With the U.S. sinking hopelessly into a black hole of debt, and households facing an avalanche of tax hikes that will at best postpone the nation’s day of bankruptcy, we are all hard-pressed at this point to see a way to a happy ending. Lo, along comes an anonymous e-mail that describes a way to solve everyone’s debt problems painlessly. If you think the plan can work, I would urge you to forward it to your congressmen. But if you see a fatal flaw in the logic, please drop by the Rick’s Picks forum to explain. The forum can be accessed by clicking on the word “Comments” under the headline on today’s commentary. Here’s the magical plan to cure America’s”Accounts Receivable Crisis”:
“It is the month of August, on the shores of the Black Sea . It is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit.
”Suddenly, a rich tourist comes to town.
”He enters the only hotel, lays a 100-euro note on the reception counter, and goes to inspect the rooms upstairs in order to pick one.
”The hotel proprietor takes the 100-euro note and runs to pay his debt to the butcher.
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”The butcher takes the 100-euro note and runs to pay what he owes the pig farmer.
”The pig farmer takes the 100-euro note and runs to pay his debt to his supplier of feed and fuel.
”The supplier of feed and fuel takes the 100-euro note and runs to pay his debt to the town’s prostitute that, in these hard times, proffered her ’services’ on credit.
”The prostitute take the 100-euro note and runs to the hotel to pay for the rooms she rented when she brought her clients there.
”The hotel proprietor then lays the 100-euro note back on the counter so that the rich tourist will not suspect anything.
”At that moment, the rich tourist comes down after inspecting the rooms, takes the 100-euro note off the desk, tucks it back into his wallet, and explains that he did not like any of the rooms. He then leaves town.
”No one earned a penny. However, the whole town is now without debt and looks to the future with great optimism.
”And that, ladies and gentlemen, is how the United States Government is doing business.”
Come to think of it, that is almost exactly the way Uncle Sam is handling the debt problem. Your comments are welcome at the forum.
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There is just one problem. There isn’t enough money around to pay off all the debts. If you borrowed money to buy a $500,000 house, and it’s now worth $250,000, you still owe $500,000.
Now, if the government were to print lots of worthless money and give it away so people could pay their debts–that would go a long way to erasing debt, only it would make the economy collapse.
There is only one ‘honest’ way to solve this problem. Let everybody who can’t repay their debts go bankrupt, and write off all the bad loans. Anything short of that will just make a bigger and more complicated more prolonged mess.
MKG
&&&&&
Your solution is the deflationary one, Ghandi, and it would visit pain on sinners in accordance with their sins. The inflationary solution — adding two or three zeroes to everyone’s bank account — would wipe out savers as a class and destroy all of the institutional conduits of saving, including the bond markets. RA
Awesome post. This shows how our economy really works. Everyone that says “got gold” has no reality of an idea. Gold does not work either if you still have debt. Then you are only replacing the gold for the dollar (which both have a value.) The REAL issue is the debt. If everyone (Consumer’s,Businesses,corporations,governments,etc) were forgiven all the debt they had instataniously and they outlawed debt as a world law then everyone would prosper. Make a law that you must pay for goods and services when rendered. If you want to buy a house you save for it and pay in full. Now I know what your thinking “banks would collapse” Just the opposite. Since it would not be able to lend money it would have less of a risk collapsing. Banks collapse because they over extend themselves. This law would put a stop to credit “debt”.
If I took all your wealth and cashed it in and turned it to gold and gave it to you you would be no richer than you are today. Example. If right now you have a million dollars in the bank and we do away with the dollar and switch to gold then you would still have a million. You would just have less bars because they are worth more. Gold does not change a thing. If you have a million in the bank and owe a million in debt (because of a house) are you richer? No actually your poorer then the first senario. You still owe the million, So you actually have a net worth of 0. So debt is a wealth killer. Get rid of your debt and pay for everything as you go. If the government owed no debt it would bring in over half a trillion each year. What it would be able to do with that money…. Well let your mind ponder on that.
