Posts Tagged ‘Auto industry rescue’

Fairy gold and economic stimulus

November 8, 2010

Poul Anderson wrote a short story 26 years ago entitled “Fairy Gold” which illustrated how economic stimulus is supposed to work better than anything else I know of.

Poul Anderson

The situation was that a brave but penniless young man wanted to join a voyage of merchant adventurers, but lacked the money to buy a share of the expedition.  His sweetheart wanted him to stay home and work in the pottery shop which she inherited from her grandfather.  Unexpectedly, a bunch of elves maneuvered him into fighting an ogre and at sundown, as a reward for his victory, gave him a a five-pound gold coin, with the warning to spend it quickly.

The young man exchanged the enormous coin for regular money with a banker, and bought himself a share of the ship’s expedition.  The banker exchanged the gold for diamonds at a profit; the jeweler bought pearls from the ship’s captain.  The captain gave the gold to a beautiful aging courtesan, whom he loved, and she bought the shop from the young man’s sweetheart in order to have an income when her beauty faded.  Without responsibility for the shop, the young woman saw no impediment to joining the young man on the expedition.  She rushed to join him, just as the sun came up and the gold coin evaporated, because it was fairy gold.  But although it wasn’t real, everyone concerned was better off for having had it.

Last week the Federal Reserve Board conjured up $600 billion out of nothing, which it will use to buy government bonds.  The board hopes the $600 billion will go sloshing through the economy, and create effects similar to the fairy gold in Poul Anderson’s story.

Maybe it will.  It certainly is not going to evaporate at sunrise.  But it may not go circulating through the economy, either, as might have been the case in earlier recessions.  All classes of people and institutions are in debt – individuals, businesses, local governments, banks.  The prudent thing for them to do if a little extra money comes into their hands is to put it away.  Or invest it in a foreign country, where interest rates, unlike in the United States, are higher than near-zero.

Financial legerdemain got us into the mess we’re in.  I don’t think we can count on financial legerdemain to get us out.

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