How the Economy works

[John Raabe]

This is a lesson about the "velocity of money".

It is a slow day in a damp little Irish town. The rain is beating down and the streets are deserted. Times are tough, everybody is in debt, and everybody lives on credit.

On this particular day a rich German tourist is driving through the town, stops at the local hotel and lays a €100 note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night.

The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the €100 note and runs next door to pay his debt to the butcher. The butcher takes the €100 note and runs down the street to repay his debt to the pig farmer. The pig farmer takes the €100 note and heads off to pay his bill at the supplier of feed and fuel. The guy at the Farmers' Co-op takes the €100 note and runs to pay his drinks bill at the pub. The publican slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him "services" on credit. The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the €100 note.

The hotel proprietor then places the €100 note back on the counter so the rich traveller will not suspect anything.  At that moment the traveller comes down the stairs, picks up the €100 note, states that the rooms are not satisfactory, pockets the money, and leaves town.

No one produced anything. No one earned anything. However, the whole town is now out of debt and looking to the future with a lot more optimism.

And that, Ladies and Gentlemen, is how the bailout package works.

[MountainDon]

 

[Ajax]

This is a lesson about the "velocity of money".

It is a slow day in a damp little Irish town. The rain is beating down and the streets are deserted. Times are tough, everybody is in debt, and everybody lives on credit.

On this particular day a rich German tourist is driving through the town, stops at the local hotel and lays a €100 note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night.

The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the €100 note and runs next door to pay his debt to the butcher. The butcher takes the €100 note and runs down the street to repay his debt to the pig farmer. The pig farmer takes the €100 note and heads off to pay his bill at the supplier of feed and fuel. The guy at the Farmers' Co-op takes the €100 note and runs to pay his drinks bill at the pub. The publican slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him "services" on credit. The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the €100 note.

The hotel proprietor then places the €100 note back on the counter so the rich traveller will not suspect anything.  At that moment the traveller comes down the stairs, picks up the €100 note, states that the rooms are not satisfactory, pockets the money, and leaves town.

No one produced anything. No one earned anything. However, the whole town is now out of debt and looking to the future with a lot more optimism.

And that, Ladies and Gentlemen, is how the bailout package works.

Interesting story.  Of course you all realize that the German tourist and the 100 euro note are entirely unnecessary.

[Txcowrancher]

hold the phone...the story did make me smile,  fun story
everyone just traded an account receivable for an account payable.
GDP growth = 0
stir the pot....

Here is how it used to work in America
The hotel owner worked real real hard and used some old paint to fix up the room and cleaned it really well, so the tourist wanted to stay for $100

the hotel guy took 50 of it and fixed up his next room and he took 50 and loaned it to his friend, the butcher.

The butcher used the 50 to buy more meat at wholesale from his friend the pig farmer, then sold it at retail. He did this a few times until he had made extra profit that paid off the 100 he previously owed to the farmer, he still has the original extra 50 that had helped grow his business, with the profit he is now paying off the 50 he borrowed from the hotel clerk. He business will remain larger that it was before

because the hotel clerk fixed up the 2nd room, he now made another 100 from a second tourist that he used the 50 to fix the 3rd room and loaned 50 to his friend the pig farmer. The farmer added the 50 to the money that the butcher repaid him and added to his bunch of pigs
etc etc etc

the original 100 that was made by the hotel owner from igenuity and hard work turned into a 1000 though out the community

give me the old days. I guess im an old fart

[cbc58]

If only it were that easy...     

[John Raabe]

Here's the Wikipedia definition of the velocity of money: http://en.wikipedia.org/wiki/Velocity_of_money

Here's the chart of this for the last 50 years. Grey bars are recession years.

[muldoon]

hold the phone...the story did make me smile,  fun story
everyone just traded an account receivable for an account payable.
GDP growth = 0
stir the pot....

Here is how it used to work in America
The hotel owner worked real real hard and used some old paint to fix up the room and cleaned it really well, so the tourist wanted to stay for $100

the hotel guy took 50 of it and fixed up his next room and he took 50 and loaned it to his friend, the butcher.

