Let me tell you a story. Somewhere in Spain, let’s say in Andalusia, there’s a small village of 15 people in the province of Granada. All its inhabitants are hard-working and enterprising, and they have the same problem as the world’s governments: each of them owes a little money to someone else in the village. In other words, everyone owes money to everyone. One day something happens that will change this situation.
A stranger arrives in the village and goes to its only hotel. He asks how much a room costs, and the owner tells him: “It’s €500 a night, and you have to pay in advance.” The stranger has no problem with that, so he puts the €500 on the counter. From then on, this is what happens:
- The hotel owner takes the €500 and rushes off to pay the electrician who did his wiring. He pays him the €500 he owed. Debt settled.
- The electrician rushes off to pay his electrical supplier the €500 he owed. Debt settled.
- The electrical supplier goes to the bar where he ran up a €500 tab in drinks. Debt settled.
- The bar owner pays the €500 he owed to the firm that keeps his accounts. Debt settled.
- The owner of the accounting firm can finally pay a €500 personal debt to the village mayor. Debt settled.
- The mayor heads to the village brothel, where he owes a prostitute €500 for various services. Debt settled.
- The prostitute goes to the hotel where the stranger booked his room and pays the €500 she owed for using the hotel’s rooms. Debt settled.
Finally, the stranger comes back to the hotel and tells the owner he doesn’t like the village and won’t be staying. “Can you give me back the €500 for the room?” he asks the hotel owner, who returns the €500 without any fuss.
Something has happened in the village: €500 came in and went straight back out, yet all the villagers are now free of debt. Nobody owes anybody anything, even though there’s exactly the same amount of money in the village as before the stranger arrived.
Here lies the mystery of how money and debt work. Global debt is as simple, or as complex, as this example. So why doesn’t the same thing happen with global debt? The answer is just as simple, or just as complex. Happy Monday!
Featured image: Dr Graham Beards, CC BY-SA 3.0, via Wikimedia Commons.
