Why Layconomics?

Layconomics started when we received the following - idiot's guide to economic boom and bust - in an email one day (partially reproduced and edited below) that attempted to explain the recent financial meltdown triggered by the real estate bust without using any technical jargon.

Once there was a little island country. The land of this country was the tiny island itself. The total money in circulation was 2 dollars (two pieces of 1 dollar coins)

1. There were 3 citizens living on this island country. A owned the land. B and C each owned 1 dollar.
   Net asset of the country = 1 island and 2 dollars.
2. B decided to purchase the land from A for 1 dollar. So, now A and C own 1 dollar each while B owned a piece of land that is worth 1 dollar.
   The net asset of the country now = 3 dollars.
3. C now thought that since there was only one piece of land in the country and land is a limited asset, its value would definitely increase. So, he borrowed 1 dollar from A, and together with his own 1 dollar, he bought the land from B for 2 dollars.
* A has a loan to C of 1 dollar, so his net asset is 1 dollar.
* B sold his land and got 2 dollars, so his net asset is 2 dollars.
* C owned the piece of land worth 2 dollars but with his 1 dollar debt to A, his net residual asset is 1 dollar.
Thus, the net asset of the country = 4 dollars.
4. A saw that the land he once owned had risen in value. He regretted having sold it. Luckily, he had a 1 dollar loan to C. He then borrowed 2 dollars from B and acquired the land back from C for 3 dollars. The payment is by 2 dollars cash (which he borrowed) and cancellation of the 1 dollar loan to C.
   * A now owned a piece of land that is worth 3 dollars. But since he owed B 2 dollars, his net asset is 1 dollar.
   * B loaned 2 dollars to A. So his net asset is 2 dollars.
   * C now has the 2 coins. His net asset is also 2 dollars.
   The net asset of the country = 5 dollars.
5. One day nobody wanted to buy the land anymore and A could not pay the two dollars he owed B. So, B grabbed the island from A. Therefore, in the end:
   * A owned nothing.
   * B owned the island.
   * C owned the 2 dollars.
   The net asset of the country = 1 island and 2 dollars again.

Even though this simple example did not exactly explain the recent financial crisis precipitated by the real estate crash, it still showed how people might feel like they are getting richer with no concomitant real growth. But, what does one mean by "real" growth?

We will attempt to address this question and more using simple examples as above in subsequent posts. So, stay tuned!

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