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Who knew unobtanium = toilet paper!

What if we look at unobtainium a little differantly.
What if we always had unlimited access to unobtainium in the past. We had so much of it we never gave it much thought, like toilet paper. Now the environment has changed and unobtainium suddenly becomes hard to come by, it's difficult to attain. One would truly think the value would raise. ....right?

But in my thought experiment I call unobtainium.......credit, now the story ends differently, doesn't it?

Nick, interesting post.

What if we went the other way, and assumed that there was little to no possibility for intertermporal substitution of unobtainium? Personally I think that's more realistic than assuming a high degree of intertemporal substitutability. I can't make up for the latte I didn't consume yesterday by consuming two lattes tomorrow, because the marginal utility of a latte diminishes sharply after one/day. Same for the Ottawa '67s game I didn't go to a couple of weeks ago - that's gone, it won't be made up.

How would your thinking change then? I would have thought that we'd want to wait to step on the gas, from a monetary point of view, until the unobtainium sector was back on-line. And keep those fiscal transfers flowing so that people can pay their rent and don't go hungry.


"What happens when they hear the news? Everybody (or everybody except borrowing-constrained Hand To Mouth agents) suddenly wants to save up to half their income, so they can spend it on unobtainium in a couple of months time."

This is basically a "good news" shock. There will be more production (and hence, more income) tomorrow. The standard consumption smoothing story is that people will want to dissave or borrow against the higher future income. Generally, if there's a positive wealth effect, the consumption demand for all things will rise.

So not sure if you story hangs together. Or, if it does, you must be making some implicit assumptions that I'm not seeing.


Nick - being a bit slow here - perhaps the point is that we can prepone our consumption of things other than unobtainium and that will help the economy keep moving? Unfortunately pretty much the only things that aren't unobtainium right now are necessities - food, housing, car repairs, that kind of thing. And the demand for necessities is highly inelastic. Home repairs might be one exception here, especially DIY home repairs, and I suspect the hardware stores are doing relatively o.k. out of this. There's also frozen food, toilet paper, etc - but there's a strict limit to how much frozen food people can store, and toilet paper isn't big bucks. But perhaps a monetary kick might get firms to do more preponing - make capital investments, say? Or am I still missing the point?

So if we're all saving dollars today, hoping to spend them on goods in the future (which are not actually being produced and stored!), then there should be a great price inflation when all of those future goods come back online. For example: everybody wants to go on that cruise they missed, but there are the same number of cruise berths as before.

Will this lead to monetary tightening, withdrawing the all the extra money being pumped out today?

Frances and David: let me try this, to see if it makes sense to you:

2 sectors are apples and bananas. Both non-durable. Bananas temporarily become unobtainium.

Consider two extreme cases:

1. Apples and bananas are perfect substitutes. It's basically a one-good economy, on the consumption side. Then we get David's case. Permanent income is almost double current income, so there's an almost double excess demand for apples (at the old prices and interest rates).

2. Apples and bananas are perfect complements. So if you have no bananas today, you don't want any apples either. Demand for apples drops to zero.

The real world can be anywhere between those two extremes. So we can easily get a fall in demand for apples, by assuming it's nearer the second extreme than the first.

And all that is before we consider differences in intertemporal substitutibility.

And if we add in any degree of substitutibility on the supply side (unemployed banana producers switching to producing apples) that would make it more likely we get an excess supply of apples.

(Plus, if they can't switch, unemployed banana producers may be borrowing-constrained, which reduces their demand for apples.)

Nick, o.k., neither of those two extreme cases are what I had in mind because they don't allow for intertemporal substitutability.

What if the one period utility function is of the form Ut=a*ln(obtaniumt)+b*unobtanium, and the two period utility function is U1+U2. So perfect intertemporal substitutablity of utility, linear utility in unobtanium, diminishing marginal utility in obtanium.

I think this is the closest approximation of how I think about the world. What's the optimal policy response in this case?

Frances: if I'm getting the math right (big IF), I *think* that utility function gives us an excess supply of obtainium (i.e. apples) if and only if there is *any* supply response from unemployed banana (unobtainium) producers switching to apples.

Nick, another crucial thing is whether or not the unemployed unobtainium workers can borrow against future consumption and/or receive transfers from the obtainium producers. The way this utility function work is that you spend all of your income on obtainium, until (MU/p)obtanium=(MU/p)unobtanium, and then you spend the rest of your income on unobtanium. So, yes, as long as there's no long-run change in relative prices (your point about there being no supply response), and people can borrow so that they're not at a corner solution, total demand for unobtainium doesn't change.

So I think if you have this utility function, a good policy is to transfer income to unemployed unobtanium workers, and monetary policy won't do much for you.

Question? Can borrowing be considered a catalyst? Wouldn't t be skewed? If majority farmers move to growing apples then wouldn't the end result be a depletion of resources over time because of unknown variables?

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