Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Stimulus story. Show me my error.
Old 05-28-2009, 12:55 PM   #1
Full time employment: Posting here.
cantlogin's Avatar
 
Join Date: Sep 2006
Location: Pocono Mtns.
Posts: 884
Stimulus story. Show me my error.

I received an e-mail with the following story. My post here isnít meant to be political. Any government or politician mentioned can be deleted or exchanged for another. I donít understand what this story is supposed to prove and Iím not sure why Iím so annoyed by the ďseriousĒ tone it conveys.
Following the original e-mail is my response and a subsequent exchange of messages. Please look this over and let me know where I have made any error in my thinking. Iím usually sensitive to criticism but I have an open mind this time.

Thanks for looking at this and for any remarks you will make.
___________________________________________

A Stimulus Story.

It is the month of August, on the shores of the Black Sea . It is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit.

Suddenly, a rich tourist comes to town.

He enters the only hotel, lays a 100 Euro note on the reception counter, and goes to inspect the rooms upstairs in order to pick one.

The hotel proprietor takes the 100 Euro note and runs to pay his debt to the butcher.

The Butcher takes the 100 Euro note, and runs to pay his debt to the pig grower.

The pig grower takes the 100 Euro note, and runs to pay his debt to the supplier of his feed and fuel.

The supplier of feed and fuel takes the 100 Euro note and runs to pay his debt to the town's prostitute that in these hard times, gave her "services" on credit.

The hooker runs to the hotel, and pays off her debt with the 100 Euro =0
D
note to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.

The hotel proprietor then lays the 100 Euro note back on the counter so that the rich tourist will not suspect anything.

At that moment, the rich tourist comes down after inspecting the rooms, and takes his 100 Euro note, after saying that he did not like any of the rooms, and leaves town.

No one earned anything. However, the whole town is now without debt, and looks to the future with a lot of optimism..

And that, ladies and gentlemen, is how the United States Government under President BHO and the State of California under Governor Arnold are doing business today and actually in California for a long time already.

At least the hooker and the hogs made out okay.
________________________________________________

My first reply:
That's an interesting fable. Now, here are some serious questions. What is the point that is being made? Is there anything unusual about the scenario? Is it in any way "bad"?

I don't mean to be an old stick in the mud but there is NOTHING exciting or unusual about that very simple example of how credit and monetary systems always have worked. It would have worked exactly the same way if chickens, sea shells or gold Krugerands were the medium of exchange. Why does anyone think the hooker and the hogs made out any better than anyone else in the story? There is at least one glaring error in the story. Maybe in the context of the presentation it is more like a lie than an error. "No one earned anything." Think about that and see if there's any way you can defend that as a true statement. The only one who might have lost out on the deal is the "rich tourist" because he didn't earn any interest on his short term loan. He did get a tour of a old historic hotel though.
__________________________________________________ _______

Story originators response:

I believe that if you read the story in a more simple way,
It shows that there was no money that stayed in the
community even though everyone's debt was settled.
____________________________________________

My final remark (I hope):

Thatís the problem. Itís a cute simple puzzle that might serve to convince a simpleton of some undefined point. A funny story at a party maybe, but it is dishonest to present it as anything other than a routine exchange of goods for services. The money is simply the means of exchange.
100 Euros were created, that's right CREATED out of thin air, when the butcher agreed to accept the hotel proprietor's promise to pay him that amount at some future time in exchange for something immediately. That 100 Euros worth of productivity is still there. Everything that follows is simply accounting.
__________________

__________________
cantlogin is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 05-28-2009, 01:06 PM   #2
Recycles dryer sheets
 
Join Date: Dec 2003
Posts: 447
I'm not sure where you're coming from with this, but in fact the hotel owner has lost out, since he gave the tourist back his 100 euro note. Effectively he's written off the lost revenue from the hooker's rooms. So no money was created.

Maybe that's obvious and I'm missing some more subtle point?

Peter
__________________

__________________
Peter is offline   Reply With Quote
Old 05-28-2009, 02:19 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Nov 2007
Posts: 7,526
I'm guessing the point of the story is supposed to be that Arnold and Barack are running the economy with smoke and mirrors.

But what I gathered from the story is that all you need is a little liquidity. All of the market participants in the little village basically had a 100 Euro asset and a 100 Euro liability on their balance sheets. After the 100 was paid back to everyone, all market participants had zeroed out their assets and liabilities. No one really gained anything from a balance sheet perspective. But the five market participants paid off their debts and didn't default on the terms of their loans.

