It is a cloudy day in a small seaside town in Greece - a country torn by the financial crisis. It’s raining, the streets are deserted. The times are bad, everybody has debts and is living on a loan. On this day a German tourist drops by and goes to a small hotel in the town. He asks the owner to show him rooms for rent … The owner gives him the keys to several rooms and asks for a deposit of 100 Euro. Then it begins:
1st: Once the potential visitor disappears up the stairs, the hotel owner takes the 100 Euro and runs to a neighbor - the butcher, to pay the debt of meat
2nd: The Butcher takes the 100EUR bill and runs with it to the lower end of the village and pays a local farmer for farm animals he’s lent him
3rd: The Farmer rushes to pay the installment for rent and food boxes to the local agricultural coop chief
4th: The Chief takes the 100 Euro, runs to the pub and pays his drinks debt
5th: The Pub owner pays the whore who’s until now “entertained” him for free
6th: The Whore runs back into the hotel to pay for the room in which she’s performed her profession
7th: The Hotel Owner puts the bill on the reception desk. At that instant, the prospective guest comes down the stairs and says that no room was to his liking. He takes his 100 Euro and is leaving the town and country …
No one has created anything - No one has earned anything - All participants got rid of their debts and now they look with great optimism forrward to the future. … And now you know how it works … the EU rescue package
This forum is murder on Opera, I had to stop using Opera because of it. It just doesn’t even work.
I think the story is supposed to suggest that “liquidity” can solve “debt gridlock” in an appeal to some kind of crude analogy between oil and stuck gears. It is, of course, childish and ridiculous. I don’t believe it deserves any serious scrutiny.
If anything, that example goes to show that you don’t need to create more money to accomodate all the different transactions that take place in an economy.
I think the flaw is thinking that a straight line and a circle are the same thing.
Straight line: If A owes B who owes C etc, down to Z, then A is going to hand money over to Z when all is said and done. A will be poorer, Z will be richer. This is as it should be. It’s called paying ones debts.
Introducing new money into this line of people will just create inflation.
Circle: If A owes B etc who owes Z, and Z also owes A, then the books of everyone are balanced, all with a net worth of zero.Someone in that circle has money in his wallet already. After all, loans were made, 27 loans, which means there was money that passed from hand to hand. Whoever has the money now can use it to pay the next guy, etc .
Introducing new money into this circle of people will just create inflation.
What is the situation the real world? The right model is the straight line. Most people who owe money are not owed money, and vice versa. There is an A and a Z.
The real outcome of the above is that the hotel owner is out a paying tenant (when he would have had the 100 Euro at the end of the day otherwise). The German tourist has also had his travel plans disrupted and wasted time. This is a net negative. Otherwise it simply demonstrates the ability of money to ease a variety of transactions.
Smiling Dave is right, everybody has zero balance (assets = liabilities). There are no net debtors in this case. They can clear the debt with no money. The problem with the real world is that this is not the case.
