, and they could easily find work in homebuilding, cleaning and dishwashing.

The government announced: “Our economy is strong!” Central bankers looked at their macro statistics and constructed averages and proclaimed “According to our indicators the economy will continue to grow at its non-inflationary steady pace of expansion”

There were a few people who wondered somewhat about these statements, because they felt that they weren’t actually doing so well. In the population there was also disbelief why prices could be called as being “stable”, when in fact for many items they had to pay more each month. But most of the citizens slept well in their belief that government and central bankers would take good care of them.

With the domestic industry steadily weakening, wages had already been stagnant for quite some time, and then they began to fall. Meanwhile, the borrowing costs began to rise. Additionally, maintaining the new houses and the new cars did not come cheap, and the prices for services that could not be imported from abroad — such as medical care and education — rose drastically. Ever more households needed additional loans to finance their old debt, and “to stay even”, as they said. It was as if in everyman’s wallet a big hole had appeared where all the cash disappeared.

The bankers wearily noticed what was going on, as more and more of their old customers showed up in need for additional loans. Just a short time ago, house prices were rising faster than debt, now it was debt that was rising faster than the house prices, and even the prices of the horse and cow shares became more and more wobbly. It dawned upon the bankers’ minds that with wages stagnant or falling and the prices for horses, cows, and houses no longer rising, a problem was ahead: many of the borrowers never in life would earn enough to service their runaway debts.

So the bankers decided to trim their easy lending. Credit tightened, and distrust and lack of confidence crept into the markets. Everything had seemed so fine for so long, but now, all of a sudden, confusion and fear gripped the traders in a shock, and they noticed that they had lost any yardstick of sound valuation.

On that same morning, one of our two boys, sitting in his office at Cow Street, began to scratch his head when he was overcome by a revelation: “What the heck”, he said to himself as he looked at the screen with the market quotations, “how come that cow papers and horse papers still trade at these high prices when in fact almost no real cow and no real horse is around there anymore in the country?” – and in a wild attack of panic and sweating from all pores, he pushed the “sell all”-button, said a bad word, and waited for the bids – yet there was no response.

Copyright 2007 – Antony Mueller & HIRAM7 REVIEW

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s