Iff commands Haroun to pick a bird, to which Haroun points out that the peacock bed is the only bird in the room. Iff, disgusted, says that someone may mention something that isn't present, and that to name something brings it into being. Haroun tries to argue, but Iff asks about all the things that Haroun hasn't seen, such as Africa or kangaroos, and if they're real even if he hasn't seen them.
Despite Haroun's willingness to accept the absurdity of his situation, he's still trying to process this new information in a very logical way. He's discovering, though, that logic isn't the same for everyone, hence Iff's disgust. This engagement with the very concept of logic adds a level of absurdity.
Iff reaches into his pocket and pulls out a handful of tiny birds and instructs Haroun to choose one. Haroun points to the Hoopoe, which impresses Iff. Iff notes that the Hoopoe is the bird in old stories who leads all other birds through danger to their goal. With that, he throws the Hoopoe out the window. Haroun rushes to the window and sees that the Hoopoe has grown as large as a bed. Iff jumps off the boat onto the Hoopoe's back, and Haroun, still in pajamas and clutching the Disconnector Tool, follows.
Even though Iff is annoyed with Haroun, he's willing to help Haroun figure out and understand Iff's logic by providing birds that are visible. Iff's comment about the historical weight of the Hoopoe will inform how we consider Butt the Hoopoe as a character going forward.
Haroun notes, as the speed of their travel pushes him deeply into the bird's feathers, that the feathers seem somehow hairy, and he thinks of Mr. Butt, the mail coach driver. Haroun yells at Iff and asks if the bird is a machine. The Hoopoe turns its head, looks directly at Haroun, and asks if Haroun has an objection to machines. The Hoopoe's voice is identical to Mr. Butt's. The Hoopoe continues, asking if as a machine he's worthy of some respect, and when Haroun accuses the Hoopoe of reading his thoughts, it replies that it's communicating telepathically as its beak must remain closed in order to remain aerodynamic. Haroun questions how this is possible, and then answers his own question with a P2C2E. Haroun asks the Hoopoe if it has a name, and the Hoopoe suggests Butt.
With the conflation here of Mr. Butt and Butt the Hoopoe, it becomes more evident that Haroun is in a dream, and the characters that populate this dream are influenced by individuals in Haroun's life in Alfibay. The joke of Butt speaking without moving its beak will be a recurring motif, and serves to question the nature of language and conversations that take place both within individuals and between individuals, as Butt takes part in and is privy to both. The fact that Butt is a machine will also provide an initial point for Haroun to begin pointing out nuance and balance.
As they travel through the sky, Haroun spots something in the distance, which Butt says is Kahani, the earth's second moon. Haroun asks how it has gone so long undiscovered, and Butt replies that it's because of speed. Kahani travels so fast, thanks to mechanical means, that nothing can detect it, and its orbit changes by one degree per rotation as to provide Story Water evenly to the planet, as well as avoid detection. Then, Butt turns its attention to landing on Kahani, which appears to be made of only colorful liquid. As they land in the warm water, Iff says that they're in the Ocean of the Streams of Story.
Haroun is again trying to reconcile what he knows of his world, and the logic and rules that govern it, with what he's being presented with on this strange journey. Also note that the names of both Iff and Butt are transposed into Haroun's dream from what Rashid told him earlier to stop "Iffing and Butting" and enjoy the stories—and the Ocean of the Streams of Story is a literalization of Rashid’s claim that he gets his stories from the “Story Sea.”
Haroun, noticing that there's no land in sight, accuses Iff of playing a trick on him. Iff explains that they're taking a shortcut to avoid bureaucratic processes, and will use Wishwater to fix Haroun's problem. Butt paddles towards a bright patch of golden water, and Iff scoops up some water in a small bottle. He passes it to Haroun and instructs him to wish very hard for what he wants, drink the Wishwater, and all will be fixed. Haroun takes a gulp, but finds he can't focus. After 11 minutes, he comes out of his jumbled thoughts to a very disgruntled Iff. Butt instructs Iff to stop taking his anger out on Haroun, for it's his own fault that they're in this mess. Haroun thinks that machines are supposed to be rational, but this one is quite temperamental. Butt tells Iff to give Haroun a happy story to drink.
Rushdie inserts some more humor here—despite being in a fantasy land, there are still boring and burdensome bureaucratic processes to contend with. As this comes to light alongside Haroun's realization that Butt is a temperamental machine, we begin to see that Haroun is being presented with a variety of unexpected individuals and situations. This will play into and inform Haroun's eventual realization of the need for balance.
Iff explains to Haroun that the Ocean of the Streams of Story is made up of a thousand and one different-colored currents, which are the Streams of Story, and each stream represents a different tale. The Ocean, then, is the biggest library in the universe, but because of its fluid nature, the stories can change and merge. The Ocean is alive. Iff says that one can carefully dip a cup into the Ocean, fill it with a single Story Stream, and drink it to restore one's spirits. He offers the cup to Haroun, who drinks it.
The greater argument of whether libraries are alive or dead rages on in the real world, but with this description Rushdie strongly asserts that libraries, knowledge, and stories are alive, well, and ever changing in this characterization of the Ocean.
Haroun finds himself on a giant chessboard, looking out through the eyes of the story's hero. He is fighting towards a tower, which holds a princess. Haroun soon discovers that he is in a “Princess Rescue Story” that deviates slightly from the Rapunzel story, however—in this story the princess has recently had a haircut, so the prince has to climb up the tower. As Haroun begins his climb, his hands and arms begin to change and grow hairy, and the princess cries that the prince is turning into a spider. The princess hacks and saws at Haroun's limbs with a kitchen knife, and Haroun falls off the tower.
The Ocean itself is alive, and on Kahani the stories can be experienced as living things as well. Despite this unconventional way of experiencing the stories, the stories themselves are still catalogued in a rational system similar to a real world library system. This gives the reader another instance in which to consider both the absurdity at play here and the balance that is achieved through that absurdity.
Haroun wakes to find Iff next to him, looking worried. Iff asked if the story went as planned, and if Haroun doesn't like Princess Rescue Stories. Haroun shares what happened, and Iff and Butt look very serious. Iff gravely says that the story took the turn it did because of pollution in the Ocean, and if the pollution has gotten this bad where they are in the Great North, then Gup City must be close to crisis and war. Haroun inquires with whom, and Butt replies that war would be with the Land of Chup, on the Dark Side of Kahani, and particularly the Cultmaster of Bezaban, the leader of the Chupwalas. Iff says that his name is Khattam-Shud, and Haroun's blood runs cold.
Haroun is already familiar with the idea of khattam-shud, in that it means "the end" and goes at the end of things. Here, that idea is taken one step further as it turns the idea into a person who then becomes the antagonist of the story. Essentially, Haroun and his companions will be fighting against “the end” and fighting for the continuation of stories. The idea of fighting against the end points back to Rashid's lost gift for storytelling, as he's potentially at the end of his storytelling career.