financial policy
 

My daughter sent me this, I think it's a reasonable explanation of cashflow, liquidity and some economic principles such as the multiplier and what government is trying to do.


It is the month of June on the shores of the Black Sea . It's raining and the little town looks totally deserted. Tough times, everybody in debt, and everybody's living on credit.

Suddenly, out of nowhere, a rich tourist comes to town. He enters the only hotel, lays a 100 Euro note on the reception counter, and goes to inspect the rooms upstairs in order to choose one of his preference.

The hotel proprietor takes the 100 Euro note and immediately runs to pay his debt to the butcher.

The butcher takes the 100 Euro note, and runs to pay his debt to the pig farmer.

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

The supplier of feed and fuel takes the 100 Euro note 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 Euro note 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 Euro note back on the counter so that the rich tourist will not suspect anything.

At that moment, the tourist comes down after inspecting the rooms, and takes his 100 Euro note, 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.

Doesn't the money multiplier rely on someone (e.g. a bank) at some point in the chain taking on that $100 or some lesser amount as a deposit/liability and subsequently lending more money, some of which becomes another deposit at another bank thus allowing the cycle to continue?

I saw the Three Stooges do that same basic routine a long long time ago.

reminds me of the dead donkey? raffle.

That doesn't explain anything about economics, because it completely ignores the concept of interest on a loan, which is the basic principle of why loaning money or providing goods/services on credit works. All this story does is explain the barter system, which is what was already in place in this town, even though the townspeople didn't realize it.

this is a question in regional economics

the tourist is the flux across the boundary (monetary inflow to the little town)

you write sets of differential equations (some use diffusion models) to characterize the flux and then either try to solve them or just simulate the solutions -- unfortunately sometimes it blows up

that's what some of my economical friends do anyway

It struck me that it was a lot like a heat flow analysis... or a geographically distributed model for biological population dynamics

fill in your own analogy...