Here is a forward I received. A very good read, and something to think about as well
It is August in a small town on the south coast of France. Holiday season is in full swing, but it is raining so there is not too much business happening. Everyone is heavily in debt.
Luckily, a rich Russian tourist arrives in the foyer of the small local hotel. He asks for a room and puts a Euro 100 note on the reception counter, takes a key and goes to inspect the room located up the stairs on the third floor.
The hotel owner takes the bank note in a hurry and rushes to his meat supplier to whom he owes E100.
The butcher takes the money and races to his supplier to pay his debt.
The wholesaler rushes to the farmer to pay E100 for pigs he purchased some time ago.
The farmer triumphantly gives the E100 note to a local prostitute who gave him her services on credit.
The prostitute goes quickly to the hotel, as she owed the hotel E100 for her hourly room use to entertain clients.
At that moment, the rich Russian comes down to the reception and informs the hotel owner that the proposed room is not satisfactory and takes his E100 back and departs.
No one earned anything… but the debt of everyone has been cleared. The small town people are happy and look forward to their future.
Could this be the solution to the global financial crisis or is there a catch somewhere?
Im sure there is a catch somewhere in this but it does sounds ideal solution to anybody’s financial crisis. Don’t spend any money but problems get solved. 🙂
Nice. There’s another angle to it. If the rich Russian tourist was the Obama-led govt, and the villagers were US citizens, and the E100 was a bailout package, things should get better, according to the simple story, because the bailout money will rescue everybody and finally return to the government.
In reality, some people will not use the money to pay off the entire debt. They may save some, use some and blow some. In some cases, a few people will vanish with the money and not clear their debts. And in a situation involving lakhs of people, there are just too many variables that will come in the way of the E100 story.
Episode Two of this story may be like this: The hotel owner uses the money to buys car parts.
Amazing one. 🙂
(via email)
Well, in real life scenario what would it be like? Can one think of the Russian tourist as a bank who is offering a loan on 0% interest? Or could it be the state, which is injecting some cash in the economy, only to take it back a little while later?
Certainly for the economist to answer but I tell you a theory that has been gaining ground — and it is that the economists have been a failure.
Economics as a science has been a failure. Neither the science nor the people associated with it have been able to 1) predict the start of the global economic downturn 2) Predict the end of the global economic downturn 3) Tell for sure, the remedy to the global economic downturn. So well, we can’t be sure if even a economist knows the answer to this.
Interesting read, this. Thank you!
(Comment received via email)
Pradeep,
Just add a banker into the scheme of things, who charges Euro 1 commission for underwriting every loan.
Conclusions:
Euro 5 dissapppeared from the system,
Euro 5 is the combined outstanding.
Assuming that Euro 5 is not repaid to teh banker, after 33 years, the outstanding plus interest (@10% p.a.) is Euros 100
Best
Ashok
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Dear Pradeep,
Nice one. I don’t know whether there is a solution to the global economic crisis, but I am trying to find the ‘catch’.
Dinakaran
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Give intelligently, without condition , this world has enough wealth to go around many times over…eh?
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Very cool one, thanks 🙂
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Yes it seems so simple but must be a catch somewhere
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the catch is simple – the hotelowner lost the ‘100 buck’ money the ‘pro’ owned him ( which he could have spent for something else – to feed his kids), the pro lost that much money the farmer owned her and so on down to the meatsupplier who lost that much money from hotel owner. everyone lost their debt ( or their asset values were written down by 100 bucks – this is what is called deleveraging and what is happenign today ). So i am sorry to such neat tricks of hand doesnt solve the global crisis ( if you want i can explain the theory. but it would take too much writing). This is just an explanation of the current crisis.
just to be clear – their liabilities decreased too. But my point was that there is no real gain in cash in their hands since they are all leveraged.
globally we ( total populations) are leveraged more than the asset values ( because the assets shrinked in value). So this exercise of reduction of assets and liabilities alone wont save us. That was what i meant by this story is the explanation of what happened as part of the crisis ( or is happening now).
i promise this is the last comment ( this explanation will make the explanation of sleight of hand even more simpler).
consider each of those people having a balance sheet with assets and liabilities as mentioned in the story.. in that case for each person
before the transaction
Balance sheet = total assets ( 100) – total liabilities ( 100 ) = 0 ….
that means they had no money/cash really. but no bad debt too
after the transaction
balance sheet = total assets ( 0) – total liabilities(0 ) = 0
they still have no money.
that means the transactions in the story is not really changing anything ( it seems nice because its cyclical. but it pretty much accomplishes nothing except to add to the velocity of money).
now here is something thats not part of the story – add in the fact in the current global crisis, assets are shrinking. so each person will show some liability after the transactions, while they will all show reduced asset against it, making everbody a net debt holder.
Funny.. I remember a very long time, I saw a Bobanum Mollyiym movie (only one created), where boban and molly were given 2 large bunches of bananas. One of them got 50ps and they just exchanged 0ps between them back and forth and ate up all the banana’s.. were bought between them and consumed perfectly legally But ultimately, they got only 50ps of revenue..
Venu
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A nice read yes!
(Comment received via email)
but who gave back the Russian’s 100 Euros…
(Comment received via email)
Rajiv,
Think of it this way – the russians money was loaned ( 100 extra liability for the hotelowner at that point, and 100 receivable for the russian) by the hotelowner to do the chain of develeraging. then later the loan was given back ( the loan was given back) when deleveraging was done. This was possible for the hotel owner because his net position was zero earlier ( 100 asset – 100 liability).
So for Russian or hotel owner no new net cash was generated or lost.
you can think of the russian like the central banks (thats what they are trying to do).
The difference is central banks have to deal with a shrinking asset base in their balance sheet ( meaning they cant get back now what they loaned). Their hope is that they will get it back later when asset values slowly increase.
That’s a nice one!
(Comment received via email)
Really nice one
why didnt i get it as a fwd??
The *catch*, as some have pointed out here, is that, in this story, each individual is *owed* the same amount that they *owe*. Someone owes the prostitute the same amount that she owes someone else. The world described in the email only needs a little actual *cash* in order to make the rounds to “grease the wheels” of debt repayment.
In *our* world, it’s different. You’ve got people who owe $10,000 in credit card debt, yet they DON’T have $10,000 owed to *them* by other people. Meanwhile, when you look at the huge banks and lenders, they mostly have people *owing* them money and they don’t owe nearly that amount to other entities.
In the ideal world in the email, it’s this perfect circle of owing. But in our world, it’s not a circle. It starts with the individuals and it ends at the big banks… and doesn’t circle back round to the people.
it’s true this happens but one thing we perhaps need to know is that the solution for the financial crisis comes from me and you. Hotelier should understand that when you get money you should trade with it first to generate some revenue for your business. their is also one thing, you cant allow somebody to book a room later only to come back and say that the facilities are bad and you give them all the cash- there has to be some % to be charge for cancellation. in this case the Russian will not go back with all the money.
lastly there are some servces/’businesses’ that you don’t offer credit facility- i mean prostitution comeon guys lets pay infact it should be cash before anything else starts. they are humanbeing and not machines or objects – this is what we call casual jobs which must be paid immediately.
The one thing I detest in regards to the ipad is the fact that you can not look at flash content. That is I beleive the tabs with Android operating system are an excellent substitute… even when the Android operating system drains your battery like crazy.
I’ve been searching for a long time who wrote this story