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How a Stimulus Package works

Occasionally I find something  or I’m sent something that I feel I must share.   The following is one of those somethings.

If you’re someone who has a little difficulty really comprehending how a Stimulus Package works,  read the following:   

It is a slow day in the small Dakota town of Pumphandle and streets are deserted. Times are tough, everybody is in debt and 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. 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 is now out of debt and looks to the future with a lot more optimism.

And that, ladies and gentlemen, is how a “Stimulus Package” works.    

 

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Comments (3)

  1. Crater

    Completely misleading.

    1) Once the money was taken from the desk — despite that it actually is theft — it serves as a temporary loan. That loan can be used to pay off any debt or credit, as usual.

    2) Those debts and credits paid off previously produced goods and services, which represents production in a former period (so saying “no one produced anything” is false).

    3) Those people are no longer in debt, which represents an income, from minus accounts to zero (so saying “no one earned anything” is false).

    4) And the most misleading issue of all is the “circle of debt” and the “magic $100″. The fact that they all owe each other exactly $100, one to the other in a perfect circle, accounts for the net zeroing of balances. It makes the $100 appear as if it is somehow magical. But as most magic it is just a “trick of the eye”, which we can expose easily.

    Lets simplify this situation by saying the motel owner owes the prostitute $100 for services rendered and she owes him $100 for a room. They don’t NEED the $100, they can simply agree to have swapped services of equivalent value. So the $100 is immaterial. If they don’t have a $100 bill, they won’t miss it. But if there is $100 lying on the desk, they can hand it back and forth and put it back on the desk again, and they would still have a net zero trade balance. See? It’s not magic after all.

    5) A stimulus package doesn’t work this way at all. I’m no economist, but I’d say it serves just like any small business loan does, to be used to stimulate production or get a business started, then get paid back.

    Republicans probably pass around this junk and believe it. But then again no one ever said they were smart …

  2. DChristianMoore

    Interesting point. I would say that as imperfect as the allegory is, Jerry is on to something since we are so deep in debt we are spending money that is either borrowed, or created. So the circle of debt is an apt metaphor. While a Keynesian may believe that is appropriate we all know it is not. The Austrian school has demonstrated that using debt and cheap money to “stimulate” an economy is no different than using vodka to cure a hangover. Better to suffer through the austerity and kick the habit.

  3. Markus Stobbe

    Now Americans can reduce the amount of debt that they owe by as much as 60% in many cases to get rid of the debts they have accumulated in the past. Since the businesses know what it is like to need financial help, they are extending this to the American public in the form of federal help for credit card debt.^

    Look at all of the most recent posting on our personal online site
    <="http://www.caramoan.ph/

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