Slow posting, normal programming will resume after Labor Day. Meanwhile enjoy this nice letter to the Editor of the FT:
From Mr Eric Keetch.
Sir, In a sleepy European holiday resort town in a depressed economy and therefore no visitors, there is great excitement when a wealthy Russian guest appears in the local hotel reception, announces that he intends to stay for an extended period and places a €100 note on the counter as surety while he demands to be shown the available rooms.
While he is being shown the room, the hotelier takes the €100 note round to his butcher, who is pressing for payment. The butcher in turn pays his wholesaler who, in turn, pays his farmer supplier.
The farmer takes the note round to his favourite “good time girl” to whom he owes €100 for services rendered. She, in turn, rushes round to the hotel to settle her bill for rooms provided on credit.
In the meantime, the Russian returns to the lobby, announces that no rooms are satisfactory, takes back his €100 note and leaves, never to be seen again.
No new money has been introduced into the local economy, but everyone’s debts have been settled. Is this “quantitative easing”?
No this is not QE.
It is simply the settling of accounts.
It could have been done with a simple IOU from the Hotelier and passed around.
The cycle is complete other than the interest owed to the Russian while he looked at the rooms. Yes, the injection of capital went around and settled all debts and the hotelier was ultimately able to have the cash in his hand to repay the Russian when he returned to collect it, but the two 800 pound gorillas are that the interest on the money is also due and as someone mentioned earlier, the receivable was liquidated and lost. It seems like this cycle would have effected at least one person in the chain in a bad way. Also, no new work was completed (no economic growth) while this cash was around. the only winner was the Russian (central bank) – unless the hotelier charges a fee for the opportunity cost of not being able to sell the rooms to other patrons while he looks around (maybe the interest rebates the Central Bank refunds to the general fund). Its interesting, but a public credits system will always beat a Central Bank from the average Joe nuckle head perspective.
Each party has netted an account receivable for an account payble.QE however involves the Treasury incurring debt while the other arm of the government (FED) buys this debt by printing money electronically.The Treasury then receives its money but the Fed has also created an equal liability
Treasury FED
Assets electronic money Treasury debt
Liabilities debt electronic money
The debt is netted out,but because the Treasury has spent the electronic money ,the balance sheet is unbalaned with the Fed incurring a liability (electronic money).this electronic money just increases the money supply.
This is not QE. This is clearing of mutual debts through a peculiar medium (money).
QE maybe clearing but is foremost transformation of valueless assets into good ones through an external agency that become holder of valueless claims: the FED, meaning ultimately the public.
@12 you’re right, but that’s what @6 was saying is you need to get the whole story, wherein goods and services are traded and wealth is created – this would then make (at least some of) that debt serviceable.
the parable assumes that the debt load is servicable. In the case of the US it is not. Circular yments are the same thng as circular arguments..to borrow aline from excel: “circular function”
cmc,
All I am saying is that the story is too simplistic and misleading and does not reflect what is. We are all prisoners of our circumstances and the math. Pitchforks is just another variable in this equation, although I never had in mind pitchforks when I wrote the comment. Things are the way they are, and not the way the story tells us. If you would like to believe the story, it’s up to you…
@ biofuel, don’t you have a pitchfork to be sharpening ;)
The thing is that things don’t work this way anymore. The hotel, a small business, borrowed on revolving credit from a bank to pay the butcher, so the 100 is in the mail to pay past due monthly payment. The bank takes 25 as a penalty for missing the due date and applies the rest to cover the interest at 9-33% APR and whatever left the principal. The banker pays himself a hefty bonus and hires the hooker and bangs her a room in the hotel. Good for the hotel and the hooker, but not good enough because most rooms and hookers are not used. If the baker were a man enough, then he would hire every hooker in town and occupy every room in the hotel; alas he is not…
everyone has an asset and liability, for ex the hotel owes the butcher and is owed by the pro. the introduction of (temporary) liquidity allows everyone to settle and reduce their balance sheet.
i’m just some dumba**, but, isn’t the money owed by the pro to the hotel a recievable? therefore, the hotel lost 100e. the hotel has to lay off staff. the resulting downgrade from 4star status to 3star, results in less meat being bought from the butcher. he has to layoff staff. which results in the rancher laying off staff, or doing without “extra-curricular staff.” which = more people on unemployment insurance. which means more taxes on those employed. everyone loses?
This story is originally due to Jacques Dreze, the distinguished Belgian economist, originating probably in the 70s or 80s. His story is a bit more general as the money left at the hotel not only is used to net all outstanding debts, but it is in fact also used to purchase new commodities and services in the village, giving rise to more employment and greater aggregate production, income and wealth. If I remember correctly, it was -at least in part- meant to illustrate the extreme new classical feature of money neutrality due to instantaneously adjusting price levels.
@ jbr – the good time girl gave the money to the hotel manager, who then was able to repay the russian.
Complete the story…
Who gives back the Russian (the central bank?) the 100 bucks?
You’re right, it’s not perfect, but a little parable teaches one basic truth. This one says a little liquidity can go a long way… but perhaps this would be a better example for netting prior to a CDS settlement auction? (not my area of expertise… just a guess)
Enjoy your time off, jck.
Agreed, not perfect but it gets the point across that q.e. is there to compensate for low money velocity.
BRILLIANT