The liquidity-providing financial bailouts initially started under the Bush administration and continued under the Obama administration acted to keep complete system failure from occurring. The government bailout was basically the rich tourist dropping the 100 Euro note on the counter and letting the village people borrow the funds temporarily. So the story actually demonstrates the exact opposite thing they were trying to show, from my point of view.
__________________
FUEGO is offline   Reply With Quote
Old 05-28-2009, 02:49 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 13,262
Quote:
Originally Posted by Peter View Post
I'm not sure where you're coming from with this, but in fact the hotel owner has lost out, since he gave the tourist back his 100 euro note. Effectively he's written off the lost revenue from the hooker's rooms. So no money was created.

Maybe that's obvious and I'm missing some more subtle point?

Peter
But that is the part that people miss... because he was 'paid' by the hooker....

As someone else mentioned... it could have been any currency... and if fact we did not even have to have a real tourist or real note... the hotel clerk could forge a note, pass it along and get it back in the end and burn it.... same result without the tourist... but he is still out the money..
__________________
Texas Proud is offline   Reply With Quote
Old 05-28-2009, 02:57 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Nov 2007
Posts: 7,526
The hotel proprietor "borrowed" 100 from the rich tourist, then repaid him in the end.

The hotel proprietor also paid his 100 debt to the butcher using the borrowed money. The hotel proprietor had another asset on his balance sheet, an accounts receivable of 100 from the hooker. She paid the invoice, at which point the AR asset changed to a cash asset on the hotel proprietor's balance sheet, which he then used to pay back the rich tourist. In the end, everyone is even.

The hotel proprietor isn't out any money, right?
__________________
FUEGO is offline   Reply With Quote
Old 05-28-2009, 04:31 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 13,262
OK... missed the first one about him getting meat from the butcher...

Yes, he is not out anything...

But remember... money is only a storage of value... it only has value because we say it does...

All the services were supplied with a promise to pay at a later date.. and as my previous post suggested, that payment could have been made by a fake note...

Now, in this example... everybody forgot that most of the transactions are taxable and the people have to pay sales tax on the $100 and income tax on their 'profits'...

So if the sales tax is 10%, then the butcher still owes the state $10, the farmer might or might not have to pay taxes... the feed store will probably pay taxes... the hooker does not pay anything....

Maybe $30 to the state is left out of this example...
__________________
Texas Proud is offline   Reply With Quote
Old 05-28-2009, 04:38 PM   #7
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
I think it's a story about the importance of the velocity of money to an economy.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 05-28-2009, 04:43 PM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Nov 2007
Posts: 7,526
Maybe it is a Rorschach test
__________________
FUEGO is offline   Reply With Quote
Old 05-28-2009, 05:45 PM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
NW-Bound's Avatar
 
Join Date: Jul 2008
Posts: 19,403
Instead of looking at it as everybody owes somebody else something, think of it as everybody has some credits against someome. They just did not have the liquidity provided by the tourist to settle their debt. The liquidity provided by the tourist caused no harm in that case. The tourist provided some "stimulus", which he later removed with no ill effects.

However, that's not representative of the real life.

Let's change the story a bit here.

The hooker at the end of the chain, who did not owe anybody anything (a LBYM hooker?), put the 100 Euro bill in her coffer.

Then, the tourist came back to the hotel and decided that he did not want to stay. The hotel owner was sweating, mumbling something to the effect that he did not have the money to pay back.

Then the tourist smiled and said "Don't worry. It's counterfeit. I have more if you want some. Just printed it on my inkjet printer this morning".

OK. Now who is the loser? Isn't it our LBYM hooker who is again scr*w*d? Note that everybody else ended up even, except for the person who had been a net creditor now ended up with a worthless piece of paper.

The winner is the hotel owner, who had been a net debtor, now had his debt wiped clean.
__________________
"Old age is the most unexpected of all things that can happen to a man" -- Leon Trotsky
NW-Bound is online now   Reply With Quote
Old 05-28-2009, 06:10 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
dex's Avatar
 
Join Date: Oct 2003
Posts: 5,105
These folky stories sound wise but they often miss their intended purpose basically because they are simple and do not understand economics.
The author is showing that outside investment can stimulate an economy - the tourist gave them a no interest loan - just as those that are buying US debt are giving the USA a loan for interest.

What this really point out is the weakness of the internet i.e. bad ideas overwhelm and push out the good ones.
__________________
Sometimes death is not as tragic as not knowing how to live. This man knew how to live--and how to make others glad they were living. - Jack Benny at Nat King Cole's funeral
dex is offline   Reply With Quote
Old 05-28-2009, 06:37 PM   #11
Administrator
Gumby's Avatar
 
Join Date: Apr 2006
Posts: 10,142
Quote:
Originally Posted by dex View Post
These folky stories sound wise but they often miss their intended purpose basically because they are simple and do not understand economics.
The author is showing that outside investment can stimulate an economy - the tourist gave them a no interest loan - just as those that are buying US debt are giving the USA a loan for interest.

