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Reminds me of the more adult 100$ debt riddle. Found it at econlib.org by David Henderson, but I've heard multiple variations before, so I have no idea where th

Reminds me of the more adult 100$ debt riddle. Found it at econlib.org by David Henderson, but I've heard multiple variations before, so I have no idea where the original comes from. "It’s a slow day in some little town…….. The sun is hot….the streets are deserted. Times are tough, everybody is in debt, and everybody lives on credit. On this particular day a rich tourist from back west is driving thru town. He stops at the motel and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs in order to pick one to spend the night. As soon as the man walks upstairs, the owner grabs the bill and runs next door to pay his debt to the butcher. The butcher takes the $100 and runs down the street to retire his debt to the pig farmer. The pig farmer takes the $100 and heads off to pay his bill at the feed store. 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 had to offer her services on credit. She, in a flash rushes to the motel and pays off her room bill with the motel owner. The motel proprietor now places the $100 back on the counter so the rich traveler will not suspect anything. At that moment the traveler comes down the stairs, picks up the $100 bill, states that the rooms are not satisfactory, pockets the money & leaves. NOW,… no one produced anything…and no one earned anything…however the whole town is out of debt and is looking to the future with much optimism."

deleted 5y ago
[deleted]
Sniffnoy 5y ago
Link to the actual post: https://www.econlib.org/archives/2012/01/an_answer_to_a.html https://www.econlib.org/archives/2012/01/an_answer_to_a.html
bartkappenburg 5y ago
Hence the existence of a clearing house in the stockmarket: cross off debt and credit in the whole market. Every one in your story has 100 credit and 100 debt which makes them worth 0. Aligning that in the right way makes a lot of sense :-)
- cgb223 5y ago
  This is a brilliant explanation of what a clearinghouse does First time I’ve understood it intuitively
  - zanybear 5y ago
    Interestingly, the scenario does not include transaction costs. In the general sense that is money that stays in the cycle (economy) ?
babaganoosh89 5y ago
Makes sense, all the people in town had $100 in debt and $100 in outstanding invoices.
Rebelgecko 5y ago
I saw an old PSA, maybe from the 50s or 60s, that had a similar situation (sans prostitute). The twist is, it's a paprr check instead of cash and the guy who wrote the check is broke. There's this whole chain of endorsements as the check is passed around town before it gets back to the guy who wrote it, saving him from the shame of a bounced check.
- long11l 5y ago
  That almost sounds like it's endorsing check fraud
- 867-5309 5y ago
  but a cheque has a giver and a receiver, the receiver cannot then give the check to someone else as payment since the giver and receiver printed on the cheque are different
  - thefringthing 5y ago
    Yes they can. By simply writing "Pay to the order of: X" in the endorsement area, the original recipient can create what's called a "third-party cheque". A bank would probably not accept this today, but it was certainly done in the past.
    - owenversteeg 5y ago
      Interesting, I used to do that all the time (up until 2018 maybe?) to let friends or family cash checks for me and it worked with no problem, even though I wasn't even in the country. I just Googled it and apparently many banks still accept third party checks, although it does seem to be partly at the discretion of the bank manager and often requires both people present. Here's a decent list of banks' conditions: https://firstquarterfinance.com/where-can-i-cash-a-third-party-check/ https://firstquarterfinance.com/where-can-i-cash-a-third-par...
OscarCunningham 5y ago
This is why the central banks have been printing money.
- phaemon 5y ago
  Well the main reason they print money is so that there will be money. That's where money comes from. It's printed. Hence the pictures on it.
  - gowld 5y ago
    Most money doesn't have pictures on it.
- jonny_eh 5y ago
  This is absolutely the correct answer. This joke/riddle gets to the heart of what "money is". It's a form of communication, it's merely a catalyst that enables trade. Another way to look at it: The debt (or the $100 bill) allowed all these different professionals to offer services to each other, without a direct back-and-forth barter. If they had started with the prostitute renting the room with a $100 bill, there would have been no debt. The reason why the physical $100 is so important (and why the Fed prints money), is that it allows for trade to occur without this accrual of debt. The existence of the debt creates the perception of risk, which prevents further trade from occurring.
  - dools 5y ago
    It’s just double entry bookkeeping
- dools 5y ago
  There is no print money operation. There is federal spending which creates net financial assets by first issuing new bonds in exchange for existing reserves and then spending those reserves back into the system. There is swapping reserves for bonds either as they mature or as repurchases. There is federal taxation which destroys net financial assets by draining reserves. That’s it, there is nothing called “print money”.
neilwilson 5y ago
That’s the classic stock/flow issue. What people forget is that values like turnover and wages are denominated in $/month not $. Mixing up the two is like mixing up miles per hour and miles.
- rytill 5y ago
  Not at all. I can't convert between miles per hour and miles given an interest rate.
  - willismichael 5y ago
    You can convert between the two with an acceleration rate.
fedreserved 5y ago
Happy little story. The hotel owner committed theft, and was saved by the whore having a heart of gold and laying here sent at the last moment
MR4D 5y ago
To recast this in accounting terms, everyone had $100 in accounts receivable and also had $100 in accounts payable. To anybody who has ever had accounting (and nightmares of t-accounts), this balances to zero.
- jameshart 5y ago
  But everybody also knew everyone else was broke, so they had mentally discounted the future value of their accounts receivable (though obviously not to the point of actually writing it off yet). So their subjective sense of their future worth was negative, until the stranger showed up and injected liquidity into the market.
  - brianpan 5y ago
    Shouldn't their future worth still be zero? Everyone has $100 owed to them (which is never coming) and $100 that they owe (which they aren't paying).
    - jameshart 5y ago
