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