The butcher used the 50 to buy more meat at wholesale from his friend the pig farmer, then sold it at retail. He did this a few times until he had made extra profit that paid off the 100 he previously owed to the farmer, he still has the original extra 50 that had helped grow his business, with the profit he is now paying off the 50 he borrowed from the hotel clerk. He business will remain larger that it was before

because the hotel clerk fixed up the 2nd room, he now made another 100 from a second tourist that he used the 50 to fix the 3rd room and loaned 50 to his friend the pig farmer. The farmer added the 50 to the money that the butcher repaid him and added to his bunch of pigs
etc etc etc

the original 100 that was made by the hotel owner from igenuity and hard work turned into a 1000 though out the community

give me the old days. I guess im an old fart

What did the hooker do?  
just kidding.

Aside from the amusing story I only have one thing to say about.  I disagree with is this line:  "No one produced anything. No one earned anything. However, the whole town is now out of debt and looking to the future with a lot more optimism."

That's not exactly true tho.  The farmer produced a pig, the shop sold feed and fuel, the pub sold drinks, the prostitute presumably earned her money.  The only distinction was that they used credit instead of money in the first place.  Credit spends like money, they did not need the tourist to repay their debts.  
This is nothing like the bailout.

The bailout story looks more like this:
The town was prospering nicely, the banks took a large percentage of credit out of circulation with fraud and criminal accounting.  By removing the credit there was not enough for all debts to be serviced.  When this happened debts rapidly defaulted.  The banks decided they needed everyone's money and just took it.  Now that the banks have the peoples wealth, and the debt stays with the people who have no money.  That was how the bailout worked.  

[John Raabe]

It is well documented that money given to lower income folks (say the unemployed) is put into circulation faster than money given to the wealthy (who are more likely to save rather than spend it).

That said, could the bailout money have been better spent in a jobs or other broad transfer program rather than given to banks?

[StinkerBell]

I personally think that we get rid of payroll taxes and go to a national sales tax.

[OlJarhead]

hold the phone...the story did make me smile,  fun story
everyone just traded an account receivable for an account payable.
GDP growth = 0
stir the pot....

Here is how it used to work in America
The hotel owner worked real real hard and used some old paint to fix up the room and cleaned it really well, so the tourist wanted to stay for $100

the hotel guy took 50 of it and fixed up his next room and he took 50 and loaned it to his friend, the butcher.

The butcher used the 50 to buy more meat at wholesale from his friend the pig farmer, then sold it at retail. He did this a few times until he had made extra profit that paid off the 100 he previously owed to the farmer, he still has the original extra 50 that had helped grow his business, with the profit he is now paying off the 50 he borrowed from the hotel clerk. He business will remain larger that it was before

because the hotel clerk fixed up the 2nd room, he now made another 100 from a second tourist that he used the 50 to fix the 3rd room and loaned 50 to his friend the pig farmer. The farmer added the 50 to the money that the butcher repaid him and added to his bunch of pigs
etc etc etc

the original 100 that was made by the hotel owner from igenuity and hard work turned into a 1000 though out the community

give me the old days. I guess im an old fart

What did the hooker do?  
just kidding.

Aside from the amusing story I only have one thing to say about.  I disagree with is this line:  "No one produced anything. No one earned anything. However, the whole town is now out of debt and looking to the future with a lot more optimism."

That's not exactly true tho.  The farmer produced a pig, the shop sold feed and fuel, the pub sold drinks, the prostitute presumably earned her money.  The only distinction was that they used credit instead of money in the first place.  Credit spends like money, they did not need the tourist to repay their debts.  
This is nothing like the bailout.

The bailout story looks more like this:
The town was prospering nicely, the banks took a large percentage of credit out of circulation with fraud and criminal accounting.  By removing the credit there was not enough for all debts to be serviced.  When this happened debts rapidly defaulted.  The banks decided they needed everyone's money and just took it.  Now that the banks have the peoples wealth, and the debt stays with the people who have no money.  That was how the bailout worked.  

