Imbalances and Stimulus: Solving the Problem

There is a joke going around the internet about the economic stimulus that goes like this:

It is the month of August in a resort town that 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 a 100 dollar bill on the reception counter, and goes to inspect the rooms upstairs in order to pick one.

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

The butcher takes the 100 dollar bill, and runs to pay his debt to the pig raiser.

The pig raiser takes the 100 dollar bill, and runs to pay his debt to the supplier of his feed and fuel.

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

The hooker runs to the hotel and pays off her debt with the 100 dollar bill 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 dollar bill 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 dollar bill, 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 Economic Stimulus Plan works.

There are different versions, but the above one is typical.

The point is that this is NOT similar to the economic situation that the world is currently in. In short, in the little village in our story we have a closed loop where everyone owes about the same as is owed to him, probably because everyone in the little village does an honest day's (or night's) work and produces about as much as he consumes.

They are not actually "living on credit", they are just holding off paying for services because of a shortage of money. Nobody has a dime, so they provide services to each other on credit, but in the end they are all credit-worthy and living within their means. When a balanced system gets stuck because of a lack of money, then a little bit of liquidity can grease the wheels and get everything moving again.

Our problem in the world today is that nobody wanted to make an honest living. We all wanted to leverage up so that we could get rich quick. We are living off the work of others and many of us are not producing nearly as much as we consume.

Some of us are living on credit, others off money gained through speculations or borrowed based on inflated asset prices. None of this is sustainable. This is what people are talking about when they mention imbalances.

The imbalances need to be corrected. If the stimulus doesn't fix them, then it will not solve the problem.

Disclosure: No positions

Comments

[Sovestor:]

While US is busy with financial reform, mortgage crisis, and wars, China is busy making sure they are going to continue to prosper. Go figure. This trend is so obvious even teenagers can understand.

Jun 18 03:47 AM

[MainStreet:]

Suppose someone stops by once a week and throws a rock through my office window. The glass shop owner takes my hard earned dollars and buys a dress for his wife. The dress maker buys a new washing machine from the local appliance vendor who spends the evening at a hotel with the hooker.

Does my broken window stimulate the local economy? Or does it simply displace capital I would have spent under my own choice and freedom?

While we can argue about the effects of demand based stimulus, know that Keynesians promote full employment and equality of individual wealth over any one person’s liberty.

And every Tax dollar the government spends in stimulus is effectively shattering windows across this nation… perhaps my great grandchildrens’ children can pick up the pieces.

Jun 18 04:09 AM