Wall Street Detects Wealth 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.
Out of the blue, a wealthy tourist arrives into town and makes his way to the only hotel which also has a bar and restaurant and wants to be shown a room. He put $100 bill on the counter and asks if he could have a meal before he inspects the rooms. Seeing the $100 bill, the owner runs off and uses it to pay off his bill at butcher supply.
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.
Compelled to make good on past debts, the fuel dealer takes the $100 bill and pays his debt to his personal prostitute. Because of hard times she gave out her services on credit and she now pays her debt to the hotel for past rooms rented for her clients.
Seeing the $100 bill back in his hands, the hotel owner lays the bill back it its original location. The wealthy tourist finishes his meal and feels refreshed and decides on foregoing the room inspections and stay at the hotel. He returns to the front desk, pays for his meal with pocket change and takes back the $100 bill and leaves to continue his journey.
The story behind the tale is that, since everyone in the town was in debt, just the mere circulation of money with no real wealth created in any ones pockets, allowed for bills to get paid and improved everyone's balance sheet. No one put money in the bank but progress was felt.
Now the wealthy tourist was impressed by his meal and had nice things to say about the town and it became a news story. Soon after, 8 new tourists make their way to the town hotel. The owner overcome by the bonanza of new customers wants to raise his room charges and menu prices. The butcher, rancher and feed and fuel suppliers are in the throes of raising their prices. And the prostitute needed to raise her prices in order to cover the increased room rates.
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. - 23222
Out of the blue, a wealthy tourist arrives into town and makes his way to the only hotel which also has a bar and restaurant and wants to be shown a room. He put $100 bill on the counter and asks if he could have a meal before he inspects the rooms. Seeing the $100 bill, the owner runs off and uses it to pay off his bill at butcher supply.
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.
Compelled to make good on past debts, the fuel dealer takes the $100 bill and pays his debt to his personal prostitute. Because of hard times she gave out her services on credit and she now pays her debt to the hotel for past rooms rented for her clients.
Seeing the $100 bill back in his hands, the hotel owner lays the bill back it its original location. The wealthy tourist finishes his meal and feels refreshed and decides on foregoing the room inspections and stay at the hotel. He returns to the front desk, pays for his meal with pocket change and takes back the $100 bill and leaves to continue his journey.
The story behind the tale is that, since everyone in the town was in debt, just the mere circulation of money with no real wealth created in any ones pockets, allowed for bills to get paid and improved everyone's balance sheet. No one put money in the bank but progress was felt.
Now the wealthy tourist was impressed by his meal and had nice things to say about the town and it became a news story. Soon after, 8 new tourists make their way to the town hotel. The owner overcome by the bonanza of new customers wants to raise his room charges and menu prices. The butcher, rancher and feed and fuel suppliers are in the throes of raising their prices. And the prostitute needed to raise her prices in order to cover the increased room rates.
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. - 23222
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posted by X - Men @ 12:54 AM
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