Stimulus story. Show me my error.

[cantlogin]

I received an e-mail with the following story. My post here isn’t meant to be political. Any government or politician mentioned can be deleted or exchanged for another. I don’t understand what this story is supposed to prove and I’m not sure why I’m so annoyed by the “serious” 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. I’m usually sensitive to criticism but I have an open mind this time.

Thanks for looking at this and for any remarks you will make.
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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.
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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.
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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.
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My final remark (I hope):

That’s the problem. It’s 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.

 

[Peter]

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

 

[FUEGO]

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.

 

[Texas Proud]

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..

 

[FUEGO]

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?

 

[Texas Proud]

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...

 

[ziggy29]

I think it's a story about the importance of the velocity of money to an economy.

 

[FUEGO]

Maybe it is a Rorschach test

 

[NW-Bound]

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.

 

[dex]

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.

 

[Gumby]

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.

 

[brewer12345]

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."

 

[violet leong]

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."

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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

 

[SecondCor521]

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