A Tourist Brings $200 To A Hotel...

Organizations and Markets:

A rich tourist came to a small town in the middle of the financial crisis. Nobody in town had the money to pay back debts owed to other people. He went into the local hotel, placed a 200-dollar bill on the counter and went upstairs to check out what kind of rooms the hotel had to offer. In the meantime the hotel manager grabbed the bill, walked over to the butcher and used the bill to pay his debt. The butcher then took the bill to the cattle farmer and paid his debt to him. Next, the cattle farmer took the bill to the cattle feed supplier and paid his debt there. The cattle feed supplier then paid his debt to the local prostitute. The local prostitute brought the bill back to the hotel and paid her debt to the hotel manager. The hotel manager put the bill back on the counter. Then the rich tourist returns down the stairs and proclaims that he didn’t like the any of the rooms. He grabs the bill and leaves the city. A pity, but more importantly, the town was now debt free and optimism was back.

In the beginning of the story, everyone is bankrupt in the sense that nobody can pay their debts and then a temporary increase in the money supply facilitates transactions and in the end, all is hunky dory.   How is this story similar to Krugman's baby-sitting coop example?  What is the function of money here?

From Financial Crisis to Debt Crisis?

From Financial Crisis to Debt Crisis? By Kenneth Rogoff:

"For better or for worse, the reason most investors are now much more confident than they were a few months ago is that governments around the world have cast a vast safety net under much of the financial system.

At the same time, they have propped up economies by running massive deficits, while central banks have cut interest rates nearly to zero.

But can blanket government largesse be the final answer? Government backstops work because taxpayers have deep pockets, but no pocket is bottomless.

And when governments, particularly large ones, get into trouble, there is no backstop. With government debt levels around the world reaching heights usually seen only after wars, it is obvious that the current strategy is not sustainable."

What is the danger to the US of a debt crisis?  What would probably happen to interest rates, exchange rates, net exports (NX), inflation, and investment (I)? 

Japan's Lost Decade and Financial Crises

Why we need a new macroeconomic paradigm | vox - Research-based policy analysis and commentary from leading economists: "Do the US and Europe risk repeating Japan’s lost decade? This column warns that if the US or European financial clean-ups falter, they will be vulnerable to recurring financial crises. It argues that macroeconomic models should not treat finance as an innocuous veil and calls for a new approach that places financial intermediaries at the centre of its models."

Part of the problem of macroeconomics is that macroeconomists mostly ignore finance and a big problem with finance economics is that they ignore macroeconomics.  More cross-specialty work please.