What this really point out is the weakness of the internet i.e. bad ideas overwhelm and push out the good ones.
Sort of a Gresham's Law for information. An interesting point.
__________________
Living an analog life in the Digital Age.
Gumby is offline   Reply With Quote
Old 05-28-2009, 07:54 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Quote:
Originally Posted by dex View Post
These folky stories sound wise but they often miss their intended purpose basically because they are simple and do not understand economics.
The author is showing that outside investment can stimulate an economy - the tourist gave them a no interest loan - just as those that are buying US debt are giving the USA a loan for interest.

What this really point out is the weakness of the internet i.e. bad ideas overwhelm and push out the good ones.
Sounds about right. Usual interweb idiocy that seems (at first glance) to mean more than it really does.

I used to work for a place that had big bronze sculptures nicknamed "Mike & Ike" with the caption: "Credit: Man's Trust In Man." Means about as much as the silly story with the Latvian hookers.

Speaking of which:

"May 27 (Bloomberg) -- When the economy starts to lift itself out of this recession, what will be the leading indicator that tells us we have turned the corner?
Some people track the price of shipping to gauge the health of global trade. Others look at the supply of freshly minted money pouring out of central banks. A few will say that signs of life in the housing markets are evidence of a recovery.
Forget them all. The one lesson we can draw from the global credit crisis is that all the traditional ways of measuring the state of the economy are about as useful as a bottle of suntan lotion in a snowstorm.
So here are two benchmarks we should all be monitoring more closely: extramarital affairs and the price of Latvian hookers. Both are telling us that there is still plenty of trouble ahead."

Latvian Hookers Signal No Recovery for Economy: Matthew Lynn - Bloomberg.com

Heh, "animal spirits."
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Old 05-28-2009, 08:51 PM   #13
Confused about dryer sheets
 
Join Date: May 2009
Posts: 1
About these statements:
"No one earned anything. However, the whole town is now without debt, and looks to the future with a lot of optimism..

And that, ladies and gentlemen, is how the United States Government under President BHO and the State of California under Governor Arnold are doing business today and actually in California for a long time already."


--------------------------------------------------------------------
I am not so sure if the 'town' or the 'US Government' can be that lucky. This sounds too much like an utopia. In real life, in only takes one 'smart guy' within that circle to decide to use the money, instead of repaying loans, for other matters (such as buying a good steak dinner, hmmm). Or the person decides to leave town and to spend it in a foreign land, this could be worst!

Violet Leong
__________________
violet leong is offline   Reply With Quote
Old 05-28-2009, 09:16 PM   #14
Thinks s/he gets paid by the post
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 2,402
For the sake of the OP, I would point out that everyone's debt was extinguished, but also everyone used an accounts receivable to extinguish that debt.

Before the arrival of the visitor, everyone had 100 in assets (in the form of accounts receivable), and everyone had 100 in liabilities (in the form of accounts payable). The visitor had 100 in assets.

When the visitor left, he left with his 100 and everyone had 0 in assets and 0 in liabilities. So no real wealth was created or destroyed.

From a liquidity point of view, the visitor transferred some liquidity (by locking his 100 in at the hotelier's desk while he examined the room) to the townsfolk. In real life, of course, lenders demand to be paid interest for this liquidity service, and borrowers expect to pay interest for the same.

Perhaps the point of the story is that if you have a zero net worth, i.e., are living paycheck to paycheck, relying on your receivables arriving to pay your payables, then you are strongly impacted by your liquidity. A real life example of this is someone who has trouble paying their rent when their paycheck is delayed.

On the other hand, people who have real wealth don't have this perception as much. If you arbitrarily assumed that each of the villagers in the original story had 10000 Euro bank accounts, things would be a lot smoother. The hotelier would then have choices: he could choose to dip into his bank account to pay off the butcher before the visitor arrives, or he could choose to pay the visitor back the 100 from his bank account before the hooker brought the visitor's 100 back to pay for the room she had used.

In real life, the greater an economic heavyweight you are, the more you can demand that people pay you what they owe and the more you can delay paying people whom you owe. If you do it enough, you can even make some money off the float. Dell, banks, and insurance companies all make money that way.

My 2 cents, anyway.

2Cor521
__________________

__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Gender (I'll show you mine, and you show me yours) Martha Forum Admin 34 06-27-2008 10:05 PM
The Margin of Error boont FIRE and Money 11 06-07-2008 01:47 PM
Fan(s) error. TromboneAl Other topics 5 05-10-2008 08:52 AM
I'll Show You Mine If You Show Me Yours haha FIRE and Money 87 11-20-2004 02:53 PM

 

 
All times are GMT -6. The time now is 09:23 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.