Proposed solution for solving Greece's economical troubles

[Kjetil]

I stumbled upon the following proposed solution for solving Greece's economical troubles:

A tourist goes into a hotel in a small Greek town. He put 300 euros on the counter in the lobby and go up to see the room ... The hotel owner takes the money and runs to the butcher and pay his bill .... The butcher takes the money and pays the farmer for the meat he bought on credit ... The farmer runs to gas station and pays the gas he has bought on credit to the tractor ... The owner of the gas station takes the money and pays his debt to the city's pleasure girl ... She goes to the hotel and pays 300 euros which she owes for her "work room" ... Hotel owner puts money on the counter. The tourist comes down the stairs to the reception. He does not like the room, so he takes the 300 euro and leaves No one has earned so much as a cent, but the city is debt free and the future looks bright for the case ...

Where's the mistake?

[softwareNerd]

Where's the mistake?

The basic presumption in that example is that nobody in that economy has any net debt. Each person owes someone and is also owed by someone else. Each of those individuals is owed exactly as much as he owes.

In real life, gross debt is not a problem. For instance, a large part of what I pay for a house may be a loan. Yet, I also own investments. If I don't take my investments and use them for a larger down-payment, it ought to be because that's right for me. As such, it not a problem: it could be the perfect decision. The problem comes when I take such a large loan that my current and future assets are inadequate, and there is no way I can pay it back.

In your example, the tourist is superfluous. Here is the situation at the start of the example:

Hotel --> owes --> Butcher --> owes --> Farmer --> owes --> Gas Station --> owes --> Whore --> owes --> Hotel

Now, suppose the Hotel transfers the Whore's debt to the Butcher, we end up with the Hotel owner being out of the loop and the new situation becomes:

Butcher --> owes --> Farmer --> owes --> Gas Station --> owes --> Whore --> owes --> Butcher

Similarly, we could cancel out every one's debt.

Of course, in practical terms it is very difficult to transfer personal debts. Even if they are backed by documented "IOUs", they are far less acceptable than money. So, this is the role of the tourist in the example: he provides a form of money that people can use -- like oil-to-friction -- to clear debts. This example would be meaningful to a situation where an actual shortage of monetary media was clogging up transactions. However, this is not Greece's issue.

If one takes every Greek person's net debt and add it up, we still have a large aggregate, net debt: one that is more than the whole country produces in a year.

Furthermore, even if all Greeks as a whole did not have any aggregate, net debt, you would still have a situation where some individuals do have net debt while others are net creditors. For instance, imagine that the Hotel owner did not owe anyone anything. Then what? The only way the "loop" can be resolved is if he forgives the Whore's debt, or if she provides him with some value equivalent to what she owes him. [The lesson: the Greeks need to work harder and pay off their creditors, consuming less than they are used to; and -- some creditors simply need to swallow hard and write off their debts.]

Edited December 21, 2011 by softwareNerd

[Kjetil]

Sounds plausible. Thanks!