Not exactly.

You forgot this part:

Politicians decided that fair wasn't fair so created new laws to make fair more fair.  To make fair, fair, the politicians forced the banks to loan money to those who could not afford to pay it back, the banks realizing they were being played by the politicians used the government run bank called 'Freddy Mac' and 'Fannie Mae' to 'secure' their loans which they knew would default.

When the loans defaulted the banks needed money to bail them out because the politicians who claim to be for the little guy aren't.  So the politicians, who prefer the elites to the needy, allowed the banks to print lots of money which they then used to bail themselves out.

Meanwhile the poor get poorer and keep electing the same politicians because they don't get it.

The end.

[cbc58]

you forgot the part where they waved a magic wand and changed accounting rules to allow all the bad assets to suddenly become good assets...  poof... no more problems.   can't wait to see what they come up with next.

[MountainDon]

I personally think that we get rid of payroll taxes and go to a national sales tax.

That FairTax. Nothing taxed until the money is spent.

[Ajax]

I personally think that we get rid of payroll taxes and go to a national sales tax.

That FairTax. Nothing taxed until the money is spent.

Enjoy your tax hike

[OlJarhead]

It is well documented that money given to lower income folks (say the unemployed) is put into circulation faster than money given to the wealthy (who are more likely to save rather than spend it).

That said, could the bailout money have been better spent in a jobs or other broad transfer program rather than given to banks?

It is well documented that the Rich pay the salaries of the poor.

That being said not taking higher taxes is not 'giving' the rich anything.

Giving those whom do not pay taxes is called 'redistribution of wealth' and does not actually help them.

I am for doing good to the poor, but I differ in opinion of the means. I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. In my youth I traveled much, and I observed in different countries, that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer.

-= On the Price of Corn and Management of the Poor, November 1766 =- Benjamin Franklin

It should be noted that the largest populations of the poor in the USA is in cities that have been long run by Democrats.

I, as a Libertarian, do not support the idea of big government in any form and tend to think that Benjamin Franklin had it right.

[Ajax]

It should be noted that the largest populations of the poor in the USA is in cities that have been long run by Democrats.

It is well documented that 'Red' states get back much more from the federal government than they pay in taxes.  The 'Blue' States subsidize them

[John Raabe]

Here is a very interesting interview with Guy Kawasaki about starting a business in this economy...

http://ethix.org/2010/10/26/guy-kawasaki-starting-a-business-answer-to-lost-jobs

Interesting magazine too.

[OlJarhead]

It should be noted that the largest populations of the poor in the USA is in cities that have been long run by Democrats.

It is well documented that 'Red' states get back much more from the federal government than they pay in taxes.  The 'Blue' States subsidize them

Correction, the Federal Government takes from all American's and re-distributes to some American's.  It is not really relevant that a state's population may have voted one way or another in a previous election.  Indeed, you could decide that Colorado was a Blue State (a dumb way to define a state anyway) recently yet previously you would have called it Red.  Means nothing.

My statement is actually factual in every sense.  Democrats control the poorest neighborhoods nationally by a huge margin.  One must ask oneself:  if Democrats have had power in this city for 60-100 years and we're still starving is it possible that their policies of re-distribution do nothing but keep the poor poor?

I've heard this "the blue states support the red states" argument many times which is kinda funny actually because it isn't very original.  However, for the sake of this discussion let me add this:

Your statement is basically accusing people of befitting from the services they are forced to pay for.

Ok, so what is your point?  The Blue states control the country (largest population centers) they force the red states to pay for services whether they want to or not, the red states use the services they are forced to pay for and then what?  The Blue states accuse them of using the service?

Amazing.