      "Alice is never gonna pay me, which means I'm gonna have to go to Bob and tell him I can't pay him back, and he'll tell everyone in town and I'll never get credit again" - a future situation with negative value. Vs. "I may be out of cash, but at least I'm debt free. I wonder if Carol will lend me $10?" - a future situation with zero - or maybe even positive value?
    - 91aintprime 5y ago
      I appreciate you asking this question, as it wasn't obvious to me either
- bo1024 5y ago
  Sure, but it's not stable or dependable. If one person goes bankrupt or dies or moves away, then everybody would go bankrupt one after the other. Compare to a scenario where everyone actually is at zero.
tshaddox 5y ago
This doesn't seem that puzzling to me. It only happens to work because all the debt in the whole town just so happened to form a perfect cycle, or equivalently (I think), everyone in town was owed the exact same amount that they owed. That seems exceedingly unlikely to occur and thus doesn't lead me directly to any conclusions about the absurdity of the real economy.
- teawrecks 5y ago
  They don't have to line up perfectly for there to be a cycle and thus some minimum amount of debt everyone has that's not real. Someone in the loop might think they owe $1000 and actually owe $900, while someone else thinks they owe $100 but actually owes nothing.
  - tshaddox 5y ago
    I'm not sure what you mean. Assuming that everyone knows all of their own debts and credits, then they already know their net balance. In the riddle, everyone already knows their net balance is 0, so I would question why everyone is so pessimistic about the future unless the terms of their debts are less favorable than the terms of the credit they've given out.
- brundolf 5y ago
  Not only that, in the real world the people in debt and the people they're in debt to are usually of different economic classes, making a cycle even less likely
celticninja 5y ago
The rich tourist isn't even required if everyone communicated about their respective debts.
- burnte 5y ago
  Which no one will do because you want to put on a good front.
  - ric2b 5y ago
    Then why was the motel owner confident that the $100 bill would come back to him so he wouldn't be caught stealing from the tourist? Clearly he knew this was happening.
    - deleted 5y ago
      [deleted]
    - pas 5y ago
      It's not clear from the story, at best he was very much betting on it.
    - tnzm 5y ago
      Because they'd all gang up on the tourist if he'd asked for his money back.
ric2b 5y ago
That one is much simpler though, it's just a closed loop of people owing each other. The interesting part is that it seems the motel owner was aware that the loop existed and would end up back with him, otherwise he would've been caught stealing from the tourist. If he already knew this he would be able to get people together and agree to cancel all the debts, with no need for the external $100 to show up.
- kemotep 5y ago
  Getting everyone in a small community to agree to cancel all debts would be like a biblical Jubilee[0]. So it is not too far-fetched of an idea to have happen. [0]: https://en.wikipedia.org/wiki/Jubilee_(biblical)?wprov=sfti1 https://en.wikipedia.org/wiki/Jubilee_(biblical)?wprov=sfti1
  - Mvandenbergh 5y ago
    In an economy which was only weakly monetised and where it would be rare to have debt tenures of more than one growing season, debt jubilees are minimally disruptive. Imagine getting a mortgage in those conditions.
    - freeopinion 5y ago
      Immediately following a Biblical Jubilee, a 30 year mortgage is perfectly manageable. 10 years later it is still manageable. 10 more years later, and you might want to cap it at a 25-year mortgage. 10 more years later and new mortgages don't go much past 15 years. Then there's a space of 5+ years that people can only get 10-year mortgages. Then no mortgages for 10 years. Then we jubilee and everything busts open again. I think it would be very hard to predict all the side effects of such a controlled cycle. It's easy to predict some of the effects. But I wouldn't have any confidence in any model that purported to tally it all up without actually living though several cycles in real life.
      - names_are_hard 5y ago
        This isn't strictly related to the biblical jubilee (wherein land ownership is reset every 50 years), but they also had debt cancelation every seven years (Deuteronomy 15). The Bible warns followers that they must not avoid lending as the seventh year approaches, calling this a sin. Well that didn't work out too well, and at some point (end of the second temple Era, about two millenia ago) the rabbinic leadership led by Hillel invented a legal loophole to work around the law without explicitly overturning it, allowing debts to persist past the sabbatical year. To read more, search the web for "prozbol" (פרוזבול). Anyway the takeaway is that good intentions aren't always enough, you have to think through the second order effects of the laws you create. The sabbatical year law was presumably invented to protect the poor, in effect it discouraged lending and helped no one.
nanis 5y ago
Here's the article[1]. It is important to note that there is no net wealth increase and the "much optimism" embodies so many unproductive value judgements. [1]: https://www.econlib.org/archives/2012/01/an_answer_to_a.html https://www.econlib.org/archives/2012/01/an_answer_to_a.html
ErikVandeWater 5y ago
What was the motel owner's plan if the $100 didn't come back her way?
csomar 5y ago
In real life, the butcher will use the $100 to buy drugs; and the drug dealer takes the money outside of the little town. You can't have that much debt build-up in this society without previous liquidity, and since liquidity suddenly disappeared, injecting it again will not fully fix the issue. The reserve banking system works. The problem is that once some people in the chain stop making payments, the whole system collapses (liquidity crisis). A bailout by injecting money is basically all the economic players bailing out the defaulters (ie: people who got services but didn't pay for them). There are many things that can screw your chain: Imports (negative money), Financial institutions making profits from some schemes without injecting the money back (negative money), or your own citizens taking dollar bills outside the country (again, negative money). Injecting liquidity is not always the answer.
panarky 5y ago
That's a good story about how debt works. I hadn't heard that one before, thanks for that! However it's a completely different story than the original post, which is about Amazon claiming credit for "producing value" when trading one thing for another thing of equal value.

