It is 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 thirdfloor.
The hotel owner takes the banknote in a hurry and rushes to his meat supplier to whom he owes E100. The butcher takes the money and races to his wholesaler to pay his debt.
The wholesaler rushes to the farmer to pay E100 for pigs he purchased some time ago.
The farmer triumphantly gives the E100 note to a local prostitute who gave him her services on credit.
The prostitute goes quickly to the hotel, as she owed the hotel for her hourly room use 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 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? Or, is there a catch here?
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May 09, 2009 9:42 am re: re: Where is the catch? #
ReplyDeletevasudevan Rajagopalan
The E100 travels from the hotel owner to the prostitute as E100. This is not possible. Every time it changes hand there will be a reduction of say 10% as every body's contribution for the exchange of services.When it reaches the prostitute it must be only E5 or so. This is the catch.
May 10, 2009 2:02 pm re: re: re: Where is the catch? #
Shivaji Jammalmadugu
I agree with Tarun. That is the exact thing happening now with most economies - govt. printing money to pay (whom????) which eventually comes back to it by way of taxes and in turn everyone in the circle retains a part of it. The catch is what will be the value of such money which is printed just to circulate? Hmmm.... am wondering why nothing pass through me ;-D
Cheers
May 11, 2009 2:52 am re: re: Where is the catch? #
Gopal Krishnan
Tarun,
I am not sure of your answer. We tried to play this as a game amongst our family members (I was the prostitute). Coulnd find the answer. My head is still spinning.
May 13, 2009 8:54 am re: re: re: Where is the catch? #
Sam ..
Assuming everyone owed the next E100, the transactions square off. I am not sure how the Hotel Owner is at minus E100. The way I look it, the hotel owner got a bailout of E100 for a specific period which sets a chain of payment. The money comes back to him at the nick of time for him to payback the bailout amount.
However, everyone in the chain would have been cash positive, if the Russian stayed and ordered room service and also the last one on the list ;)
May 13, 2009 9:26 am re: re: Where is the catch? #
Rana Singh
hi,
This case should be looked in reverse.
The case does not take into account that at every transcation there has to be a "VALUE ADDITION".
The case is flawed on the assumption that everyone owed the exact amount backward in the chain.
This case looks more like "passing the parcel"
Interesting read though
cheers..
Rana Singh
PH: 093425 37713
May 27, 2009 3:59 am "The Catch" is... #
Samir Jhaveri
Hi V Kumar,
I just read your story and I did not find anything confusing. Let me explain the "catch"...
First of all, the beginning statement "Everyone is heavily in debt."
and the ending statement "But everyone no longer has any debt and the small town people look optimistically towards their future."
is misleading.
In reality, there was no debt. While everyone owed E100, everyone were also to claim E100.
The everyone means "the hotel owner, the butcher, the wholesaler, the farmer and the prostitute".
To make this easy, write these words in a circle and an arrow pointing in one direction (from one to the next).
This is like "sundry debtors" and "sundry creditors" both amounted to E100 in their "books of accounts", so to speak.
The Russian's money has nothing to do with this story - he gave E100 and took it back later, so there is no loss or profit to anyone.
Everyone returned the E100 they owed to the concerned person.
Hope that ends the confusion :)
cheers!
Samir
Jun 17, 2009 6:08 am re: "The Catch" is... #
Manish Bhatia
The catch is that everyone has received their money from their debtors and paid of to their creditors. So the debt now stands at 'zero' across the board. However, no future source of revenue has been created. In the lack of future source of revenue the parties concerned are yet not in a position to utilise services of each other.
Similary for the global recession to end it is not about repaying existing debts. It is important that each party in hte system has enough disposable money that would help to create and use services in future. Such is not the case in the story listed. Hence the listed story cannot be treated as a possible analogy to the solution to global economic crisis.
May 08, 2009 9:30 pm
ReplyDeleteTarun Hukku
The hotel owner's cash balance is E100 less than what he expected it to be. So theoritically he could be in loss while all the others income went up by E100. So if he did what the Russian could do then we would be back to square one.
This is similar to saying that all the debt in the world could be written off and we would all be happy.
If the hotel owner was a government he could have printed some money but alas :-)