But again, it doesn't change the fact that the RICH pay the taxes by huge margins (nearly 50% of American's pay little to no taxes) and pay the salaries of the poor.  Demonizing them is pretty goofy

OH and by the way, no government working in this nation or in any other nation pays ANY taxes.  SO remove them from the equation.  And, of course, neither does the military (and I served for over 8 years and am a veteran -- for the record).

If you don't realize that I'd be happy to explain it

[OlJarhead]

It should be noted that the largest populations of the poor in the USA is in cities that have been long run by Democrats.

It is well documented that 'Red' states get back much more from the federal government than they pay in taxes.  The 'Blue' States subsidize them

Another problem with this statement is that it fails to take into account (Huff and the gang never bother to do this of course) the salaries of workers at certain facilities in those 'red' states.  The original articles were published in 2004 and some of the 'red' states are really blue (colorado mentioned earlier is one of them) but besides that Sandia National Lab has very high payed employees on the government payroll.  This is just one example but must be considered.

Furthermore, the figures used for this argument aren't actually total money figures, they are 'per capita' figures which ignore the fact that a state with 2 million people that gets 200 million dollars is going to appear to get more government money 'per capita' then a state with 30 million that gets 2 billion dollars.

So, sure, you can say the little state that got 9 bucks a person is a hog because they got 9 bucks versus the state with people that only got 4 bucks but if the state with 4 bucks got 200 times the money you're being rather disingenuous.

But then anyone reading Huff or similar sites is of course not really intellectually honest...do a little research, it's amazing what you might find.

[Squirl]

Ah the old partisan debates.  The poor are the problem; it's all their fault, etc.....  The flaw with the article has nothing to do with any of the rich vs. poor.  It is politics.  In 2004 Republicans controlled the house, senate, and white house.  I wonder where the federal spending pork went?  Both parties are just as corrupt.  Even though a majority of the population of the United States lives in Urban and Sub Urban areas, they are not represented equally in congress because of the divisions set up in the Constitution.  This gives people in rural unpopulated states more representation per vote.  More representation = more power = more money. 

Also that is completely untrue that they were always democrat.  Many have switched back and forth.  Same exact politicians too, they just change party with whatever way the political winds are blowing.

[Phssthpok]

I personally think that we get rid of payroll taxes and go to a national sales tax.

"We must not let our rulers load us with perpetual debt. We must make our election between economy and liberty or profusion and servitude. If we run into such debt, as that we must be taxed in our meat and in our drink, in our necessaries and our comforts, in our labors and our amusements, for our calling and our creeds...[we will] have no time to think, no means of calling our miss-managers to account but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our fellow-sufferers... And this is the tendency of all human governments. A departure from principle in one instance becomes a precedent for [another]... till the bulk of society is reduced to be mere automatons of misery... And the fore-horse of this frightful team is public debt. Taxation follows that, and in its train wretchedness and oppression." ~ Thomas Jefferson

[OlJarhead]

Ah the old partisan debates.  The poor are the problem; it's all their fault, etc.....  The flaw with the article has nothing to do with any of the rich vs. poor.  It is politics.  In 2004 Republicans controlled the house, senate, and white house.  I wonder where the federal spending pork went?  Both parties are just as corrupt.  Even though a majority of the population of the United States lives in Urban and Sub Urban areas, they are not represented equally in congress because of the divisions set up in the Constitution.  This gives people in rural unpopulated states more representation per vote.  More representation = more power = more money. 

Also that is completely untrue that they were always democrat.  Many have switched back and forth.  Same exact politicians too, they just change party with whatever way the political winds are blowing.

Being Libertarian I tend to see things a little differently perhaps but being into History I'm often confused with the R's....funny how that works.

In 2004 the R's controlled all three but weren't really Republicans, they were actually more 'Progressives' then anything else...the same Progressives that also call themselves Democrats.  This is why there is so much confusion and the D's and R's fight back and froth while doing the same thing all the time.

Of course not all Republicans are progressives, nor are all Democrats.  However non-progressive Republicans tend to be Conservatives that lean to the Libertarian side while non-progressive Democrats don't really exist -- why?  Because the Progressives (by the way Teddy Roosevelt was really the first big Progressive) co-opted the democratic party.