deleted 5y ago

[deleted]

Sniffnoy 5y ago

Link to the actual post: https://www.econlib.org/archives/2012/01/an_answer_to_a.html https://www.econlib.org/archives/2012/01/an_answer_to_a.html

bartkappenburg 5y ago

Hence the existence of a clearing house in the stockmarket: cross off debt and credit in the whole market. Every one in your story has 100 credit and 100 debt which makes them worth 0. Aligning that in the right way makes a lot of sense :-)

cgb223 5y ago
This is a brilliant explanation of what a clearinghouse does First time I’ve understood it intuitively
- zanybear 5y ago
  Interestingly, the scenario does not include transaction costs. In the general sense that is money that stays in the cycle (economy) ?

babaganoosh89 5y ago

Makes sense, all the people in town had $100 in debt and $100 in outstanding invoices.

Rebelgecko 5y ago

I saw an old PSA, maybe from the 50s or 60s, that had a similar situation (sans prostitute). The twist is, it's a paprr check instead of cash and the guy who wrote the check is broke. There's this whole chain of endorsements as the check is passed around town before it gets back to the guy who wrote it, saving him from the shame of a bounced check.

long11l 5y ago
That almost sounds like it's endorsing check fraud
867-5309 5y ago
but a cheque has a giver and a receiver, the receiver cannot then give the check to someone else as payment since the giver and receiver printed on the cheque are different
- thefringthing 5y ago
  Yes they can. By simply writing "Pay to the order of: X" in the endorsement area, the original recipient can create what's called a "third-party cheque". A bank would probably not accept this today, but it was certainly done in the past.
  - owenversteeg 5y ago
    Interesting, I used to do that all the time (up until 2018 maybe?) to let friends or family cash checks for me and it worked with no problem, even though I wasn't even in the country. I just Googled it and apparently many banks still accept third party checks, although it does seem to be partly at the discretion of the bank manager and often requires both people present. Here's a decent list of banks' conditions: https://firstquarterfinance.com/where-can-i-cash-a-third-party-check/ https://firstquarterfinance.com/where-can-i-cash-a-third-par...

