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kudukid

A Little Story About £100

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It is the month of August; a resort town sits next to the shores of a lake. 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 £100 on the reception counter and goes to inspect the rooms upstairs in order to pick one.

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

The Butcher takes the £100 and runs to pay his debt to the pig farmer.

The pig farmer takes the £100 and runs to pay his debt to the supplier of his feed and fuel.

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

The prostitute runs to the hotel and pays off her debt with the £100 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 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, 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.

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:lol::lol::lol:

I like it, unfortunately the prostitute ran off to put it down as the deposit on a BTL because prices are soft and she is looking for a way into a respectable profession and her morgage broker told her that she would still be likely to get a 125% morgage if she said that it was her main residence.

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It is the month of August; a resort town sits next to the shores of a lake. 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 £100 on the reception counter and goes to inspect the rooms upstairs in order to pick one.

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

The Butcher takes the £100 and runs to pay his debt to the pig farmer.

The pig farmer takes the £100 and runs to pay his debt to the supplier of his feed and fuel.

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

The prostitute runs to the hotel and pays off her debt with the £100 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 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, 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.

money velocity fallacy

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Blah Blah Blah

The hotel proprietor has paid off the £100 debt with money he doesn't have and will have to make good the shortfall somehow.

Edited to get rid of quote

Edited by shylock

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It is the month of August; a resort town sits next to the shores of a lake. 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 £100 on the reception counter and goes to inspect the rooms upstairs in order to pick one.

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

The Butcher takes the £100 and runs to pay his debt to the pig farmer.

The pig farmer takes the £100 and runs to pay his debt to the supplier of his feed and fuel.

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

The prostitute runs to the hotel and pays off her debt with the £100 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 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, 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.

Assuming that the assets and liabilties described in the story above were the only assets and libilities in a closed system, everyone in the town had a net worth of zero before the tourist arrived and a net worth of zero after the tourist departed. Nothing changed.

All that happened is the £100 caused everyone in the town to net off their assets and their liabilities with no change in net worth.

Much like what the OTC derivatives market could do if everyone set their minds to it ......

Edited by LuckyOne

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Assuming that the assets and liabilties described in the story above were the only assets and libilities in a closed system, everyone in the town had a net worth of zero before the tourist arrived and a net worth of zero after the tourist departed. Nothing changed.

All that happened is the £100 caused everyone in the town to net off their assets and their liabilities with no change in net worth.

Much like what the OTC derivatives market could do if everyone set their minds to it ......

And the debts were paid for services aquired?

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This only works if every individual is holding the same amount in savings (money they are owed by others) as they hold in debts (money they owe others). In reality we have some people who have net savings (older people with pensions and cash in the bank, sovereign wealth funds, creditor nations like China and Japan) and some people who have net debts (younger people with student loans, those with personal loans/credit cards/negative equity, debtor nations like the UK and USA). The huge question is: what is the real price that net debtors are going to have to pay to net savers to repay the loans? This is going to be a real transfer of wealth/future income. I think the general consensus is that the debtors have promised to pay more than they can realistically afford, which means the real value of the debt (=the real value of savings) is going to have to fall. This can be done the messy way, with individual bankruptcies and defaults, or it can be done the smooth way, with high inflation which devalues the currency in which debts are denominated and reduces the real value of all debts. Right now, high inflation would probably be a good thing overall. Long live QE.

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Assuming that the assets and liabilties described in the story above were the only assets and libilities in a closed system, everyone in the town had a net worth of zero before the tourist arrived and a net worth of zero after the tourist departed. Nothing changed.

All that happened is the £100 caused everyone in the town to net off their assets and their liabilities with no change in net worth.

Much like what the OTC derivatives market could do if everyone set their minds to it ......

Yes, they could have done exactly the same with an IOU note.

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This story is a very good illustration. An illustration of how we allow ourselves to be slaves to our currency.

All this trade had already happened but the actors on the system couldn't see that they could cancel each other's debts amongst themselves, they thought they needed currency to do it, when they didn't.

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This only works if every individual is holding the same amount in savings (money they are owed by others) as they hold in debts (money they owe others). In reality we have some people who have net savings (older people with pensions and cash in the bank, sovereign wealth funds, creditor nations like China and Japan) and some people who have net debts (younger people with student loans, those with personal loans/credit cards/negative equity, debtor nations like the UK and USA). The huge question is: what is the real price that net debtors are going to have to pay to net savers to repay the loans? This is going to be a real transfer of wealth/future income. I think the general consensus is that the debtors have promised to pay more than they can realistically afford, which means the real value of the debt (=the real value of savings) is going to have to fall. This can be done the messy way, with individual bankruptcies and defaults, or it can be done the smooth way, with high inflation which devalues the currency in which debts are denominated and reduces the real value of all debts. Right now, high inflation would probably be a good thing overall. Long live QE.

The story probably does illustrate why the consequences of QE and large government debt in a place like Japan where most of the government debt is held by locals might be very different to places like the UK and the US.