Anyway, what amazes me is that when the spending got really out of hand 2006-2008 the MSM and the Democratic party loves to blame that on Bush however they forget that the R's lost the house and senate to the D's in 2006 and the last two years of Bush's presidency the purse strings were controlled by the D's -- and Bush, being a Progressive didn't veto anything.

As for the Constitution you will note that representation is not in accordance with the originally intended guidelines, were it so the Cities would have even more representation but so too would the rural areas.  In truth the problem isn't that the Constitution gives more representation to the rural folks nor that they get more money (they don't) but that Gerrymandering has drawn districts in such a corrupt way that representation is manipulated so much that it's totally corrupt in some areas (look at Barney Franks district).

Worst still is that those who side with the D's won't demand a stop to the corruption of the D's because they view them as their team while the R's won't either -- it's their team.

The Libertarians are just called crazy and ignored -- while they are the closest out there to the Founders.

Nice huh

[Windpower]

I was discussing taxes and the benefits that the wealthy were getting in the US with my BIL

My position was basically that the wealthy in the US were NOT paying their fair share

his position was that I was just another 'tax the rich' liberal, envying the rich and fostering class warfare etc etc or basically the sh** that comes out of Anal Cystbaugh's mouth daily (but I digress)

Unfortunately I did not have facts at the time to back up my assertion, so I went to the IRS website and, sure enough, there were the facts and figures

 Based on the latest year published, 2008

people earning over 200,000 in "taxable income" in 2008 earned $1,975,000,000,000 out of a total of $4,025,000,000,000 (these are rounded numbers)

that is 49% of "taxable income" in the US -- about half

This same group of tax payers  (roughly the top 10% of individuals) that earned over $200,000 paid

$519,000,000,000 out of a total of $834,000,000,000 in total income tax

or about 62%

or put another way they paid on average about 12% more than the 'bottom half' of us that earned under $200,000 in 2008

to me this really doesn't look like the top 10% are over taxed at all based on their income

add to this that these tax payers only pay Social Security tax in the first $103,000  or so ....


arguably these top 10% get much larger benefits from living in the US in terms of services and protection of their wealth, yet they pay on average only 12% more taxes

or actually after SS tax is taken into consideration they pay about 6% more than the bottom half of the income

Does this seem out of line to anyone else.....



Another thought

IF the cap were taken off the Social Security Tax the money going into SS would roughly double.

seems to me that that would cure a lot of funding problems for SS

does anyone here think that the wealthy (over $200,000 a year group ) really need an Obama tax break

[Windpower]

another interesting factoid from the IRS

the top "Size of Adjusted Gross Income" bracket was "$10,000,000 or more"

13,312 tax payers earned an average of about $30,000,000

these top 13,312 tax payers paid and average of 21 % tax on their 'adjusted Gross income"

this is alot of money

but

We payed about 22% last year (NOT including Social Security) and we sure aren't in the over $200,000 per year group

yep, I guess I am just another 'tax the rich' class envy guy

[Squirl]

Windpower, the numbers can be spun anyway someone wants to for talking points.  Earlier it was mentioned that 50% of taxes are paid by the rich.  Agreed.  OK.  That means that 50% of the taxes are paid by the people that have 95% of the wealth.  So the converse is that the other 50% of all taxes are paid by people that only have 5% of the wealth in this country.  And who said the system was fixed?

[Shawn B]

Good points Erik but I must disagree about Bush. Let's not forget that the war spending in Iraq and Afghanistan is done through debt and of course a lot of military spending is never fully known because it is done "off-book". Bush also created the Department of Homeland Security (Stupidity) which was the single largest creation of Federal government employees since the days of FDR. More Federal employees means more taxes, or deficit financing. Deficit financing is done through China and other nations buying U.S.  debt, or Helicopter Ben firing up the presses. Either way is no good. Also the Bush's are more neoconservatives or neocons than Progressives.