OscarCunningham 5y ago

This is why the central banks have been printing money.

phaemon 5y ago
Well the main reason they print money is so that there will be money. That's where money comes from. It's printed. Hence the pictures on it.
- gowld 5y ago
  Most money doesn't have pictures on it.
jonny_eh 5y ago
This is absolutely the correct answer. This joke/riddle gets to the heart of what "money is". It's a form of communication, it's merely a catalyst that enables trade. Another way to look at it: The debt (or the $100 bill) allowed all these different professionals to offer services to each other, without a direct back-and-forth barter. If they had started with the prostitute renting the room with a $100 bill, there would have been no debt. The reason why the physical $100 is so important (and why the Fed prints money), is that it allows for trade to occur without this accrual of debt. The existence of the debt creates the perception of risk, which prevents further trade from occurring.
- dools 5y ago
  It’s just double entry bookkeeping
dools 5y ago
There is no print money operation. There is federal spending which creates net financial assets by first issuing new bonds in exchange for existing reserves and then spending those reserves back into the system. There is swapping reserves for bonds either as they mature or as repurchases. There is federal taxation which destroys net financial assets by draining reserves. That’s it, there is nothing called “print money”.

neilwilson 5y ago

That’s the classic stock/flow issue. What people forget is that values like turnover and wages are denominated in $/month not $. Mixing up the two is like mixing up miles per hour and miles.

rytill 5y ago
Not at all. I can't convert between miles per hour and miles given an interest rate.
- willismichael 5y ago
  You can convert between the two with an acceleration rate.

fedreserved 5y ago

Happy little story. The hotel owner committed theft, and was saved by the whore having a heart of gold and laying here sent at the last moment

MR4D 5y ago

To recast this in accounting terms, everyone had $100 in accounts receivable and also had $100 in accounts payable. To anybody who has ever had accounting (and nightmares of t-accounts), this balances to zero.

jameshart 5y ago
But everybody also knew everyone else was broke, so they had mentally discounted the future value of their accounts receivable (though obviously not to the point of actually writing it off yet). So their subjective sense of their future worth was negative, until the stranger showed up and injected liquidity into the market.
- brianpan 5y ago
  Shouldn't their future worth still be zero? Everyone has $100 owed to them (which is never coming) and $100 that they owe (which they aren't paying).
  - jameshart 5y ago
    "Alice is never gonna pay me, which means I'm gonna have to go to Bob and tell him I can't pay him back, and he'll tell everyone in town and I'll never get credit again" - a future situation with negative value. Vs. "I may be out of cash, but at least I'm debt free. I wonder if Carol will lend me $10?" - a future situation with zero - or maybe even positive value?
  - 91aintprime 5y ago
    I appreciate you asking this question, as it wasn't obvious to me either
bo1024 5y ago
Sure, but it's not stable or dependable. If one person goes bankrupt or dies or moves away, then everybody would go bankrupt one after the other. Compare to a scenario where everyone actually is at zero.

tshaddox 5y ago

This doesn't seem that puzzling to me. It only happens to work because all the debt in the whole town just so happened to form a perfect cycle, or equivalently (I think), everyone in town was owed the exact same amount that they owed. That seems exceedingly unlikely to occur and thus doesn't lead me directly to any conclusions about the absurdity of the real economy.

teawrecks 5y ago
They don't have to line up perfectly for there to be a cycle and thus some minimum amount of debt everyone has that's not real. Someone in the loop might think they owe $1000 and actually owe $900, while someone else thinks they owe $100 but actually owes nothing.
- tshaddox 5y ago
  I'm not sure what you mean. Assuming that everyone knows all of their own debts and credits, then they already know their net balance. In the riddle, everyone already knows their net balance is 0, so I would question why everyone is so pessimistic about the future unless the terms of their debts are less favorable than the terms of the credit they've given out.
brundolf 5y ago
Not only that, in the real world the people in debt and the people they're in debt to are usually of different economic classes, making a cycle even less likely

celticninja 5y ago

The rich tourist isn't even required if everyone communicated about their respective debts.

