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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
by MR4D 6y 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 6y agoBut 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 6y agoShouldn'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 6y 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 6y agoI appreciate you asking this question, as it wasn't obvious to me either
- bo1024 6y agoSure, 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.
- Red_Leaves_Flyy 6y agoThis is how banks, and by extension - entire economies, implode when an over leveraged something fails, taking down all the other over leveraged players dependent on their success in a series of dominoes.