By the way, anyone see a flaw in this reasoning? It seems to good to be true.
It's a slow day in a little Lancashire town. The sun 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 tourist from down south is driving through town. He stops at the motel and lays a £100 in cash on the desk saying he wants to inspect the rooms upstairs in order to pick one to spend the night.
As soon as the man walks upstairs, the 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 repay his debt to the sheep farmer.
The sheep farmer takes the £100 and heads off to pay his bill at 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 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 rich traveler will not suspect anything.
At that moment the traveler comes down the stairs, picks up the £100, 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 now looks to the future with a lot more optimism.
photo courtesy flickr cc via Horia Varlan
I couldn't find any flaws but Peanut pointed out that technically every time the money changed hands it should have been taxed, so ultimately it would wind up being less than £100 by the time the traveller gets it back.
This looks like a variation on the fractional reserve system of banking taught in intro econ classes. Except in this case things are done in reverse and no one holds any reserves. Instead of lending the money like a bank, they are paying back the debts.
One of the main flaws that I see is that there is no interest inflating the debts, nor are there taxes decreasing the original 100.
Stacey
If the hotel owner was owed the 100pounds and was given the money by the prostitute, he should have banked it. In the end he is out the money since he couldn't deposit it or improve his financial situation with it. Ultimately, the money has to come from somewhere to reduce everyone's debts.
To me it seemed like someone was getting gipped and the motel owner seemed to be the prime suspect.
I hadn't even thought about the interest - good point!
it is great article thanks