Punchinello’s Chronicles

April 27, 2011

eBay, the Fed, and Shill Bidding

Let’s you and me start a small business, okay? We’ll pretend we’re in the same family, maybe. Or, you can imagine it’s you and your spouse, significant other, kids or someone otherwise sharing money and expenses. The key here is that the two of us have weekly expenses, and we make some money. The problem is, we’re not making enough money these days, to cover our expenses. So we figure we’ll start a business.

The first thing we do is come up with a product. We’ll call it The Widget, since that’s what lots of companies you hear about in books are making. It’s a really popular product, apparently, since I read about it all the time. It’s like that Parking family who has a monopoly on all those signs you see everywhere.

The next step is that we’ll sell Widgets on eBay. Everyone likes doing that, and it doesn’t take a lot of know-how to get started. We’re buying our Widgets wholesale from China, probably, for around $4 each. So we’d “like to” sell them for around $10 apiece. On the other hand, we’ve heard that if you put something up for auction, you might even make more than your basic asking price. Cool beans, that’s the way to go!

Alright, we’re ready to go. We’ve listed a Widget and set the starting bid at $5 (to cover the listing fees and stuff). Nobody can actually see that starting bid, we just put in a reserve. We also have a “Buy it Now” price of $10 so people don’t have to be bothered with auction bidding. If they don’t want to.

Just one problem. Nobody’s ever heard of us! We’re a totally new company, no word-of-mouth, no online presence, and we’re selling a variation of the same Widget other people are selling.

Here’s what we can do, as long as we ignore all ethical standards, cancel any moral principles, blindfold our conscience, and generally act like Wall Street financiers or government officials. We create two different screen-names and eBay accounts. They’re different from our actual business name and account, under which we’re listing our product.

To get some action going, I’ll make a bid. Then you make a bid. Then I’ll make a bid really fast. You make another bid, and BAMMO!…suddenly we’ve got A Hot Item! Obviously it’s a hot item, otherwise “people” wouldn’t be bidding on it so rapidly, right? And man-oh-man is that price goin’ up! Woah…we’re already at $9.50! Just a few more bids and we’ll be selling it for more than our ten bucks!

Neat-O!

We’re Hot! We’re A Rising Star! Product activity is sky-rocketing! People are taking notice, what with all that activity goin’ on about Widgets! “Have you heard? Widgets are the hot new item! A gotta-have thing, dude, and people are bidding like crazy! Just go to eBay and you’ll see!”

Finally, only seconds before the auction closes, I make a bid for $10.75 and win! Hoo Hah! (Fist in the air, air-guitar, Injun war dance across the living room!) I won! I got it! It’s…MINE!! ALL MINE!!!

I send you the $10.75 via PayPal, who takes out their small percentage for the transaction. You get around ten bucks, and we decide to go out and celebrate! After all, we Sold Our First Item! We’re gonna be RICH! We suddenly have money!

Right?

Obviously, we don’t have SQUAT! I take the money out of our household checking expenses to pay YOU the money for the item WE sold! The result is a net zero! And actually, that’s not true either. The true result is that we took a loss. We had to pay a listing fee, a PayPal transaction fee, and a Final Value fee.

This is pretty much exactly how the Federal Reserve and the United States Treasury work with the bonds and other so-called securities.

Right now, each month the US Treasury lists somewhere around $75-billion in bonds and securities on the open auction markets, which might as well be eBay for all they’re worth.

“Bidders” then start placing their bids. US Treasuries and bonds are a good deal, see, because they’re safe. You can buy them with paper money and when you sell them again, you get the same amount of paper money back again. It used to be that you’d get some additional paper money, historically known as something called “interest.”

Nobody uses “interest” anymore. Probably because nobody’s interested.

The Treasury calls up folks in the family and let’s them know there’s a hot new Widget for auction. They’re calling it the 10-year bond, or maybe the 2-year bond. It’s hot! It’s cool! It’s massive! It’s The Cat’s Meow! (Does anyone say that, really?) “Ya gotta buy this new product, dude! It’s awesome! There’s all KINDS of activity goin’ on right now, with EVERYone wanting in on the action!”

The Federal Reserve puts in their bids, Bank of America puts in a bid, Citigroup, Wells Fargo, JP Morgan, HSB; they ALL put in bids! The Fed sees that the bid is going hot an heavy, and by gosh they sure don’t want to lose so they put in a higher bid!

At the last moment, just before the auction closes, the Fed sweeps in with a hyooooOOGE bid and wins! Fists in the air, happy feet, air guitar, and a whole lotta whoopin’ and hollerin’ over there at the office. They WON!

Thank God “we” sold all those securities and bonds! If we hadn’t, we wouldn’t have any money! And if we didn’t have any money, we couldn’t afford to pay the monthly interest on our credit cards and loans! China would get really mad! So would Japan, England, Brazil, India, Russia and so forth. The Financial Markets would get mad! Everyone would get really really mad!

But not to worry: We sold out of all our Widgets — those whatchamacallits…the bond thingie! So now we’ve got Moh’ Money! At least enough to play around for a month, until we can list some more stuff!

Good deal, dude! We’re gonna get totally rich! All’s we gotta do is keep sellin’ those Widgets and bonds! There’s obviously a huge amount of excitement about them, ’cause, like, dude!…whenever we list them for auction they get, like, totally sold OUT!

Right?

Okay, so somewhere along the line here, you probably figured out that this is ridiculous! Nobody would be fooled by something as idiotic as this kind of scheme (or is it a scam?), right?

WRONG!

There’s an entire whole Group of people who are Totally Fooled! That group is called The United States Congress! Yup, the best government money can buy! They’re, like, totally fooled, dude!

Each month, Our Esteemed Members of the August Body of American Leadership (except for a few new members here and there) go out and party it up! They’re totally excited, because The Treasury just sold out of all it’s debt issues! Obviously, America is still The Home of the Great, Land of the Rich!

Otherwise, why would everyone be so excited about buying our bonds and securities? Heck, all’s ya gotta do is look at the stock market, for cryin’ out loud. It’s going up pretty much all the time! Sure, there are a few times when it goes down, but not for long!

There’s no question we can afford a higher debt ceiling. There’s no question we can afford to keep ALL the fabulous programs and benefits! There’s no question we can continue building up more debt. After all, according to Leading Economists and pretty much everyone in California, “Debt equals Wealth!” Right? Right!

Let’s just keep voting in those Esteemed Members of our August Leadership. They sure know what’s what! They understand business! They know how to make stuff! In fact, let’s just give them control over all the business activity in the country, maybe even the world! They’re experienced, right? They’ve got the background, the know-how, and they surely know a lot more than anyone else.

Right?

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