[![][2]][2]In thinking about the current financial “crisis” from the perspective of China, [The China Expat][2] brings up an analogy from Peter Schiff‘s [Crash Proof][3] :

[]: http://1.bp.blogspot.com/_b2anAyo1mOo/SPhag7CLThI/AAAAAAAAANs/HcYker8jvgQ/s1600-h/desert-island-800x600.jpg [2]: http://www.thechinaexpat.com/china-to-america-no-more-money-for-us/ [3]: http://www.amazon.com/gp/product/0470043601?ie=UTF8&tag=thechinainves-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=0470043601

Let’s suppose six castaways are stranded on a desert island, five Asians and one American. Their problem is hunger.

So they sit down and divide labor as follows: One Asian will do the hunting, another will fish, the third will scrounge for vegetation, the fourth will cook dinner, and the fifth will gather firewood and tend the fire. The sixth, the American, is given the job of eating.

So five Asians work all day to feed one American, who spends his day sunning himself on the beach. The American is employed in the equivalent of the service sector, operating a tanning salon that has one customer: himself. At the end of the day, the five Asians present a painstakingly prepared feast to the American, who sits at the head of a special table built by the Asians specifically for this purpose.

Now the American is practical enough to know that if the Asians are going to continue providing banquets they must also be fed, so he allows them just enough scraps from his table to sustain them for the following day’s labor.
Modern-day economists would have you look at the situation just described and believe that the American is the lone engine of growth driving the island’s economy; that without the American and his ravenous appetite, the Asians on the island would all be unemployed.

The reality, of course, is that the American is not the engine of growth, but the caboose, and the best thing the Asians could do would be to vote the American off the island—decoupling the caboose from the gravy train. Without the American to consume most of their food, they’d have a lot more to eat themselves. Then the Asians could spend less time working on food-related tasks and devote more time to leisure or to satisfying other needs that now go unfulfilled because so many of their scarce resources are devoted to feeding the American.

Ah, you say, but that analogy is flawed because in the real world the United States does pay for its “food” and Asians do receive value in exchange for their effort.

Okay, then let’s assume the American on the island pays for his food the same way real-world Americans pay, by issuing IOUs. At the end of each meal, the Asians present the American with a bill, which he pays by issuing IOUs claiming to represent future payments of food.

The castaways all know that the IOUs can never be collected, since the American not only produces no food to back them up, but also lacks the means and the intention of ever providing any. But the Asians accept them anyway, each day adding to the accumulation of worthless IOUs. Are the Asians any better off as a result of this accumulation? Are they any less hungry? Of course not.