Economics

[Katharine]

I've just been sent this. Can anyone who knows more about the subject than I do, comment on the last sentence?

It is the month of August, on the shores of the Black Sea. 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 Euro note on the reception counter, and goes to inspect the rooms upstairs in order to pick one.

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

The Butcher takes the 100 Euro note, and runs to pay his debt to the pig grower.

The pig grower 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 rich tourist comes down after inspecting the rooms, and takes his 100 Euro note, 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...

[lonelymom]

[Fjgrogan]

So in theory we don't need money at all, just some sort of universally accepted token to represent it. Which is precisely what a banknote is - a promissory note representative of the cash which is hidden away somewhere to back it up - all that gold in Fort Knox for example? What if the gold is not really there, and it is all a hoax? It will be blatantly obvious that I have no knowledge whatsoever of economics!

[Fjgrogan]

Addendum - my economic philosophy is 'Do not spend what you do not have'. It may not be the key to eternal happiness, but on the whole it seems to work for me!

[Mid A 15]

The concept described is known as the circular flow of income.

It works ok as long as "the tourist" leaves the 100 Euro note rather than reclaims it!

In America they've previously spent "the tourist's" money before he has arrived. When he didn't arrive they hit problems.

Thank you Neil Simms! (My Economics teacher at CH).

[NEILL THE NOTORIOUS]

I know that I am a silly old Geriatric BUT ---
The one thing which infuriates me, in the present Recession, is the constant advertising on TV of "Easy Loans"
Quote : "Even if you have CCJs (Count Court Judgements) we can still help with a loan -- (WHAT ?) all cases will be considered sympathetically "

People who are in serious financial difficulty are fertile ground for this sort of Scam, which I believe should be STOPPED by the Government. I heared on the Radio today about a "Pay Day Loan" which was at OVER 1000% and this is LEGAL

The CAB (In which I served for 8 years) examine, carefully, disposable income, and negotiate with Creditors. I confess that although I don't smoke myself -- I always managed to allow a little extra under "Cleaning Materials" -- one has to be practical , not in Moral Judgement !

LOAN COMPANIES--------

GRRRR and again GRRRR !

[Jo]

So in theory we don't need money at all, just some sort of universally accepted token to represent it. Which is precisely what a banknote is - a promissory note representative of the cash which is hidden away somewhere to back it up - all that gold in Fort Knox for example? What if the gold is not really there, and it is all a hoax? It will be blatantly obvious that I have no knowledge whatsoever of economics!

And taking a step further back, that's all any money was originally - a token that (generally speaking) represented the worth of one person's effort against another person's effort. If the person you were bartering with for corn didn't need your skills in hedge-laying in exchange, he could accept a token that he could exchange for some other skill that he did need.

[AKAP]

The concept described is known as the circular flow of income.

It works ok as long as "the tourist" leaves the 100 Euro note rather than reclaims it!

In America they've previously spent "the tourist's" money before he has arrived. When he didn't arrive they hit problems.

Thank you Neil Simms! (My Economics teacher at CH).

Thanks Andy, now I know I made the right decision.
Physics with Chris Vincent-Smith was much easier to understand especially with his fantastic use of Meccano to explain things.

[englishangel]

what gold in fort Knox? the US left the gold standard nearly as long ago as the UK did.

[NEILL THE NOTORIOUS]

Don't tell me that "Goldfinger" wasn't true ?

I am devestated !

[Fjgrogan]

'the USA left the gold standard ..........' Well I told you I knew nothing about economics! It wasn't on the CH syllabus all those centuries ago!

[englishangel]

http://en.wikipedia.org/wiki/Gold_standard

[midget]

Surely our beloved leader sold most of our gold (at the bottom of the market) when he was Chancellor?

[J.R.]

Don't tell me that "Goldfinger" wasn't true ?

I am devestated !

Arr ! Pussy Galore, a.k.a. Honor Blackman. 'Whoar' !!

I met her on a Cobham petrol-station forecourt several years ago. What a lady ! We chatted as we filled our tanks ! (No rude comments, perleeez !!)

(Sigh !!!)

[cstegerlewis]

As another Neil Simms Alumni who went on to do economics at university, it is indeed representative of the circular flow of money, which is at the heart of the capitalist system. Essentially someone has to 'add value' to the process in order for wealth to be created, but otherwise a strong measure of a healthy economy is the velocity money flows round the system. Where it has all gone wrong recently is that, in order to increase the velocity, and therefore allow more to be 'earned' by banks, the financial institutions created far too much credit, which helps situations like that above exist ie everyone does something but does not yet have the means to pay for it, so we all end up in debt to each other. Once the 'new' money is choked off, the flow stops, and everyone remains in debt unitl we have either earned the money (the hotelier receiving the deposit) or we can borrow again to pay off our existing debts.

The big problem with it all is that the banks 'created' money for credit ie it never existed, they just expected the flow would continue with earnings and interest making it more than they leant out and everyone appears wealthier - most banks were running capital ratios of 3-4% during last year, ie they only held on deposit 3-4% of what they had leant out, thus risking massive collapse should all the investments fail at the same time, as there really wasn't any actual money to support it.

And as usual, if you owe the bank £100, you have a problem, if you owe them £100m, they have the problem

Hope that makes sense