burnte 5y ago
Which no one will do because you want to put on a good front.
- ric2b 5y ago
  Then why was the motel owner confident that the $100 bill would come back to him so he wouldn't be caught stealing from the tourist? Clearly he knew this was happening.
  - deleted 5y ago
    [deleted]
  - pas 5y ago
    It's not clear from the story, at best he was very much betting on it.
  - tnzm 5y ago
    Because they'd all gang up on the tourist if he'd asked for his money back.

ric2b 5y ago

That one is much simpler though, it's just a closed loop of people owing each other. The interesting part is that it seems the motel owner was aware that the loop existed and would end up back with him, otherwise he would've been caught stealing from the tourist. If he already knew this he would be able to get people together and agree to cancel all the debts, with no need for the external $100 to show up.

kemotep 5y ago
Getting everyone in a small community to agree to cancel all debts would be like a biblical Jubilee[0]. So it is not too far-fetched of an idea to have happen. [0]: https://en.wikipedia.org/wiki/Jubilee_(biblical)?wprov=sfti1 https://en.wikipedia.org/wiki/Jubilee_(biblical)?wprov=sfti1
- Mvandenbergh 5y ago
  In an economy which was only weakly monetised and where it would be rare to have debt tenures of more than one growing season, debt jubilees are minimally disruptive. Imagine getting a mortgage in those conditions.
  - freeopinion 5y ago
    Immediately following a Biblical Jubilee, a 30 year mortgage is perfectly manageable. 10 years later it is still manageable. 10 more years later, and you might want to cap it at a 25-year mortgage. 10 more years later and new mortgages don't go much past 15 years. Then there's a space of 5+ years that people can only get 10-year mortgages. Then no mortgages for 10 years. Then we jubilee and everything busts open again. I think it would be very hard to predict all the side effects of such a controlled cycle. It's easy to predict some of the effects. But I wouldn't have any confidence in any model that purported to tally it all up without actually living though several cycles in real life.
    - names_are_hard 5y ago
      This isn't strictly related to the biblical jubilee (wherein land ownership is reset every 50 years), but they also had debt cancelation every seven years (Deuteronomy 15). The Bible warns followers that they must not avoid lending as the seventh year approaches, calling this a sin. Well that didn't work out too well, and at some point (end of the second temple Era, about two millenia ago) the rabbinic leadership led by Hillel invented a legal loophole to work around the law without explicitly overturning it, allowing debts to persist past the sabbatical year. To read more, search the web for "prozbol" (פרוזבול). Anyway the takeaway is that good intentions aren't always enough, you have to think through the second order effects of the laws you create. The sabbatical year law was presumably invented to protect the poor, in effect it discouraged lending and helped no one.

nanis 5y ago

Here's the article[1]. It is important to note that there is no net wealth increase and the "much optimism" embodies so many unproductive value judgements. [1]: https://www.econlib.org/archives/2012/01/an_answer_to_a.html https://www.econlib.org/archives/2012/01/an_answer_to_a.html

ErikVandeWater 5y ago

What was the motel owner's plan if the $100 didn't come back her way?

csomar 5y ago

In real life, the butcher will use the $100 to buy drugs; and the drug dealer takes the money outside of the little town. You can't have that much debt build-up in this society without previous liquidity, and since liquidity suddenly disappeared, injecting it again will not fully fix the issue. The reserve banking system works. The problem is that once some people in the chain stop making payments, the whole system collapses (liquidity crisis). A bailout by injecting money is basically all the economic players bailing out the defaulters (ie: people who got services but didn't pay for them). There are many things that can screw your chain: Imports (negative money), Financial institutions making profits from some schemes without injecting the money back (negative money), or your own citizens taking dollar bills outside the country (again, negative money). Injecting liquidity is not always the answer.

panarky 5y ago

That's a good story about how debt works. I hadn't heard that one before, thanks for that! However it's a completely different story than the original post, which is about Amazon claiming credit for "producing value" when trading one thing for another thing of equal value.