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Let us begin with the story of an emperor who ruled over a prosperous kingdom. His employees demanded a pay hike for which the royal treasury didn’t have the resources. The emperor instead promised them a gold coin every month after retirement for as long as they lived. The employees agreed.
When the first batch of employees retired, the promised gold coin was paid religiously each month. More of his subjects flocked to become royal employees due to the attractive pay and pension. However, the royal treasury didn’t have enough money to buy the gold coins. It borrowed from moneylenders who obliged as the emperor had an impeccable track record of repayment.
All was well for many years. But as the ranks of retirees swelled, the royal treasury had to borrow more. The moneylenders grew worried it wouldn’t be able to bear the burden. They demanded a higher interest rate.
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