Over the course of his career, Dr. G has fielded numerous questions. The following is one example of the Q&A he has exchanged with his clients and others. We are in the process of categorizing the Q&A so that you will be able to click on the subject (i.e. debt for the question below) to acesss specific areas of interest.
Hey, Bob: Our son sent me the item below. Since my professional hat doesn't fit very well any more, I thought you might like to take a crack at explaining how this can occur. Dan Slow Day in Texas It's a slow day in a little East Texas town. The sun is beating down and 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 east is driving through. He stops at the motel and lays a $100 bill on the desk and says 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 supplier of feed and fuel. 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. The hooker rushes to the hotel and pays off her room bill with the hotel owner. The hotel proprietor then 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, and leaves town. No one produced anything. No one earned anything. However, the whole town is now out of debt and now looks to the future with a lot more optimism. And that, ladies and gentlemen, is how the United States Government is conducting business today, Dan, The illustration doesn t help explain how our government is conducting business. But it does raise some interesting economic issues. To begin with, the $100 that the rich tourist placed on the counter represented spending power the tourist had earned. When the motel owner took the money, he essentially stole the tourist s purchasing power. If the $100 had not eventually worked its way back to the motel owner, it would have been a clear case of theft. At the end of the day, since the motel owner was able to return it, the purchasing power was still in the hands of its rightful owner. No harm, no foul. With respect to the town s debt, the example involves a number of potentially confusing issues surrounding debt. It s helpful to understand what these are. While the individuals in the example considered themselves to be in debt, from an economic perspective the community as a whole had no debt. What it had was a lack of information about who owed what to whom. The temporary use of the $100 helped to provide the information necessary to show that the group as a whole really wasn t in debt. To see this, it s better to start with a smaller group of only two people. I owe you $100 and you owe me $100. Now, you could consider that we have $200 in total debt between us. However, it s obvious that we can simply agree to offset one another s debt. If I owe you $100, and you owe Joe $100, and Joe owes me $100, it becomes more complicated. We need more information before we can agree to extinguish the debt. What the example does illustrate is that numbers purporting to show the amount of actual debt that people have can be grossly overstated. The example also illustrates other important points. One is that every dollar of debt is offset by a corresponding dollar asset. It also serves to illustrate a distinction between the economic concept of debt and an individual s concept of debt. From an economic perspective, we go into debt when we take another person s income or spendable earnings in this time period and commit to transfer a portion of our future income or spendable earnings to that person. In the example of the town in Texas, there was no transfer of spending power from one time period to the next. There was simply a transfer of current spending power among a number of people. From the perspective of each individual, they were in debt. From an economic perspective they were not. This is how they were able to extinguish their collective debt once they became aware of their situation. Hope this helps, Bob
