Credit

[zasanya]

Recently someone sent a mail to me apparently as a joke.Now I dont understand much about finance and credit but wonder if its a joke or reality.Any comments?

 

This is how debt repayment works in some countries

 

Is this an apt representation of the ground realities?

 

It is a slow day in the neverland. 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 is driving through town. He enters the only hotel in the sleepy town and lays a hundred Rs bill on the desk stating he wants to inspect the rooms upstairs in order to pick one to spend the night.

 

Now the amazing debt repayment juggernaut starts rolling -

 

(1) As soon as the man walks up the stairs, the hotel proprietor takes the hundred Rs bill and runs next door to pay his debt to the butcher.

(2) The butcher takes the 100 Rs and runs down the street to pay his debt to the pig farmer.

(3) The pig farmer then takes the 100 Rs and heads off to pay his debt to the supplier of feed and fuel.

(4) The guy at the Farmer's Co-op takes the 100 Rs 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.

(5) The hooker runs to the hotel and pays off her debt with the 100 Rs to the hotel proprietor paying for the rooms that she had rented when she brought clients to that establishment.

(6) The hotel proprietor then lays the 100 Rs bill back on the counter so the rich traveler will not suspect anything. At that moment the traveler from walks back down the stairs after inspecting the rooms. He picks up the 100 Rs 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 this is how some people are conducting business today.

 

 

.

[kenberg]

As stories go I suppose it's not horrible. I gather from the final sentence ("some people" being a bit of a tip off) that this series of events is viewed as a bad thing. I don't see why. If A and B each owed the other $100 they could probably figure out for them selves that they should call it even. If A owes B owes C owes D owes E owes F owes A, each owing the same $100, then the situation is the same but harder to manage. The insertion on a temporary basis of $100 loosens things up with the result that instead of people wondering how they will pay the $100 they owe and collect the $100 that they have coming, it all gets straightened out and the $100 used as a lubricant can be returned.

 

If we pursue this fantasy I guess the rub is that I don't owe anyone any money so if I get the $100 I just keep it and the chain is broken. Fantasy and life come together a little here. The government sent me an extra $250 in Social Security as a stimulus. It sits in my checking account, stimulating nothing. I have a strong preference for steady predictable payments that are properly adjusted to inflation. No stimulus bonuses, no later reductions.

 

But in general terms, plunking down some money in the right places to get things moving is probably not crazy.

[PassedOut]

Money is a medium of exchange. It provides a level of abstraction that enables us to avoid the problems of a direct barter system. Credit represents the promise of future payment for goods and services delivered now.

 

In the example, everyone had delivered and received services of equal value, but the lack of available money had prevented clearing the debts.

 

I guess the real "lesson" is that you need sufficient money and credit available to maintain a modern, healthy economy. But the tone of the story seems to suggest something sinister about that. Kind of puzzling...

[Winstonm]

The flaw in the story is that the hotel owner started this chain with borrowed money - the 100 cannot belong both to the hotel owner and the stranger at the same time so the hotel owner only borrowed it for a time. The sum total at the end of the day is the same as when the day started - one person is owed 100.

[mike777]

Recently someone sent a mail to me apparently as a joke.Now I dont understand much about finance and credit but wonder if its a joke or reality.Any comments?

 

This is how debt repayment works in some countries

 

Is this an apt representation of the ground realities? 

 

It is a slow day in the neverland.  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  is driving through town.  He enters the only hotel in the sleepy town and lays a hundred Rs bill  on the desk stating  he wants to inspect the rooms upstairs in order to pick one to spend the night.

 

Now the amazing debt repayment juggernaut starts rolling -

 

(1) As soon as the man walks up the stairs, the hotel proprietor takes the hundred Rs  bill and runs next door to pay his debt to the butcher.

(2) The butcher takes the 100 Rs and runs down the street to pay his debt to the pig farmer.

(3) The pig farmer then takes the 100 Rs and heads off to pay  his debt to the supplier of feed and fuel.

(4) The guy at the Farmer's Co-op takes the 100 Rs 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.

(5) The hooker runs to the hotel and pays off her debt with the 100 Rs to the hotel proprietor  paying for the rooms that she had rented when she brought clients to that establishment.

(6) The hotel proprietor then lays the 100 Rs bill back on the counter so the rich traveler will not suspect anything.  At that moment the traveler from  walks back down the stairs  after inspecting the rooms.  He picks up the 100 Rs 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 this is how some people are conducting business today.

 

 

.

There are several acceptable ways of accounting for revenue(earnings) in this case lets assume revenue is earned when it is actually paid. Until then lets call it accounts receivable, an asset.

 

In this example step one is borrowing 100$ all the other steps earned something when the account was paid off. So in fact many people "earned" something.

 

Of course revenue, earnings, are not the same as profit.

 

The lesson here is you can earn something, to receive as a return for service, but not earn a profit.

 

 

Now banks do this, they create money, they literally create money.

 

 

Day one you loan 100 bucks to a bank.

Day two the bank loans a farmer 90 bucks.

Day three you walk into the bank and get your 100 bucks back, the fed loans the bank 90 bucks.

Day 100 the farmer repays 90 bucks plus 3 bucks interest. The bank repays the fed one buck interest and 90 bucks principal and the bank makes 2 bucks profit.

 

repeat process billion times over...

 

What is the danger?

1) the bank cannot make enough good loans so makes dangerous loans.

2) the interest spread becomes negative, bank borrows short term and loans out long term.

[PassedOut]

The flaw in the story is that the hotel owner started this chain with borrowed money - the 100 cannot belong both to the hotel owner and the stranger at the same time so the hotel owner only borrowed it for a time. The sum total at the end of the day is the same as when the day started - one person is owed 100.

No.

 

Each of the businesses in the OP owed another business 100Rs - let's say they had recorded that debt under "Accounts Payable." But each had also granted credit of 100Rs to another business - let's say they had recorded that amount under "Accounts Receivable."

 

All of the businesses started the day even and all ended the day even.

 

That's because at the end of the day the Accounts Payable and the Accounts Receivable had been zeroed out. The reason that the accounts had not been cleared earlier was that currency was not available.

 

The hotel owner shouldn't have grabbed the 100Rs, but any medium of exchange would work. Let's say, for example, that the hotel owner (like California) wrote an IOU.

[helene_t]

The problem with this town is that the hotel has no way of spending the money they earn from renting out to the hooker since the hooker fails to take her customers for dinner so the hotel doesn't need to buy meat. So the butcher gets no money and, therefore, neither does the farmer nor the fodder co-op nor the hooker nor the hotel.

 

What needs to be done is that the council introduces a 100% hotel tax and spend the money on meaty lunches for the pupils at the public school. Then we get the economy rolling.

[bid_em_up]

The flaw in the story is that the hotel owner started this chain with borrowed stolen money - the 100 cannot belong both to the hotel owner and the stranger at the same time so the hotel owner only borrowed it for a time.  The sum total at the end of the day is the same as when the day started - one person is owed 100.

No.

 

Each of the businesses in the OP owed another business 100Rs - let's say they had recorded that debt under "Accounts Payable." But each had also granted credit of 100Rs to another business - let's say they had recorded that amount under "Accounts Receivable."

 

All of the businesses started the day even and all ended the day even.

 

That's because at the end of the day the Accounts Payable and the Accounts Receivable had been zeroed out. The reason that the accounts had not been cleared earlier was that currency was not available.

 

The hotel owner shouldn't have grabbed the 100Rs, but any medium of exchange would work. Let's say, for example, that the hotel owner (like California) wrote an IOU.

I agree with Winston for a change.

 

Suppose the hooker decided instead to support her herion addiction and bought $100 worth of herion from her local dealer who then ships the $100 out of the country never to be seen again.

 

Now let the man walk downstairs and say the rooms are not satisfactory, where's my $100?

[Al_U_Card]

The OP is remarkably like the framers of the Constitution wanted the Treasury Dept. to work. Create the money and circulate it as required so that commerce can operate with the money serving only as a medium of exchange and not enrichment.

 

Sadly the private banks like to make money and debt service is how they do it. Create the money and loan it, at interest, to the country. Somewhere, someone has to owe for them to make money.

 

Every President (legislator etc.) that has opposed this (Jackson, Garfield, Mckinley, Roosevelt and Kennedy) were uhhhhh firmly opposed by the central bank interests.

 

I am not sure what Mike is referring to with his "repeat a billion times" mantra.

 

The banks can create money and need only hold a reserve of about 10% to loan out more. Once a loan is created, it too can serve as part of the reserve. A veritable machine for profit by credit management.

 

This video is long but worth it's weight in gold....

 

http://www.youtube.com/watch?v=vL6xCOAolZE...re=channel_page

[luke warm]

The flaw in the story is that the hotel owner started this chain with borrowed money - the 100 cannot belong both to the hotel owner and the stranger at the same time so the hotel owner only borrowed it for a time. The sum total at the end of the day is the same as when the day started - one person is owed 100.

who?

[jdonn]

The flaw in the story is that the hotel owner started this chain with borrowed money - the 100 cannot belong both to the hotel owner and the stranger at the same time so the hotel owner only borrowed it for a time.  The sum total at the end of the day is the same as when the day started - one person is owed 100.

Either 0 or 6 people are owed $100, it can't be 1. I think it's 0. A circle of 6 people each owed $100 to the next person in the circle, and you can view it as they have bartered away the debt. It's easier to imagine, and the same idea, if you view it as two people owed each other $100 and called it a wash. That's my practical viewpoint, although I think on a legal basis they all still owe the $100 since the original payment was stolen.

[luke warm]

That's my practical viewpoint, although I think on a legal basis they all still owe the $100 since the original payment was stolen.

or just 'borrowed without permission'... in any case, if someone is still owed $100 i'd like to know who

[Al_U_Card]

or just "created" a medium of exchange without an interest penalty.