Bunny received the following in email and couldn't wrap her brain around it. Neither could her brother, nor the person who sent it to her:
It's a slow day in the small town of Pumphandle, Saskatchewan, and the streets are deserted. Times are tough, everybody is in debt, and everyone is living on credit.
A tourist visiting the area drives through town, stops at the motel, and lays a $100.00 bill on the desk, saying he wants to inspect the rooms upstairs to choose 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 $100.00 and runs down the street to retire his debt to the pig farmer.
The pig farmer takes the $100.00 and heads off to pay his bill to his supplier, the Co-op.
The guy at the Co-op takes the $100.00 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 $100.00 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 now thinks that they are out of debt and there is a false atmosphere of optimism and glee.
And that, my friends, is how a “government stimulus package” works.
Bunny then sent it to me, asking if I could wrap my brain around it. And upon first reading, yeah, it's hard to grok what exactly happened and how it happened. But I think I can pull this apart.
First off, one way to look at money is as a means of exchange of goods and services. Farmer Bob raises cows but wants some poultry to eat for a change. Farmer Chuck has the chickens and wouldn't mind some beef. I've just checked the current spot prices for beef and chicken:
animal weight in pounds cost per pound ------------------------------ cow 1,400 $4.25 chicken 4 $2.00
That's nearly 350 chickens per cow. I'm sure that Farmers Bob and Chuck could come to some agreement, like a chicken for a pound of beef. This is easy, because Farmer Bob has something that Farmer Chuck wants, and Farmer Chuck has something that Farmer Bob wants—there's a direct exchange. This can even be extended to “debt”—Farmer Chuck could give a chicken to Farmer Bob for later payment in beef. But it gets tiresome working out the “price of chickens” in asparagus or the “price of beef” in potatoes. Thus some commodity that everyone agrees upon to exchange for goods and services—in our case today, United States dollars (I realize the dollar isn't a commodity like pork bellies or gold and is in fact, a fiat currency, but I don't want to bog this down any more than necessary).
Now to our particular example. There is a circle of debt between the proprietor, butcher, pig farmer, co-op, hooker and back to the proprietor. It's a larger circle of debt than between our example of Farmers Bob and Chuck, but it is there, it just took a bit for it to manifest itself. And no one had the entire picture—the proprietor was in debt to the butcher, but was a creditor to the hooker; the pig farmer was in debt to the co-op, but a creditor to the butcher. This mutual debt wasn't broken until the introduction of money from the tourist to unravel the debt ring. Remove the hooker from our little story, and the proprietor would be on the hook for $100 to the tourist, or his debt to the butcher would still exist, and so on down the line to the co-op.
In addition, the story also hinges on the mutual debt all being the same amount. But say the debt had been $50 between the proprietor and butcher but $100 for everyone else and the debt doesn't vanish at all—it just kind of moves about a bit. So I don't think the story is that good of an example of a “government stimulus package” at all—not everyone's debt is the same, nor is all debt in the United States local to the United States. Someone is going to end up holding onto some debt.