It is a slow day in the East Texas town of Madisonville.

Flamed Diving

It is a slow day in the East Texas town of Madisonville.
It is raining, and the little town looks totally deserted.
Times are tough, everybody is in debt and everybody lives on credit.
On this particular day a rich tourist from the East is driving through town.
He enters the only hotel in the sleepy town and lays a hundred dollar bill on the desk stating he wants to inspect the rooms upstairs in order to pick one to spend the night.
As soon as the man walks up the stairs, the hotel proprietor takes the hundred dollar bill and runs next door to pay his debt to the butcher.
The butcher takes the $100 and runs down the street to pay his debt to the pig farmer.
The pig farmer then takes the $100 and heads off to pay his debt to the supplier of feed and fuel.
The guy at the Farmer's Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has lately had to offer her "services" on credit.
The hooker runs to the hotel and pays off her debt with the $100 to the hotel proprietor, paying for the rooms that she had rentedwhen she brought clients to that establishment.
The hotel proprietor then lays the $100 bill back on the counter so the rich traveler will not suspect anything.
At that moment the traveler from the East walks back down the stairs, after inspecting the rooms.
He picks up the $100 bill and states that the rooms are not satisfactory...... Pockets the money and walks out the door and leaves town.
No one earned anything. However the whole town is now out of debt, and looks to the future with a lot of optimism.
That, ladies and gentlemen, is how the United States Government is conducting business today.

Saw this on another forum. I think it's rubbish, as it implies that debt somehow disappears through liquidity injections.

Anyway, thought I would toss it out there.

Anonymous1987

I don't get it. If the hotel is owed $100 from the hooker and the hotel owes the butcher $100 then the net assets of the Hotel are $0. Technically the town isn't in debt at all.

leftism

I must remember to check out Madisonville next time i'm in Texas. The town sounds like a total shambles but apparently the hookers work for free!

Flamed Diving

Anonymous1987 wrote: »

I don't get it. If the hotel is owed $100 from the hooker and the hotel owes the butcher $100 then the net assets of the Hotel are $0. Technically the town isn't in debt at all.

That's even more correct.

Time Magazine

Anonymous1987 wrote: »

I don't get it. If the hotel is owed $100 from the hooker and the hotel owes the butcher $100 then the net assets of the Hotel are $0. Technically the town isn't in debt at all.

But isn't this sort of missing the point? I mean isn't the world constantly in a state of debt-credit equivalence?

Flamed Diving

The analogy would have been better with the introduction of interest, somehow.

Anonymous1987

It seems to me to be a perfectly healthy functioning credit system, unless someone has the $100 and isn't paying up, my guess is the guy at the Farmers Co-op. Who pays a hooker on credit?:eek:

jimmycrackcorm

It all falls apart when the farmer spends $100 on cheap chinese plastic thingies instead.

Anonymous1987

Anonymous1987 wrote: »

It seems to me to be a perfectly healthy functioning credit system, unless someone has the $100 and isn't paying up, my guess is the guy at the Farmers Co-op. Who pays a hooker on credit?:eek:

healthy is not the word I'd use.

Neither interest rates nor capital constraints - those would collapse the system.
Also, note that this only works because the Hotelier owes the butcher who owes the hotelier, so there is zero net debt between them and hence the hotelier would not pay the butcher. Note: this is not the same as zero net aggregate debt.

Anonymous1987

Deleted User wrote: »

healthy is not the word I'd use.

Neither interest rates nor capital constraints - those would collapse the system.
Also, note that this only works because the Hotelier owes the butcher who owes the hotelier, so there is zero net debt between them and hence the hotelier would not pay the butcher. Note: this is not the same as zero net aggregate debt.

Sure the introduction of interest rates and capital constraints would collapse the system but assuming this town is a closed economy without interest rates and capital constraints wouldn't zero net debt equal zero net aggregate debt? and while no-one has actually paid the $100 can we assume that the $100 is still in the system? Effectively the $100 is just a measure of the value of the goods and services provided so does the $100 really even matter if effectively everyone has paid off their debt with goods or services?

Otherwise someone has decided to create their own credit i.e. the guy at the farm co-op cheats the hooker and the whole system will eventually implode.

Anonymous1987

Anonymous1987 wrote: »

Sure the introduction of interest rates and capital constraints would collapse the system but assuming this town is a closed economy without interest rates and capital constraints wouldn't zero net debt equal zero net aggregate debt? and while no-one has actually paid the $100 can we assume that the $100 is still in the system? Effectively the $100 is just a measure of the value of the goods and services provided so does the $100 really even matter if effectively everyone has paid off their debt with goods or services?

Otherwise someone has decided to create their own credit i.e. the guy at the farm co-op cheats the hooker and the whole system will eventually implode.

My bad, zero net debt on aggregate in this case will mean zero net individual debt. However, we still have the fact that everyone owes and is owed the same amount, so debt will cancel without the need for the stranger. So there is no debt in the model really.