Whenever I speak on the subject of economics, I almost always tell the story of Thriftville and Squanderville. Let me give due credit to Warren Buffett who first told the story of two side-by-side islands of equal size: Thriftville and Squanderville.

On these islands, land is a capital asset. At first, the people on both islands are at a subsistence level and work eight hours a day to meet their needs. But the Thrifts realize that if they work harder and longer, they can produce a surplus of goods they can trade with the Squanders. So the Thirfts decide to do some serious saving and investing and begin to work 16 hours a day. They begin exporting to Squanderville.

The people of Squanderville like the idea of working less. They can begin to live their lives free from toil. So they willingly trade for these goods with “Squanderbonds” that are denominated in “Squanderbucks.” Over time, the citizens of Thriftville accumulate lots of Squanderbonds. Some of the pundits in Squanderville see trouble. They foresee that the Squanders will now have to put in double time to eat and pay off their debt.

At about the same time, the citizens of Thriftville begin to get nervous and wonder if the Squanders will make good on their Squanderbonds (which are essentially IOUs). So the Thrifts start selling their Squanderbonds for Squanderbucks. Then they use the Squanderbucks to buy Squanderville land. Eventually the Thrifts own all of Squanderville.

Now the citizens of Squanderville must pay rent to live on the land which is owned by the Thrifts. The Squanders feel like they have been colonized by purchase rather than conquest. And they also face a horrible set of circumstances. They now must not only work eight hours in order to eat, but they must work additional hours to service the debt and pay Thriftville rent on the land they sold to them.

Sound familiar? It should. In many ways, Squanderville is America.