The Rich Tourist

[chin]

I found this in a horse racing forum.  

Very funny way to look at circulation of money, and perhaps related to the availability of credits in the market. I read somewhere, forgot which book (perhaps Alan Greenspan's autobiography?) that wealth creation is a function of velocity of money.

http://www.horsestreet.com/ubb/Forum4/HTML/001982.html


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The Rich Tourist

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 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 that in these hard times, gave 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 United States Government
is doing business today.

[hangchoi]

The point is .......Who is the rich tourist?.......

Seems Obama wants to get the rich tourist laid the bill there without getting back.......

[chin]

I think the original story is not necessarily talking about the recent specific US government policy, but perhaps the general culture on money matters.

In my college days studying economics, we have a term describing how one dollar spent can generate a few more dollars of business transaction in the society. I think the term was something like propensity to save/spend.

In this particular story, the propensity to save was 0% (or the propensity to spend was 100%.) The US society has been geared/educated/induced/seduced to this spending pattern for a long time. Alan Greenspan's low interest policy certainly played a very role in substaining the spendings. I think I read somewhere that American collectively spend more than they earn, thus the propensity to spend is >100%.

This kind of spending pattern certainly generated a lot more business volume. But the whole system may also more fragile to shocks. If the society's propensity to save is a high, in theory it has buffers to absord the shocks.

But in reality I am not sure that's completely true. Maybe the psychology/culture taht generated the saving in the first place would cause people to save even more in the event of an economic shock. Thus the business contraction the same as the "spend-all" society.

BTW I don't think Obama is the Rich Touist. The people who lend to Obama, like the Chinese & Japanese & Middle Easterners are the Rich Touists. The lending is in the form of buying US treasury bills, etc...

(But are these lendings really lendings? When there is no real alternative to store the surplus cash or trade gains, all the Chinese, Japanese, Middle East money can only go back to the US treasury and become perpetual lendings. A perpetual lending is almost the same as equity injection.)

[hangchoi]

I am saying that Obama is the hotel proprietor who will get the rich tourist laid his bill.......

Well....same as South Korea, the people in South Korea are all bankrupt technically, i.e. they all have a net debt and live on credit as well.

I think it will take at least a few decades to change that perpetual lending if those rich tourists really want to do so.

[kido]

This is a problem that puzzled me for long long time:

Imagine a close system we have a small village where everyone is working happily, if everybody is earning, where does the money come from?  Isn't that a zero-summed game of wealth?

[hangchoi]

I think, in your case, the money is come from the appreciation of asset value.

[chin]

Kido's question is very interesting, and I think the answer to that illustrated one of the greatest inventions ever - credit. You are puzzled because you are thinking only in cash terms like a Newtonian - the total energy (cash in this case) in a system is constant.

I need to go to the office now to finish off the golf sim installation. I will answer in more detail later.

But I think the key to your question is the concept of asset (Hang's ides), plus the creation of credit/banking system.

[chin]

And BTW before I go, I have to say this.

In our modern world, wealth is created as a function of velocity of cash, not total sum.

[wongyan]

I would say rich and poverty is a relative concept.  Similar to what we record our marks when playing snooker.  You can either add 4 points to your rival or deduct 4 points from your own when you hit a wrong ball.  Money is even more complicated nowadays since government can issue more cash without gold! so it really means that money is no longer a "valid" representation of your belongings.  Your belongings or what you deserved to have in the future will diminish day after day if you don't invest.  In fact, you have to invest aggressive enough to overcome the "inflation".  what a complex world!!

[kido]

I think, in your case, the money is come from the appreciation of asset value.

I think I agree with you. Appreciation is a reason.. But it will inevitably induce inflation, and hence "earning" to the people is just an illusion, in fact their buying power is reduced.   And in terms of Newtonian explanation: the wealth is conserved.