Watching the dollar’s recent plight in the foreign-exchange markets, I am reminded of a fascinating story I came across some years ago in an anthology of supernatural tales called “The Bottle Imp.” It has its origins in German folklore and goes something like this:
An imp residing in a bottle bestows upon its holder the power to have all of his or her wishes fulfilled. Whatever you desire is yours, as long as the bottle is in your possession. But as in anything connected with imps and wizardry, there is a catch.
If you die with the imp bottle in your ownership, you go straight to hell. So unless you have a morbid taste for eternal punishment, you must eventually get rid of it by selling it to someone else before you die.
Not much of a catch there, you might think. A bottle that can make all of your wishes come true must surely be in great demand. It must also be the easiest thing in the world to sell for a hefty profit. Just get the bottle to grant you all sorts of wishes first, then promptly sell it to the highest bidder. You can have it all your way, coming and going.
It must have been a foolish devil indeed to come up with such a generous idea, you might think. Unless you’d read the small print very carefully. Had you done so, you would have seen that the bottle is not to be sold for a profit, but at a price lower than the one you bought it for.
No problem, you might still think. After all, a ¥1 million item is very easy to sell for ¥990,000. Even if the purchaser knows that he too must eventually sell the imp bottle at a loss to avoid hellfire, he’ll feel safe enough in the knowledge that he has plenty of margin there to work with.
But just stop and think again. That “margin of loss” is going to grow thinner every time the bottle changes hands.
Suppose you have been foolish enough or desperate enough to buy the bottle for just ¥1. How are you going to sell it at a loss when ¥0.9 is not a valid pricing option in this day and age? To make a sale at anything less than ¥1, you’d have to travel back in time to an age when the “sen” (one-hundredth of a yen) was still an active currency unit.
Thus what starts off looking like a golden bargain ends up becoming the road leading straight to eternal damnation.
All currencies have something of the imp bottle in their nature. There comes a point when the thing becomes unsellable, whatever price you’re asking for. If nobody will touch the thing with a barge pole unless they are in a suicidal state of mind, blind faith in the imp bottle is liable to make life quite painful for you.
The same goes for government bonds. People are flocking to them now because they look like a safe haven amid all the economic uncertainty out there. Yet beware of the fly in the ointment, even if you don’t believe in the imp in the bottle. You must make sure yours is not the kind that will take you to hell at maturity.
Spine-chilling tales are in greater demand than ever this summer as the record-breaking heat continues. Connoisseurs, however, need look no further than the currency and bond markets.
Noriko Hama is an economist and a professor at Doshisha University Graduate School of Business.