Japan's has a large gross internal balance sheet which nets to zero and large external assets. The US and the UK have large net external liabilities funding their net internal balance sheet.

An internally financed system is clearly very different to an externally financed system.

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The hotel proprietor has paid off the £100 debt with money he doesn't have and will have to make good the shortfall somehow.

Edited to get rid of quote

Wrong!

The hotel proprietor provided accommodation to the prostitute who "created" the £100 by providing a service.

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An internally financed system is clearly very different to an externally financed system.

This is a global economic crisis, and Planet Earth is an internally financed system.

Probably :ph34r:

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Wrong!

The hotel proprietor provided accommodation to the prostitute who "created" the £100 by providing a service.

And there we have it.

Money creation is all about blowjobs. I always thought that central bankers were c0cksuckers ......

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The hotel proprietor has paid off the £100 debt with money he doesn't have and will have to make good the shortfall somehow.

Precisely. Remove the rest of the crap and the net result is "hotellier is £100 down". It demonstrates velocity and the multiplier effect of spending rather well, but has bugger all to do with the current situation.

To make it analagous to the current situation the tourist would have to return to the hotel and tell the hotellier that he doesn't want the room yet or doesn't want his £100 back yet although will, at some point in the future, be back to claim either the room or the £100, or a combination of both, whilst also demanding a note from the hotellier he can show to his to wife to prove where the £100 went so she doesn't beat him up with the Kenwood Chef bread making attachment for going £100 down for nothing.

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This is a global economic crisis, and Planet Earth is an internally financed system.

Probably :ph34r:

Very true.

The solutions are, however, being sought at a national level.

China are going to exchange paper for things so that more netting of bits of paper can happen at the national level within the debtor nations. Cold comfort for the UK and the US ......

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Three cheers for rich tourists! If a banker had turned up then the town would be screwed.

Instead of a straightforward exchange of good and services amounting to a zero sum transaction, they would all be scrabbling round trying to create extra value to pay off the interest on the loan.

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China are going to exchange paper for things so that more netting of bits of paper can happen at the national level within the debtor nations. Cold comfort for the UK and the US ......

Well, more fool whoever is taking dollars and sterling from the Chinese right now. Probably the best thing for rebalancing the global economy would be if they spent them buying goods from the USA and UK. I guess eventually that currency will make its way home anyway though, and we will have to pay for it by exporting real goods and services and receive only our own worthless paper in return. Being a net exporter is actually not that much fun, Britain did it post-WWII in the austerity years to repay the war debt. You're basically working for the rest of the world for free (or in return for promises of repayment one day in the far, far future).

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Precisely. Remove the rest of the crap and the net result is "hotellier is £100 down". It demonstrates velocity and the multiplier effect of spending rather well, but has bugger all to do with the current situation.

Why is the hotelier £100 down?

In the story he initially owed £100 by the prostitute and owes the butcher £100.

The prostitute pays her debt and his debt is cleared before the tourist wants his money back.

Does this not make him square?

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One bad debt and the whole town is insolvent.

Five bad debts recovered and suddenly the town owes £150 in income tax, assuming the prossie keeps accounts.

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It is the month of August; a resort town sits next to the shores of a lake. 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 £100 on the reception counter and goes to inspect the rooms upstairs in order to pick one.

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

The Butcher takes the £100 and runs to pay his debt to the pig farmer.

The pig farmer takes the £100 and runs to pay his debt to the supplier of his feed and fuel.

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

The prostitute runs to the hotel and pays off her debt with the £100 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 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, 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.

What utter sh*te. This is vampire squid thinking.

Debts are not worth 100% of their value, especially in hard times.

So if the hooker legs it to the next town with her 100 quid?

That's what happened when Lehmans went down.

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It is the month of August; a resort town sits next to the shores of a lake. 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 £100 on the reception counter and goes to inspect the rooms upstairs in order to pick one.

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

The Butcher takes the £100 and runs to pay his debt to the pig farmer.

The pig farmer takes the £100 and runs to pay his debt to the supplier of his feed and fuel.

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

The prostitute runs to the hotel and pays off her debt with the £100 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 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, 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.

Simplistic and wrong unfortunately. In this scenario everyone's debts cancel out, regardless of the £100 on the counter. In the real world we owe most of the debt to creditors like China, who owe us sweet FA.

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Assuming that the assets and liabilties described in the story above were the only assets and libilities in a closed system, everyone in the town had a net worth of zero before the tourist arrived and a net worth of zero after the tourist departed. Nothing changed.

All that happened is the £100 caused everyone in the town to net off their assets and their liabilities with no change in net worth.

Much like what the OTC derivatives market could do if everyone set their minds to it ......

Your analysis is correct. But something has changed. The level of trust in the closed system is now much higher. As everyone has been repaid, they are more likely to forward credit again in the future. As a result there is likely to be higher levels of economic activity as people buy and sell their services off of each other.

If that £100 hadnt of turned up, there would have been riots in the streets as everyone defaulted.

Which explains why the Bank of England are leaving a fat wad on the table whilst they pop upstairs for a short time.

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