The Tale of the $100 Bill
By now we’ve probably all been forwarded a version of the tale of the $100 bill that single handedly wiped out lots of debt. In case some readers haven’t seen it yet, it goes something like this:
A bald-headed bearded stranger stopped in town and went into an small old hotel to check in. He asked to go check out the rooms first so, in good faith, he left a $100 bill—a deposit of sorts—with the hotel owner. The hotel owner immediately ran next door to pay his grocery bill. The grocer ran it across the street to pay one of his suppliers. The supplier used it to pay off his co-op bill. The co-op guy ran it back across the street to pay the local hooker who had taken up residence in the aforementioned hotel. The hooker ran it downstairs to pay her hotel bill just ahead of the returning traveler, who picked the $100 bill off the desk and left saying that the rooms were not satisfactory.
Someone asked the hotel owner, “Who was that stranger?” The owner said, “I don’t know, but he sure looked a lot like Ben Bernanke.”
Okay, I added the ending myself.
What gets me is how hard it is for me to see what’s wrong with that story. Lots of debt was paid off. Much of the town got deleveraged. Many were helped. Nobody was harmed. Everyone but the hotel owner earned the money they used to pay their debts, and he would have as well had the stranger stayed the night, but the stranger did get his money back.
Maybe Ben should lend Europe some $100 bills.
So, is the problem exacerbated by so many of us holding on to our $100 dollar bills in our clenched fists? It’s getting harder and harder to let go.
Is it important that the stranger entered the local system (i.e., town) with a recognized unit of value, rather than sketching out a hundred dollar bill on a napkin to serve as deposit money?
It seems like the story isn’t exactly a microcosm of what’s going on in the U.S. Here the same government that runs up the debt, creates as many “dollars” as it needs to in order to repay the debt.
Yep. That’s true for all of us.
I admit I am stumped as well….anyone have the answer?
But I do know that this is not the way the real world works. I think the trick is that the hotel owner both owed and was owed the same amount, so started and ended with nothing. The “debt” never really existed in the first place,
I also agree with your prediction. Ben will bail out Europe. I wish I shared your faith in him, but I really think we need a maestro, and not a helicopter.
Some guesses (and I’m making this up as I go):
1. The stranger did not charge for risk (if he knew he was lending his money he would have)
2. If the debtors got together they could have cleared the debt among themselves. The money wasn’t required.
3. Obviously no new wealth or value was created.
yours is an old joke that has been around for a number of years since the inevitability of the oncoming euro crisis was recognized. the joke involved a rich german tourist to ireland.
no need to send $100 bills across the pond.
It was a good laugh,thanks.
The reason this seems like a solution to a debt problem is that it makes no mention of the goods and services which were acquired in exchange for the debts being cleared by the $100 bill. In the story, the debtors owe money to one another, and can therefore essentially clear their debts by mutual agreement. In the real world’s debt crises, individuals and organizations owe money to various lenders who have provided something to the debtors. Mutual agreement to cancel, for example, a bunch of mortgage debts, would result in a loss to the lenders.
Nothing wrong with the story at all. notice that everyone is balance sheet neutral in the story(everyone has a $100 receivable/asset and a $100 payable/liability) – they are all having a temporary liquidity crisis which was solved by the temporary liquidity injection. Using the analogy for EU situation is the actual wrong. You are just confusing Liquidity crisis(the story) with Insolvency crisis(EU and more).
The problem with this little tale is that the magic $100 bill won’t be used as described.
The Spanish hotelier will use the $100 for the services of the Italian hooker. The Italian hooker will use the $100 to buy blow from a Greek dealer. The $100 will then be shipped to some offshore bank, where it ultimately will become a claim on the US economy.
The stranger will return to the hotel desk, express his dissatisfaction with the room, and the hotelier will explain that there must have been a misunderstanding and the money is gone. Later, the stranger, who actually does look remarkedly like Ben Bernanke, will fudge his expense account to recover the $100 from American taxpayers.
The hotel keeper is 100 dollars poorer. Let’s call him a tax payer.
The problem is that, no matter what, the hotel owner is out the cost of the hooker’s stay. The owner got $100 from the hooker, but he used that to pay the stranger back without covering any of his business costs. It would be no different than if the stranger never showed up and the hotel owner took $100 out of his drawer to start the whole thing off.
@jeff, @Trevor – not true. Just imagine that the Owner paid off the grocer $100 with what the hooker paid him indirectly. read the story again – everyone eventually received $100 that they were due and paid off the $100 that they owed. No one is worse off and the system as a whole got unclogged by the temporary liquidity injection form the visitor.
@krish — indeed true. Start the story without the stranger and assume the hotel owner has $100 in his drawer. Hotel owner pays $100 > grocer > co-op > supplier > hooker > hotel owner. The $100 is back in the hotel owner’s drawer and the books are clear, right? But he still has to pay the cost of the hooker’s room. No value has been added by $100 trading hands.
What if the hotel owner didn’t have $100? He’d ask the hooker for it, or better he’d ask the hooker to sleep with the grocer. The grocer would ask her to sleep with the supplier. The supplier would ask her to sleep with the co-op guy who already owes her $100 and would just say “let’s call it even.” The economy resets to zero BUT THE HOTEL OWNER STILL HAS TO COVER THE COSTS OF THE ROOM.
The system getting “unclogged” in any scenario doesn’t help. The best case scenario here is for the hooker to sleep with the stranger and bring a new $100 into the economy.
The hotel owner was named Corzine. He converted money from a customer (Stranger) account to business use (groceries). The $100 did not properly belong to Corzine until the Stranger agreed to rent the room – which he never did. Everyone else in the loop was legit; they were paid for goods/services already provided and had no way of knowing the money was stolen by Corzine. And the Stranger was not Bernanke; there was no evidence that he printed up the $100 himself – we should assume he earned it thru goods/services he provided to others.
Thanks for the replies. As for my prediction, and it’s accuracy as shown by today’s Fed Action, past performance does not guarantee future results:)
Ben Bernanke is the genius that Richard Nixon accurately predicted it would take to destroy an economy as strong as the USA.
Hopefully, cooler heads will prevail and undo this bonehead swap deal before taxpayers are fully screwed being stuck with a worth-less Euro bloated Fed Balance Sheet.
One issue is that this is a simplistic artificial case where $100 would have been idle cash sitting in the persons pocket, so there was no cost to lend it. In reality when large sums are involved, they aren’t sitting in a pocket or stuffed into a mattress someplace. If they are lent to one person then they aren’t lent to another person instead. There is always opportunity cost.
The Story provides simple evidence that the creation of goods, as in the MANUFACTURING of goods contributes to economic growth.
Although adding a 15% restocking fee could be added to help compensate the Hotel Owner for the lost customers that may have been turned away while the bald headed stranger “viewed” the room at his leisure……and probably used the room for his short termed pleasure!
My best guess is that the hotel keeper sold a call option on the room which had an embedded cancelation clause….for a sort period of time, the hotel keeper had “sold the space”….when the visitor returned he canceled the option and retrieved the $100.
Using the Ben analogy, this was a repo using the room as collateral.
That’s not stimulus. It’s using money in escrow improperly to pay off debt, then having the good fortune to replenish the funds before the owner came calling. As for the general comments, you’re quite right and perhaps Europe could benefit from a few hundred (million) dollar bills.