Wall Street Notes Revenue Redistribution And Monetary Policy
There is this story about small town in Honduras nestled on the coast of the Caribbean. With about one visitor a month, the economy wasn't boding well for the town and all its citizens, it seems, were living on credit and in debt.
Suddenly, a rich tourist comes to town. He enters the only hotel, lays a $100 bill on the reception counter, and asks for a meal and later goes to inspect the rooms upstairs in order to pick one. The hotel proprietor takes the hundred dollar bill and runs to pay his debt to the butcher.
The produce supplier and meat packaging supply guy takes the $100 bill and runs off to pay off his debt to the rancher. The rancher runs out with the $100 bill to pay for feed costs. The feed and grain merchant runs out and pays his bill for fuel costs.
The fuel merchant owns a debt to the town prostitute who, because times were hard, offered her services on credit. With the $100 in hand, she runs over to the hotel and give the owner the $100 bill to pay down her bill for rooms she had to rent for past clients.
The hotel proprietor then lays the hundred dollar bill back on the counter so that the rich tourist will not suspect anything. After finishing a great meal and feeling refreshed he pays for the meal with pocket change and foregoes inspecting the rooms. Feeling energized and seeing the storm clouds lift, the rich tourist takes his hundred dollar bill and leaves town.
As the story unfolds, so far, no one earned anything. However, the whole town is now with less debt, and looks to the future with a little more optimism. That is similar to how the United States Government is doing business today shifting liabilities from one balance sheet to another.
When the wealth tourist happens to tell the newspaper service about the great little undiscovered town he happened upon and his great meal, the news story brings new tourist to the town. The hotel proprietor besieged with new rental prospects want to raise room rates. The butcher seeing business about to take off wants to raise his rates. On down the line the feeling to raise prices ensues. The rancher the feed supplier want an increase, the fuel merchant and even the prostitute who needs to charge more because of the increase in room charges.
What has happened is that liabilities transferred from one balance sheet to another. As everyone knows, paying debts keeps money in circulation as long as the debts remain in place. Once they are paid off, new borrowers for loans need to be found. But when "green shoot" optimism begins to reign, everyone wants to raise prices. And the race begins unless monetary policy tightens money supply. If you chose to fly ahead of impending news, get your Wall Street Journal subscription today. - 23200
Suddenly, a rich tourist comes to town. He enters the only hotel, lays a $100 bill on the reception counter, and asks for a meal and later goes to inspect the rooms upstairs in order to pick one. The hotel proprietor takes the hundred dollar bill and runs to pay his debt to the butcher.
The produce supplier and meat packaging supply guy takes the $100 bill and runs off to pay off his debt to the rancher. The rancher runs out with the $100 bill to pay for feed costs. The feed and grain merchant runs out and pays his bill for fuel costs.
The fuel merchant owns a debt to the town prostitute who, because times were hard, offered her services on credit. With the $100 in hand, she runs over to the hotel and give the owner the $100 bill to pay down her bill for rooms she had to rent for past clients.
The hotel proprietor then lays the hundred dollar bill back on the counter so that the rich tourist will not suspect anything. After finishing a great meal and feeling refreshed he pays for the meal with pocket change and foregoes inspecting the rooms. Feeling energized and seeing the storm clouds lift, the rich tourist takes his hundred dollar bill and leaves town.
As the story unfolds, so far, no one earned anything. However, the whole town is now with less debt, and looks to the future with a little more optimism. That is similar to how the United States Government is doing business today shifting liabilities from one balance sheet to another.
When the wealth tourist happens to tell the newspaper service about the great little undiscovered town he happened upon and his great meal, the news story brings new tourist to the town. The hotel proprietor besieged with new rental prospects want to raise room rates. The butcher seeing business about to take off wants to raise his rates. On down the line the feeling to raise prices ensues. The rancher the feed supplier want an increase, the fuel merchant and even the prostitute who needs to charge more because of the increase in room charges.
What has happened is that liabilities transferred from one balance sheet to another. As everyone knows, paying debts keeps money in circulation as long as the debts remain in place. Once they are paid off, new borrowers for loans need to be found. But when "green shoot" optimism begins to reign, everyone wants to raise prices. And the race begins unless monetary policy tightens money supply. If you chose to fly ahead of impending news, get your Wall Street Journal subscription today. - 23200
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posted by X - Men @ 4:28 AM
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