October 7, 2009

Solution to global economic crises?

There was an interesting forward some weeks back that makes sense to share with everybody...

It was August. 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 hurry and rushes to his meat supplier to whom he owes E100. The butcher takes the money and races to his wholesale supplier to pay his debt. The wholesaler rushes to the farmer to pay E100 for pigs he purchased some time ago. The farmer goes quickly to the hotel, as he owed E100 the hotel for using hotel room for some family function in past. 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 E100 back and departs.

There was no profit or income. But everyone no longer has any debt and the small town people look optimistically towards their future. COULD THIS BE THE SOLUTION TO THE Global Financial Crisis?

Surely not... So what is the catch?? There was an intelligent reply to this mail which makes interesting read

Very interesting story – macroeconomists call this story the “Keynesian theory” – the hypothesis that additional money supply will stimulate an economy to come out of recession.

Unfortunately the Russian tourist has gone back. So there will be no one to eat the meat that the hotel owner has bought from the butcher. So he will not buy any more meat from the butcher. So the butcher is not going to buy any more pigs from the wholesaler. And therefore the wholesaler will not buy any more pigs from the farmer. Which means the farmer is not likely to use the hotel rooms for any more family functions. So the gloom continues.

Moral of the story – money supply alone will not help the economy to come out of recession. There has to be a genuine upswing in underlying consumer demand.
Do we see a deja vu here?? US is currently pumping in money and flooding the market... so, perhaps it appears as though things are looking up but actually, the gloom continues:( ?? Any comments?


R Swaminathan said...

Mere additional money supply WITHOUT additional consumer demand will only cause speculative assets such as stocks, real estate, gold etc. to go up without any real economic activity.
Additional money supply WITH additional consumer demand, but WITHOUT additional production of goods and services will only cause prices to go up, viz inflation.
The real solution will be additional money supply FOLLOWED BY additional consumer demand FOLLOWED BY additional production. Only then will real GDP go up.
In other words, there is no alternative to hard work !

Raji said...

Oh yes, I am glad people are waking up to this fact, as there was a dangerous trend 10 years ago in India, to look down on old economy and the youth were swayed by services sector and new economy vis a vis the conventional brick and motor industries.