Wednesday, June 10, 2009 The Velocity Of Money, Obama Style An Analogy That Helps Describe The Rotation Of Bailout Dollars
There is no doubt that the government is printing an enormous amount of money that is "designed" to stimulate the economy, get banks lending, get consumers spending, generate employment through "shovel" ready projects (although a small percentage of these projects have gotten off of the ground)and in general pull us out of "the worst economic crisis since the Great Depression".
Has this happened? The yield curve has steepened (difference between short and long term interest rates) which is a positive for bank earnings as they borrow short-term and lend long-term. The problem is that the people that need loans to buy houses or durable consumer products like cars are not getting it. Some are, but they have credit scores above 700 and strong balance sheets.
So in a story that puts it into language you don't need an MBA from MIT to understand, here is an analogy regarding the movement of money in the current economic environment:
Chapéu Mexicano - Merry go round (picture)
The other day I went out to lunch with some friends. As we were sitting around the table the state of the economy came up and the things that our Government was doing to "help" out. One of the fellows sitting around the table came up with the following analogy and I thought it pretty much hit the nail on the head, so with nothing else to do, I decided to pass it along to you guys.
It is a slow day in the East Texas town of Madisonville. It is raining, and the little town looks totally deserted. Times are tough, everybody is in debt and everybody lives on credit.
On this particular day a rich tourist from the East is driving through town. He enters the only hotel in the sleepy town and lays a hundred dollar bill on the desk stating he wants to inspect the rooms upstairs in order to pick one to spend the night.
As soon as the man walks up the stairs, the hotel proprietor takes the hundred dollar bill and runs next door to pay his debt to the butcher. The butcher takes the $100 and runs down the street to pay his debt to the pig farmer. The pig farmer then takes the $100 and heads off to pay his debt to the supplier of feed and fuel. The guy at the Farmer's Co-op takes the $100 and runs to pay his debt to the local prostitute who has also been facing hard times and has lately had to offer her "services" on credit. The hooker runs to the hotel and pays off her debt with the $100 to the hotel proprietor paying for the rooms that she had rented when she brought clients to that establishment.
The hotel proprietor then lays the $100 bill back on the counter so the rich traveler will not suspect anything. At that moment the traveler from the East walks back down the stairs after inspecting the rooms. He picks up the $100 bill and states that the rooms are not satisfactory. Pockets the money and walks out the door and leaves town.
No one earned anything. However the whole town is now out of debt, and looks to the future with a lot of optimism. That ladies and gentlemen is how the United States Government is conducting business today. If that doesn't scare you, then I don't know what will.
