Wednesday, May 13, 2009

Financial Knowledge for Dummies (Part 2)

In a small town on the South Coast of France, holiday season is in full swing, but it is raining so there is not too much business happening.
Everyone is heavily in debt.
Luckily, a rich Russian tourist arrives in the foyer of the small local hotel.
He asks for a room and puts a Euro100 note on the reception counter, takes a key and goes to inspect the room located up the stairs on the third floor.
The hotel owner takes the banknote in a hurry and rushes to his meat supplier to whom he owes EU100.
The butcher takes the money and races to his supplier to pay his debt.
The wholesaler rushes to the farmer to pay EU100 for pigs he purchased some time ago.
The farmer triumphantly gives the EU100 note to a local prostitute who gave him her services on credit.
The prostitute goes quickly to the hotel, as she was owing the hotel for her hourly rooms used to entertain clients.

At that moment, the rich Russian is coming down to reception and informs the hotel owner that the proposed room is unsatisfactory and takes his EU100 back and departs.

There was no profit or income.

But everyone no longer has any debt and the small townspeople small look optimistically towards their future.


Source Provider: Jefus


Anonymous said...

The hotel owner charges the Russian 20 EU for cancellation fees and so there's a profit of 20 EU

Anonymous said...


Why cant our Finance Minister think of this and solve country economic crisis....?

ycg said...

no. that view is of an ultimate extreme end and assumes market is perfect. it never is & will never be. once you introduce the reality of money market leakages, currency valuation, profiteering ...etc etc, everyting will go haywire. Your next question would probably be, why introduce all these then knowing that it will cause instability. My answer, human nature.

But of course, you know that...

if that is the view we are going to take, then we should consider the purest form of trading. I think the country that came closest to this is probably North Korea, where no one owes to/owns from anyone except to & from the government. simple ya, but of course, kimjongII is no saint.

moo_t said...

This will NEVER happen as long as there is something call "government".

The government will collect 10% from hotel service tax. Left EU90. When the chain of moneystart, the money figure will diminish because of tax. So when come to the hooker, it might only left EU50.

USA and many country government REFUSE to tell anyone "where the money goes" before the economy crisis. Now you know. :)

Anonymous said...

for obvious reasons, it is not applicable to the real financial situation.

here in the story, everyone as a debt (liability), and also an equal amount of collateral (an asset to be collected) of equal amount to offset the debt he owns. this means that his books is not negative (liability exceed asset).

the problem happens when his debt is not a viable, but a bad debt, eg a drunkard borrows his money. well, you know that you might as well kiss the money goodbye in this case. in the story, all of the lenders are honest people, and they immediately clear their debt asap.

but in the real financial world in a crisis, most of the bank so call asset suddenly becomes zero, or virtually worthless. people who owns them money is not able to pay up. with the added equation of interest, and others cost. finally the problem snowballed into a financial crisis.

Jefus said...

Interesting reading

This appeared in the St. Petersburg Times Newspaper. The Business Section had asked readers all week for ideas on "HOW WOULD YOU FIX THE ECONOMY?"

This man nailed it.

Dear Mr. President,

Patriotic retirement:

There are about 40 million people over 50 years old in the work force - pay them $1 million apiece severance with the following stipulations:
1) They leave their jobs. Forty million job openings - UNEMPLOYMENT FIXED
2) They buy NEW American cars. Forty million cars ordered - AUTO INDUSTRY FIXED
3) They either buy a house or pay off their mortgage - HOUSING CRISIS FIXED

Like I have been saying, they are bailing out the wrong people.

Anonymous said...

i don't think the above will work. too lazy to go into the details and reasoning, but anyway like i say it won't work. might as well do it like genghis khan, kill all those above 50 years old.

what is needed is a 'New Deal' like the one suggested by Franklin Roosevelt in the 1930.