The nature of debt.

HAMISH_MCTAVISH

1000 people live around the perimeter of an island. Each borrows £100 from his next door neighbour to the right.

The total debt outstanding at any given time is £100,000.

But the total debt can be paid off with just the same £100 being passed from one person to the next.

Total debt and net debt are two very different things....;)

crazyguy

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1984ReturnsForReal_2

If each person owes £100 to another.

The total to pay back is ZERO

Thrugelmir

HAMISH_MCTAVISH wrote: »

1000 people live around the perimeter of an island. Each borrows £100 from his next door neighbour to the right.

The 1000th person leaves the island and spends the money on a holiday.

So the island as a whole is a £100 poorer.

Cleaver

HAMISH_MCTAVISH wrote: »

1000 people live around the perimeter of an island. Each borrows £100 from his next door neighbour to the right.

The total debt outstanding at any given time is £100,000.

But the total debt can be paid off with just the same £100 being passed from one person to the next.

Not if they each spent their £100 on novelty cheese graters from China.

1984ReturnsForReal_2

Cleaver wrote: »

Not if they each spent their £100 on novelty cheese graters from China.

Those cheese graters are the antiques of the future. A little like some big ruby & a construction firm or Britains bonds..

Graham_Devon

You seem very eager to let us all know about this debt stuff Hamish.

I'm wondering. As this is now your third thread which starts telling us something, but never tells us what your point is.....what's your point?

Thrugelmir

Graham_Devon wrote: »

You seem very eager to let us all know about this debt stuff Hamish.

I'm wondering. As this is now your third thread which starts telling us something, but never tells us what your point is.....what's your point?

Perhaps that the UK should impose capital controls and revert to a banking system pre fractional reserve.

dtsazza

HAMISH_MCTAVISH wrote: »

The total debt outstanding at any given time is £100,000.

But the total debt can be paid off with just the same £100 being passed from one person to the next.

That's only because in this example, every person on the island borrows £100 and then keeps it - or alternatively, they borrow £100 to fund the £100 loan to the next guy.

So depending on how you want to account for it, either each person has zero debt (they just acted as a middleman to sell on a debt from the left neighbour to the right neighbour), or has £100 in savings as well as £100 in debts.

Whichever way you do it, every member of the island has zero net debts.


Now if each member borrows £100 and then spends that £100 on something, the situation is different. Assuming the purchases "things" are non-liquid (holidays already taken are great examples, as they can't be sold for any money), then each person now has £0 savings/assets and £100 debts. And it would take £100k total influx to pay off all their debts.

Though that assumes that all of their purchases were offshore - otherwise some of the islanders will have received £100 as rental on their beach hut, which will offset that individual's debt. In fact, if someone spent part of their £100 loan building/buying the hut, they'll be making profit on a good business decision.


Ultimately then, the net outstanding debt can be very different at the level of an individual, and at the level of the economy as a whole.

HAMISH_MCTAVISH

dtsazza wrote: »

That's only because in this example, every person on the island borrows £100 and then keeps it - or alternatively, they borrow £100 to fund the £100 loan to the next guy.

Now if each member borrows £100 and then spends that £100 on something, the situation is different.

Unless they just bring forward consumption, and repay the debt later.

In which case it's still a situation of zero net debt, but with economic stimulus today.

Though that assumes that all of their purchases were offshore - otherwise some of the islanders will have received £100 as rental on their beach hut, which will offset that individual's debt.

In fact, if someone spent part of their £100 loan building/buying the hut, they'll be making profit on a good business decision.

And this is where it gets interesting.

Even debt spent on consumer tat can be good because money recirculates within the economy, and thanks to fractional reserve banking, debt creates more money, which then recirculates further, etc.

So lets say Person A, who happens to be a hop farmer, goes to the bank and deposits £1000. Person B goes to the bank and borrows £900, then spends it all on a giant party at their local pub.

The £900 is taken by the pub and deposited in their bank. It's then used to pay employees wages, buy more stock, etc. Those employees then spend the money with their local shops, the supplier takes the money for beer and uses it to pay the brewer, who then pays the farmer (Person A) for more hops.

The money has recirculated within the economy, and will keep doing so.

But in the meantime person C has gone to that bank and borrowed £810 to start a business.... Which he buys from Person D who deposits the £810 in his bank.

And the process continues, at each stage creating multiple claims on the same money, and in so doing effectively creating more money until with a 10% reserve rate the original £1000 deposited has bloomed into £9000 circulating within the economy.

So even the highly irresponsible act of borrowing money for a p1ss up in a pub can be turned into useful and productive economic endeavour.

Debt is an essential part of the economic process.
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Too little debt within society is worse in many ways than too much.

purch

Without a youtube link, and a bloke with long hair shouting, there is no way I can get my head around that explanation :eek: