Monday, May 18, 2009

The Relevance Of Velocity Of Money & Confidence

The story below is meant to be a funny story, but it also helps to explain the importance of velocity of money and confidence. Confidence in markets, financial well bring and job security have a great impact on the economy. To restore financial health, it is important for people and governments to spend and not just save. All fiscal stimulus are there to help with spending, especially when the public refuses to spend. Thats mainly the reason why Japan is still in the doldrums since the early 90s till even today, because Japanese save and save. South Korea attacked the Asian financial crisis by spending ferociously, not just the government but the general public took on the advice to spend with gusto and hauled itself out of recession faster than the rest. As irresponsible as it may sound, to continue to spend is a patriotic duty.


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 Euro100 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 banknote 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 was owing the hotel for her hourly room use to entertain clients.

At that moment, the rich Russian is coming down to reception and informs the hotel owner that the proposed room is unsatisfactory and takes his E100 back and departs.

There was no profit or income. But everyone no longer has any debt and the small town's people look optimistically towards their future.

p/s photos: Chen Kuang Yi


ONI said...

Wow! Briliant!

bootleg86 said...

hmm, i thought everybody had a balanced account since each of them is debit $100 and credit $100?

Anonymous said...

A good bed time story to educate the kids about finance and economy.

Perhaps the educational system needs to incorporate such educational methodology

Chauncey Gardener said...

On the flip side, the US is all about spend, spend, spend (on credit) and they are also in big doo-doo.

Not only that, they are borrowing more to spend.

Structurally, it is wrong !

clk said...

In the world we live in unfortunately there are timing, cut-offs, deadlines etc.

Along the chain, there will be delays and the whole chain stalls, sometimes briefly, sometimes longer. If everything happens simultaneously, then the chain explained above is fine/well; but it just doesn't happen.

For example, someone may just keep the money and pay another guy 3 days later or forgot to pay until 2wks lapse...the payee has interest to pay etc.

Its like at a traffic light, when the light turns green, does all the car move instantly?

terjun.tanpa.parachut said...

that why interest was probihited in Islam

terjun.tanpa.parachut said...

that why was probihited in islam

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