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

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.

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 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.

Interesting little story about a moneychanger gamechanger called Goldman Sachs:

http://forums.somethingawful.com/showthread.php?threadid=3159732&pagenumber=1

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!

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

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.

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

The “FATAL FLAW” is that the hotel proprietor is OUT 100 euros. He recorded income from the prostitute, but then the rich tourist came downstairs and took it away. He now has a negative balance…end of ingenious plan….and when OUR creditors come downstairs and TAKE THEIR money…our GAME will be OVER!!!

Great and highly intelligent comments to an oversimplified storyline!

There is no way around the fact that in our present situation one player benefits disproportionately from the private central bank system, namely the criminal syndicate of private central bank owners, who control their army of well-paid, but crooked secret-handshake-obedience-cult helpers by fear of death: “look what we did to the private-central-bank-haters Lincoln and to several of the disobedient Kennedys (Hitler, who was mentioned by a blogger above as some kind of a central bank hating hero, was in reality the syndicate’s agent and lived out his life in an estancia near San Carlos de Bariloche, Argentina, after a job well done delivering the second k.o. punch to Germany, which brought that country into the syndicate’s full control to this day)”.

The Syndicate is presently benefiting from everyone’s desire to “borrow time” from them and will oblige their hapless host of sheeple as long as they can still find borrowers for the necessary increase of the debt bubble. They can grant more time until everyone is maxed out and until there is no one left who is creditworthy enough to borrow from them. As long as there are still future income streams to be had from tax increases or new taxes (e.g. value-added-taxes), and as long as the rating agencies can still give their (fraudulent) blessing to the worthiness of government debt, this last great bubble of government borrowing can be kept going (with the help of the traitorous double agents in our governments).

God help us when this last bubble pops! The syndicate has also prepared for that eventuality: see Google (U-tube) the US concentration camps and more than 10,000 installed guillotines.
By the way: can you still buy tins of corned beef in the US? We can no longer get it here. The supermarket owner, where I bought it last, told me that his supplier told him that it was banned for reasons of mad cow disease. I doubt that this is the real reason. The real reason is more likely to be that governments and insiders are stocking up at the expense of regular consumers, because they know what’s coming and when. (Corned beef is ideal for safe long-term storage.)

On a more “cheery” note: the Dow broke down convincingly from an uptrend line today. This uptrend line was 64 trading days old (13 weeks) yesterday and has given an amazingly strong support on 10 “touchdown” days. I suppose the Plunge Protection Team of the Syndicate used this trendline to intervene at appropriate points. The clumsy footprints of the PPT were clearly visible on many of those days, when the market was “squeezed” upwards during the last 30 to 90 minutes of trading or in overnight futures trading (cheaper when most traders are sleeping). This pattern is no longer discernible during the last few weeks or so. The banks have been (partly) recapitalized by this sucker rally. Now that they have gotten their money cheaply, their stock prices are free to fall again. Buy FAZ, SKF (triple resp. double short financials) and SRS (double short real estate) and DXD, SDS, QID (double short the stock indices). As a precious metals hedge I prefer AGQ (double long silver) at this time.

I’ve indicated on another occasion that the Syndicate may be betting on a “murderous” depression (avian, not swine, flu, straight from the bio weapons lab in Fort Dettrick, Maryland, delivered by chemtrails and then by vaccines, as a solution for “depressed conditions”). Their ill-gotten US Treasury bonds , notes and bills (purchased with thin air) could quadruple in market value as well as in price-deflation value in such a depression. So could their trillion dollar derivatives positions (short gold, stocks and whatever else). I hope I’m wrong and some friendly aliens or some courageous insiders do something to foil some of these plans.

I used to be much of a Bible believer and remember something about usury money lending with a legally binding little safety valve, namely the 50th year of Jubilee, at which time the loan was forgiven. If we had some variation of that system today, we would not be in the trouble we are in….. There would be no usurer syndicate ruling the world, because it just wouldn’t be profitable enough. Maybe we can hire Sir Alan Greenspan to throw his weight behind such a reformation of usury laws. He could do this “pro bono” as an atonement for his blatant complicity in the latest housing bubble crash……

You know, the method as suggested would work just fine if everyone in that community was in collusion, nobody gave any change, and it was all seamlessly orchestrated so debts could be cleared in a couple of hours. But even if all those elements are not present, quite frankly, in the big picture this is really how it all works anyway. As long as the buck circulates we can have wealth, build equity stakes, utilize services and generally come out ahead. And that’s why credit and velocity work hand in hand. It is a brilliant concept until one chain in the link gets broken.

Off the subject now……That was a brilliant call on gold at 918 Rick. You keep impressing me.

