Stimulus for Dummies

By John Ballard

This viral email has been circulating for several months but I just got a copy today.

Stimulus Package

In case you never figured it out

It is a slow day in the small Saskatchewan town of Pumphandle, and streets are deserted.
Times are tough, everybody is in debt, and everybody is 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 now looks to the future with a lot more optimism.
And that, ladies and gentlemen, is how a Stimulus Package works.

This what I wrote the sender.

As crazy as this looks, it illustrates the reality of what must happen if the world is ever to be dug out of the credit hole we are in.

That $100 actually liquidated $400 in debt and is yet to be spent. It's called the velocity of money, one of the hard to measure variables when the money supply is being assessed.

And it is exactly the thinking that makes it okay for the Fed to take bonds off the market and the government to own part of GM and AIG. All that, plus the so-called "quantitative easing" (I and II and who knows how much more...) that Bernanke has been doing.

The economic ticking bomb, of course, is that when and if the economy really heats up the velocity of money PLUS the total amount in circulation will equal inflation.

Fiscal and monetary policies are always walking the razor's edge, and outstanding credit is a constantly changing and unpredictable quality.