Jim
Anti-Debt Advocate
“The Debtor is slave to the lender.”
This can be done ONLY inside the US. Debts owed outside of the US are a different matter.This is where the real problem is? If it was that easy why would anyone bother to work? The US has no real money left. One thing might be true.They do have a huge military.They might entertain the idea of “Stealing IT”. After all has it not been the way of all past empires?The other problem is that many eyes are looking.Good luck.
A delightful explanation of the role of money as a medium of exchange in almost any economy except perhaps the most simple where barter might work.
I like the sequel to this tale. The tourist, who is loaded with a suitcase full of 100-euro notes, continues his world sailing tour, but alas is shipwrecked and stranded with one other survivor on a deserted island. The only food is a fruit that hangs securely from 20ft tall trees. You get the picture. Who would you rather be? The tourist with the suitcase stuffed with soggy 100-euro notes or the other survivor with the 30ft extension ladder?
Re the rich tourist
The tourist makes a prepayment which finances the reduction of debt but the prepayment has to be repaid which means the hotel manager has to borrow from the butcher etc and the vicious circle starts again It is basically a demonstration of how powerful the principles of double entry are versus creative accounting.
In bookeeping terms, apart from the tourists, the others are creditors to each other whilst the rich tourist is a debtor ( either in money or service terms)
In other words, if you know an institution which has the money equivlent of the total toxic debt to deposit in a bank and then every creditor pays every other creditor off the final creditor must deposit that money in the bank so that the original depositor can cash its cheque for the final withdrawal.
The joke is an accountsants trompe l’oeuil
B mendes F C A
The system is flawed. What if the hotel proprietor took the euro note and left town?
Or the prostitute was a lousy piece? Then, there’d be chaos. The best solution is to have more lawyers.
It’s a good short attempt at the financial analogy that exists and as John Silvera said.
I believed the hotelier got screwed when I first read this.
But he didn’t!
He paid a debt at the start…remember!
Rick,
The root cause of our national disaster to come has to do with the banksters and gangsters that surround our president. As a stand alone guy he is a decent man completely surrounded by deceptive people who advocate fiat currency and bank fraud. Our forefathers warned of this exposure and the outcome that it brings.
“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow around them will deprive the people of all property until the children wake up homeless on the continent their Fathers conquered…I believe that banking institutions are more dangerous to our liberties than standing armies…The issuing powers should be taken from the banks and restored to the people, to whom it property belongs.” Thomas Jefferson
Interesting little story about a moneychanger gamechanger called Goldman Sachs:
http://forums.somethingawful.com/showthread.php?threadid=3159732&pagenumber=1
Dale just illustrated the “tendency to hoard” – which is an issue many deflationists are not taking into account.
There are several points to be made here from this parable.
First each party is making two transactions. First he has income in the amount of 100 euros. Next he is making a de t service payment in the amount of 100 euros. Therefore he has had 100 in income and his balance sheet is showing 100 less in de t which means his net worth went up by 100. The tourist is like a taxpayer in that he made an involuntary loan. Unlike the taxpayer he gets his money back. Since these were unreportable cash transactions the government never got it’s cut. If the taxman was in each locatio and took a portion to finance govt activities like giving the hooker an aids test and inspecting the butchers meat and checking the hotel for bed bugs, the tourist may have only gotten 50 euros and an IOU. Just like taxpayer.
But let’s take it a step further. If our tourist goes to each party and says you’re owed 100 euros and there is virtually no chance you will ever get paid. So he buys each debt for 10 per ent of face value, then he redeems each debt for 100 euros worth of service or product from each debtor, at the end of the day you will have a well fed, well rested and sexually satisfied tourist at highly discounted price. And the town’s people will have a little bit of money and a lot less debt.
