It is a slow day in the small Saskatchewan town of Pumphandle and streets are deserted.

Times are tough, everybody is in debt, and everybody is living on credit.

A tourist visiting the area drives through town, stops at the motel, and lays a $100 bill on the
desk saying he wants to inspect the rooms upstairs to pick one for the night.

As soon as he walks upstairs, the motel owner grabs the bill and runs next door to pay his debt to the butcher.

The butcher takes the $100 and runs down the street to retire his debt to the pig farmer.

The pig farmer takes the $100 and heads off to pay his bill to his supplier, the Co-op.

The guy at the Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her "services" on credit.

The hooker rushes to the hotel and pays off her room bill with the hotel owner.

The hotel proprietor then places the $100 back on the counter so the traveler will not suspect anything.

At that moment the traveler comes down the stairs, states that the rooms are not satisfactory, picks up the $100 bill and leaves.

No one produced anything.

No one earned anything.

However, the whole town is now out of debt and now looks to the future with a lot more optimism.

And that, ladies and gentlemen, is how a "stimulus package" works.

The mean debt was only 20 bucks though as the whole chain (5 of them) each owed the same 100, seems to me that there is now 80 greenbacks missing, that must be the interest (or bankers bonus). Could be the inflation rate.
Does a hooker inflate herself or her customer

Could be why the banks owe a couple trillion, or more to the point why we owe them a couple trillion.
Just goes to show how a small $100 debt can ruin us all

3k!

Hang on a minute!

The hotelier didn't get his money did he? Instead of keeping it, he handed the $100.00 back to the traveler. Anyone of you interested in a Dickster/Ponzi investment scheme? Just send me your details....and pin number!

Posted By: dicksterHang on a minute!

The hotelier didn't get his money did he? Instead of keeping it, he handed the $100.00 back to the traveler.

Yes, but he started the day $100 in debt to the butcher and $100 in credit to the hooker. Balance = zero.
Now he's cleared his debt with the butcher and the hooker has cleared her debt with him. Balance = zero.
His net worth hasn't changed but he's no longer in debt.

The point of the story, I think, is that it's relatively easy to get rid of debt if liquidity is applied where it's needed.
Which, as CWatters says, is what the BOE has been trying to do with quantitative easing (not very successfully).

The tourist is the only character who's got any liquidity, both at the start and the end of the story.
Liquidity is essential for any economy.

Our current problem is that the people with cash (banks and capitalists) aren't moving it around. Instead of the BOE buying government bonds there's a good argument for it giving every VAT registered business £30k in cash - much more likely to get the economy moving than pumping money into the constipated banks.

Looks like Greece is going to get half their bonds debt written off with the banks agreeing to a 50% "haircut". Next time we hear on the news that the Greeks are going on strike because of government spending "cuts" perhaps we should remind them of this one. Worryingly there is talk that the latest deal only postpones the problem for about 18 months.

The moral hazard ought to be somewhat contained given that the Greeks are probably going to have to pay a shocking interest rate for the foreseeable future, like a teenager with a new credit card, to borrow in future, to reflect the probability of them failing to learn that <insert economic crime du jour> is not a good idea, doing it again, and defaulting again.

Oh, sorry, it's not officially a default.

But you and I are paying our bit via additional losses of our (esp RBS and Lloyds) banks.

Rgds

Damon

Defaulting is not a bad thing; companies do it all the time (though they call it "restructuring" or "chapter 11"). Ancient Greece did it as did Argentina more recently. Didn't Iceland effectively default too? Money only has the value that we collectively believe it has - there is no "intrinsic" value.

Paul in Montreal.

So is there any growth or is it just optimism? This always confuses me - if the 'growth' in the economy for last 15 years was funded by debt is it real?

No Seascape, thats the point. Whilst there certainly was real growth in the last 15 years it has been distorted and exaggerated by UNSUSTAINABLE levels of debt money creation. a debt bubble. That excessive debt allowed speculative bubbles to be maintained, especially in the property sector. Look at Ireland, classic example. They were suddenly exposed to large amounts of easily available credit/debt, followed by human nature/greed which fueled a speculative bubble that popped as it always does when the weight of debt becomes too much for the financial markets.

Its like a pendulum swinging too far out, its needs to swing back to rebalance, ie the debt finally needs to be paid back, but no ones wants to do it cause it hurts. Thats the situation the world faces at the moment. The other "solution" is to print money to pay back the debt as Germany did in the 1920s, except its called "quantative easing" or moneterization of debt. Quantative easing is effectively a form of stealth theft.

Actually "wealth theft".

Perhaps we all need reminding that In Latin “mort” means death. As we're all, in one sense or the other, mortgaged up to the hilt, perhaps we ought to just pass the razor blades round.

Didn't mean to spoil everyone's day with the OP. Sorry chaps.

Got both those too, but not smug - and wouldn't dare even mention it whilst surrounded by a lot of very fit guys getting screwed by the way things have gone. Remember the old Russian proverb about the sparrow?

So this Hooker, is she Greek and half price now?

Yes, the banks are to blame for reckless lending.
Yes, governments are to blame for reckless debt-fuelled spending.
Yes, we're all to blame for grabbing the credit and squandering it on baubles and bubbles.

But, as the story that started this post shows, debt is only a problem when there's a lack of liquidity. As long as everyone has enough cash flowing through their accounts it doesn't really matter what the levels of debt are - the system works.

The economy has stalled not because we're all in debt, but because the distribution of the debt has become so convoluted and opaque no-one knows what anything is worth any more, so the people with the cash will neither lend nor spend for fear of making a loss. The economy has stalled because of lack of liquidity.

This is why the policy of austerity is so utterly stupid at this moment in the boom/bust cycle.
The government should be applying a strong laxative to the constipated banks and small-brain hoarders of wealth in order to get the cash flowing.
Using the QE money to fund shovel-ready infrastructure projects would also help.

When the economy is fit and healthy again, that's the time to tackle government debt, not now.