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Wednesday, March 14, 2012

The Parable of the Broken Traffic Lights

A brilliant parable that explains fiat central banking in the context of a traffic light.
"Suppose on some sunny afternoon in a large city somewhere in the western world, a man discovers on awaking from a two-hour nap that several hundred car accidents had occurred in the city while he slept. He wonders why. First he considers the possibility that the weather was the cause, but the gorgeous afternoon sun pushes that thought aside. The odds of many hundreds of cars having simultaneous mechanical problems seems infinitesimally small, so he rules that out as well. He ponders the question further and eventually asks himself whether the drivers in that fair city just had a bout of group psychosis or mass delusion. The odds of that also seem pretty low. As his brain slowly awakens, he stumbles across the likely culprit: Something must be wrong with the traffic lights. He concludes that the lights are not working, leaving the drivers to figure out how to negotiate the intersections on their own. Wouldn’t that, he wonders, cause many accidents? He turns to his wife and suggests that explanation. She replies: “If you came to a traffic light and saw it was not working at all, wouldn’t you slow down and proceed cautiously? In fact, after Hurricane Katrina didn’t people in New Orleans just treat broken traffic lights like four-way stops, without explicit direction to do so?” Our fellow acknowledges his wife’s insightfulness and continues to ponder. Soon it hits him: It’s not that the traffic lights were not functioning at all, but rather they were all green... When the central bank intervenes, however, it turns all the lights green.

Read the rest here
Bastiat Institute 

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