I am assuming on a macro level, the tourist represents foreign bond/treasury purchases and the town is the US economy.One fatal flaw revolves around the assumption that the tourist situation is new, when in fact we have been relying on an ever growing number of tourists doing precisely the same thing. No new tourists or even a decline of tourists leaving their “deposit” (consider it taking treauries or bonds) means the bills do not get paid and the townspeople are stuck with their frozen balance sheets because noone is paying their debts or able to (a bit of an assumption here)
On a micro level where the tourist represents the taxpayer via government guarantees of zero cost money to the money center banks, or worse, through the fed, guarantees the swap of toxic assets for treasuries. At first everyone seems to be getting paid, but the government,representing the taxpayer or hotel manager is increasingly dependent on deposits or swaps to keep the system going. Eventually the tourists whether internal taxpayers or external bond buyers become afraid to leave any kind of deposit for fear of never getting repaid.
Simplistic models are good!
The game is easy to see when there are 10 guys in a room with 9 chairs – obfuscated when there are 20 million with 19,999,000 chairs!!
If you work with a simple model, it’s also clear that debt amongst ourselves is of a different order than debt owed to the banks. The “magic” of GDP does indeed work as described in the fable, (albeit temporarily / cyclically), but we enjoy no such advantage (leverage) in paying off the initial loan – the one that “created” the money / debt in the first place.
We always hear about debt as % of GDP – makes no sense at all.
GDP may create “virtual wealth” within an economy, but it has nothing to do with creating wealth regards the initial loan, (zero sum game + interest).
And the linkage of the economy and finance is another great way of confusing the issue.
Re. The gold standard, can you gold / Austrian School guys please explain how you create money? I cannot find this information anywhere, (i.e. is all your money debt too? Gold-standard debt ??).
And has anyone out there investigated CAFRs?
There is a reason this does not work. Debt is not owed between individuals its owed to the banks somewhere down the line and when you pay off debt to banks the account is zeroed and money is taken OUT of circulation meaning this situation meaning we are always kept at zero point as insane as it is its literally designed to prevent the creation of wealth real wealth that is.
I am trying to bring to peoples attention the importance of a new technology which is currently being used only as a charity but I think people have not grasped the potential yet and that is micro loaning sites such as Kiva.com
In this type of credit debtor system the creditor(you) has already earnt their credit giving it value and they loan what they have earnt unlike banks who create out of thin air what they loan, therefore when the debtor pays back the money it does not get taken out of circulation but instead the process has created more wealth all round so like your story where debt can be paid off this easy value can also be created this easy, so much abundance would be created it would be hard to grasp.
Paying off debt this easy is NOT how the US is doing business otherwise everyone would be debt free this is how it would work under a micro loaning system where people loaned to each other bypassing the banks and fractional reserve system.
Paying off debt this easy is NOT how the US is doing business otherwise everyone would be debt free this is how it would work under a micro loaning system where people loaned to each other bypassing the banks and fractional reserve system.
Rick, You hit the jackpot on this one (65 comments) and YOU get the bogus 100 schmirroro note! So choose door #1, #2, or #3 (or #4, etc.) No hankypanky!
This is a humorous tale, but it is NOT a trick. This is exactly how money works. It does not matter where the money comes from or who creates it or who destroys it or who puts it into or takes it out of circulation. The humorous start of the tale makes it appear as a trick, but it is not. It simply and clearly shows the role of money (no matter what is used as money) as a medium of exchange – remember Econ. 101?
The Hotel owner might just as well have printed up a counterfeit 100 euro note and the whole tale would have worked. He might also have written his own 100-IOU and as long as everyone accepted his IOU as a medium of exchange the whole tale would have worked. Even a computer program that they all tapped into for purposes of bartered economic exchange between themselves would have worked without the transfer of any item as money. It would be a computerized system of barter thus without the need for a medium of exchange.
The tale could have used a 100 euro note that the hotel owner already had and we could have seen it transferred around the group and come back to the hotel owner. All the 100 euro debts would have been paid exactly as in the tale, but of course there is no humor in that.
It is really quite easy to come up with humorous tales about the function of money as a medium of exchange, because most of us can get easily confused (including me a retired prof. of economics) by the functions of money.
All of these would work just like the tourist’s 100 euro note, but perhaps these methods would not be qui
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