Cam

I just want freaking gold to go up one of these days…..is that too much to ask for?

The problem with the US is that it is a net debtor which must be paid from future production thereby impoverishing future generations at the pleasure of existing ones. The actors in this episode have all rendered past services to pay for past pleasures. None of them were net debtors; they had effectively extinguished their past debts through barter. Fiat money had become irrelevant.

Very well written. Printing of so much money as the past two administrations have been doing will only lead to the value of the dollar falling and hyperinflation setting in at some point down the road. The pricing of oil in some other currency will finally ring the death bell for the US Dollar. Unfortunately, greed will lead to the destruction of the US. We have seen the beginning of the end of this Ponzi financial system.
God Bless the USA.

The fallacy is that the rich tourist NEVER PAID for the room. He only put his money up as a temporary reservation. Never sealed the deal and pulled out at the end. Not sure how this relates to how business is being conducted now tho….did find this on another site….

“I thought Arnie already went to Obama for a bailout last week, and he indeed did turn Arnie down for exactly the reason you suggest.

As far as what else Obama is doing, I’m reminded of a time when I was just starting to rollerblade… I got rolling down a gentle slope, and found myself going uncomfortably fast, and saw a speed bump approaching. My braking skills were pretty weak at that time, so my choices were to deliberately crash before hitting the speed bump, hit the bump and crash anyway, or attempt to jump the damn thing and hope I landed it. I took my chance with jumping it, and (to my amazement) landed still upright on the other side.

The analogy should be obvious: things are out of control. If he “levels” with everyone, we crash before we hit the bump. If he just keeps going, we crash a little later. I think he’s going to try jumping, but he can’t jump until the last moment. Whether he’s able to land it on the other side remains to be seen.”

The difference between the “town on shores of the Black Sea” and the good ole USA – is that here everyone owes to one entity – Banksters. Debt payments, unfortunately, trickle up. The great transfer of wealth from the middle class to the super-rich is happening now

The fallacy here is that the example is an extreme oversimplification as well as being an isolated case of debtors owing debtors. In the real world, the vast majority of debt is owed to central banks, i.e. the central banks are not a point in the debt circle where the money goes back to another creditor … they have NO creditor since they can print any money they want. I.e. there is no circle.

Yes, there would be a few examples like this in the real world. Emphasis on few. Note that in such cases, however, the rich tourist is not needed. Those people, upon figuring out the existence of the debt circle, could all simply agree to cancel said debts.

If the example was alluding to maybe a central bank placing $ on the desk (in the system) such that prior knowledge of the circle was not necessary, then the assumption is that the money will actually be used to pay debt. There is no way to guarantee that beyond the hotel proprietor, i.e. he can be given the $ with the condition that he pay debt with it, but beyond that the use of the $ is up to that individual, i.e. the feed store owner might decide to have another fling w/ the prostitute instead of paying a creditor. And if the idea is that the $ would end up back at the central bank anyway, then the simpler solution would be for the central bank to simply forgive the debts of its debtors, with the requirement that any such payments otherwise made be made to the debtors other creditors, at which point those can pay theirs more, etc etc.

The ultimate simplification would be to print as much as is necessary to pay everyone’s debt, period. The problem with this is, of course, inflation, and thus everyone was paid with depreciated money, and of course nothing *real* was produced.

Interesting that everyone had only one debt, that throws the solution out the window. Also, human nature is not so as to the fact that each ran to pay his debt to the other person. Also, what would have happened if even one person had saved the money. Remember when the US govt handed out free money last year it was used to draw down debt or was saved.
Summary – there is no easy out. The current problem is way too complicated for a quick shot solution. Consider 1.5 quadrillion dollars in derivitives that need to reconciled. No one has the money for that.

The problem with this story as an anology for our economic system is that the debt most individuals and businesses are buried in is owed to banks, not to other businesses and individuals. In the real world the hotel owner goes and pays his bank, then the bank LOANS it to someone else, but not just the original 100 — the bank, through fractional reserve practices, loans out 10 times the amount, so total debt in the system just increased, not decreased, and the chain of debt repayment created in the story stops just got longer, not shorter.

The tourist was just ripped off and never got the money back. Is the tourist the American tax payer?

John Biggs (no, not the famous one)

I enjoyed these comments tremendously and the information about Weimar Germany and how it remarkably extricated itself from the tyranny of the central bankers under Hitler. As a practicing astrologer of 30 years, the u.s. is most certainly going down an economic black hole and will not recover. This fall and early winter will see another horrific dip in the economic structure, which will be followed by an unprecedented economic spiral that will last several years at least. The united states is done-the wealth of the people sacrificed on the alter of the globalist bankers hell bent on world domination and complete enslavement of the peoples and resources of the earth.

