How Stimulus Money works

[Papa Bear]

It's a slow day in the small town of Springfield and the streets are deserted. Times are tough, everybody is in debt, and everybody is living on credit.

A tourist visiting the area drives through town, stops at the motel, and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs .... to pick one for the night.

As soon as he walks upstairs, the motel owner grabs the bill and runs next door to pay his debt to the butcher.

(Stay with this..... and pay attention)

The butcher takes the $100 and runs down the street to retire his debt to the pig farmer.

The pig farmer takes the $100 and heads off to pay his bill to his supplier, the Co-op.

The guy at the Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her "services" on credit.

The hooker rushes to the hotel and pays off her room bill with the hotel Owner.

The hotel proprietor then places the $100 back on the counter so the traveler will not suspect anything.



At that moment the traveler comes down the stairs, states that the rooms are not satisfactory, picks up the $100 bill and leaves.

No one produced anything. No one earned anything.

However, the whole town now thinks that they are out of debt and there is a false atmosphere of optimism and glee.

And that, my friends, is how a "stimulus package" works!

 

[TechnoLoGs]

If only Massachusetts got that memo. I don't think they got that memo.

 

[Eosyn]

 

[benjamming]

As the $100 passes from each person, it becomes less - $90, then $50, then $0, then more credit is issued to cover the smoke & mirrors...

 

[Darren270]

Bingo!

 

[SwampSurvivor]

Very true!

 

[S65AMG]

Sounds clever but this does not really reflect the mechanism of a fiscal stimulus. A fiscal stimulus incurs debt in order to create growth, which increases tax revenue which helps pay down the debt.

The story simply describes credit and the money supply.

You have to understand that the hotel owner stole the money in the hope that he would sell a room for the night. If he had, then there would have been economic activity. The situation ended up that there wasn't any economic activity and simply settling of debt initiated by the hotel owner who used a pre-payment. The use of a pre-payment to contract the money supply is the opposite of using credit to increase the money supply which is what had happened in this little economy beforehand, and is something that has been going on for centuries.

So this is nothing more than an illustration of credit and the money supply. Nothing more profound than that. But of course it sounds really clever and is used to make political points that are readily accepted.

 

[javacontour]

The story isn't true because the guy got his money back.

In a real government stimulus program, the potential patron would never see the $100 again.

 

[SteveSRT8]

As S65AMG said above, it's just a sugary sweet tale of an imaginary economy.

Borrowed money cannot stimulate much at all. It's been shown time and time again that Gov't money 'injection' does very little to help the economy. Only removal of constraints against commerce increases economic activity and adds real revenues to the tax coffers.

 

[S65AMG]

We should separate a fiscal stimulus from a monetary stimulus.

A fiscal stimulus can work, primarily to smooth out economic cycles. Over the long term one could argue that government spending crowds out private spending but that is more to do with the absolute size of government over time. In the short term, if fiscal policy is used judiciously, it can prevent dips and prevent overheating. Since we all accept that government is responsible for spending on defence and infrastructure, then spending on things that employ the most number of people domestically, on items we need to spend money on anyway makes sense during dips.

A monetary stimulus can also work in the short term because making borrowing cheaper makes more investments worthwhile. However, long term monetary stimulus just ends up devaluing the currency, leading to inflation. Short term monetary stimulus, like short term fiscal stimulus, can manipulate the economy into doing the right thing which would lead to greater long term performance.

It's just like using medicine or something like caffeine to get you through the day. If you use it once in a while, it's fine. But if you use it continuously then you'll be in trouble long term.

 

[SteveSRT8]

We are living the results of a huge injection of borrowed funds into the economy. Much more than advertised as alternative energy is also being heavily subsidized.

The results are real, and out there for everyone to see.

 

[S65AMG]

The interest rate and actual payment on the current debt is very low, so it is not a huge issue at present.

But we should not be spending as much as we do on defense, and we should not have such an tax system that favors certain segments according to the success of their political lobbying while being so complicated for the average person that it creates both an unnecessary overhead and strange incentives and disincentives. We should also understand better the root causes of our world beating medical costs including the huge sums spent with a blank check on seniors where the return in terms of quality and length of life is minimal compared to elsewhere.

The above would easily solve any current deficit concerns as well as many future concerns.

Future entitlements are certainly a worry. However, if we were willing to look at the root causes of our countries health issues, then that would be largely solvable without cuts.

 

[SteveSRT8]

I could have a field day with your talking points but that would likely devolve into political discussion.

Suffice it to say that deficit spending is of no benefit and should be illegal as it represents basic fiduciary mismanagement when we collect so much dough. Then we should remove the business/govt. connection (lobbyists) that is so tight now it is killing us.

Defense probably wastes more than anyone could even imagine. And massive amounts of spending attract fraud like flies to honey, no matter where it is.

IMO the govt should not be involved in healthcare at all...

 

[Shannow]

Originally Posted By: S65AMG
Sounds clever but this does not really reflect the mechanism of a fiscal stimulus. A fiscal stimulus incurs debt in order to create growth, which increases tax revenue which helps pay down the debt.


Google "Australia Budget 2013", and you'll see the fallacy in that logic...

 

[JHZR2]

Originally Posted By: S65AMG
Sounds clever but this does not really reflect the mechanism of a fiscal stimulus. A fiscal stimulus incurs debt in order to create growth, which increases tax revenue which helps pay down the debt.

The story simply describes credit and the money supply.

You have to understand that the hotel owner stole the money in the hope that he would sell a room for the night. If he had, then there would have been economic activity. The situation ended up that there wasn't any economic activity and simply settling of debt initiated by the hotel owner who used a pre-payment. The use of a pre-payment to contract the money supply is the opposite of using credit to increase the money supply which is what had happened in this little economy beforehand, and is something that has been going on for centuries.

So this is nothing more than an illustration of credit and the money supply. Nothing more profound than that. But of course it sounds really clever and is used to make political points that are readily accepted.


Well said. The initial money was stolen. Of course you could argue that money made out of thin air was similar... But your basic premise I agree with 100%. And because it was really an approach to make political points, time to get locked down.