The transactions could be all legally recorded in Adam Smith’s “Bill” of exchange, and the 100 Eruo note could incidentally (in Smith’s time) be exchanged for gold.

Hi Rick, I’m keeping this e-mail in my live section since I’d love to see a lot more of the comments.

That said, it’s clear that eventually the “US Ponzi scheme of finance” will collapse. When… who knows!! To be on the safe side, I’ll continue to put my money on physical gold.

gerry

“THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE”

This “statement” appears on all the “money” printed in the USA. The story above proves one thing above all else: There is no “real money” anymore, ONLY DEBT.

Real money is Constitutional, better known as Gold and Silver.

David above said it best: “…by creating “money” out of thin air and introducing it into an economy based on debt, the very real debts get wiped out by very fake “money,” leaving everyone supposedly richer in the process. The reality is that nobody gained anything in the process. ”

Got Gold?

So far, everyone has missed it. The hotel proprietor is out 100 euros. He recorded income from the prostitute, but then someone (the rich tourist) came downstairs and took it away. He now has a negative balance. Everyone else is even, on paper.

This illustrates that someone, somewhere, ALWAYS gets screwed in such a transaction.

TANSTAAFL!!!

Andy

A nice little story but it does not describe debt retirement; it describes a clearing system.

One major flaw in this concept, is that this theory assumes all debt is internal debt with no money owed to forign debt and no real products are bought from foriegn nations. Such debt can bot be settled under this theory.

This is the scenario the gvt envisioned when they handed over the treasury to Wall St. The problem is Wall Street is the hooker, the pig, and the casino and the money never left their pockets. (Except to pay themselves bonuses for the biggest con job in the history of the world.)
If the gvt had given a small fraction of that to the people the velocity of money would have played out as described and the peoples problems would be solved.
Wall Street would have a hole in their pocket because of their greed for leverage.

Mark has it right.

The townsfolk weren’t in debt.
They owed and were owed the same amount.

Now if our government had just given every man, woman, and child in the USA the $30,000 each (which totals what the bankers gave themselves), then the economy would fly, debts would be paid, and taxes would eventually repay the government.

We’ve been suckered into the same old trickle down con in a new disguise.
Baaa Baaa Bleat!

I think most of the comments above missed the point of the story. Leaving aside the legality and the minutia of who owes what to whom, it illustrates the fact that, by creating “money” out of thin air and introducing it into an economy based on debt, the very real debts get wiped out by very fake “money,” leaving everyone supposedly richer in the process. The reality is that nobody gained anything in the process.

And that is the exact problem with the USDollar and the massive debts in this country: we might get paid more (thanks to inflation) and we “qualify” for more credit … er… debt, we are no better off than before. The USDollar is a massive kiting operation wrapped in a Ponzi scheme supported by massive amounts of bulls**t from the Fed.

Got gold?

Had the feed supplier been married and not needed the services of the prostitute, he would have pocketed the Euro, whereupon the Hotel owner would have been tossed in jail for theft.

Well..Rick..it seems the banks did indeed pass the money around from bank to bank allright; but some how or other we were not in the loop and still have full liability for our debt and theirs.
We would be much better off using the Hitler plan. We were taught that it was the German government that caused their inflation, but we are finding out it was really the central banksters.* Hitler shut down the central bank in 1933 and issued honest, debt free script in payment for labor and services rendered. Prior central bank debt was disavowed as illegal. Fractional reserve banking outlawed. Trade was carried out through BARTER. In a few years Germany was the most powerfull nation in Europe. Not a pleasent sight for the banksters. Germany had to be stopped and since the victors write history we never heard a word about how Germany went from basket case to world power in 8 years.
When we finally get to “basket case” maybe we too can find a goverment who will give us honest money, shut down the central bank, disavow our illegal debt, tax cosumption only, outlaw fractional banking, etc. etc. The only problem is the banksters will do to us what they did to Germany and 100 years from now posterity will watch movies about the “unimaginable atrocities”committed by that traitorous, evil, renegade United States.
* http://www.webofdebt.com:80/articles/bankrupt-germany.php

That shows the velocity of money I guess, but the hotel proprietor never gets paid because the money is returned to the tourist. Meanwhile, anyone wishing to conduct business would once again enter into a transaction based on debt. It seems this would be analagous of the taxpayer paying taxes to the Treasury, the Treasury lending the money to the Fed, the Fed giving the money to the banks(TARP). The banks repayng the Fed, and the Fed asking for more money from the Treasury via the taxpayer.

Perfect logic assuming no one pays or enforces the collection of taxes on income or services rendered.