Asia Times: The party's over

[marmar]

A CHANGE OF BALANCE, Part 1
The party's over
By Chan Akya


The idea of paper money having a vague intrinsic value can be highlighted in the age-old story of the two brothers who owned equal shares in a pub. Whenever one wanted a pint of beer, he would pay the other a dollar, who would then pay him back for his own draw of beer. Pursued ad nauseum, this meant that the same dollar could account for unlimited quantities of beer; provided of course neither brother ever used it to buy something other than beer from his sibling.

More importantly, the game could continue until the brewery sent its chap around to collect money for all the beer that had been drunk by the brothers. As a general rule, the brewery would have wanted to get paid a little more than one solitary dollar for the whole keg of beer.

In essence, this story captures the idea of what happens when stated transactions do not produce incremental cash flows, or when increased liabilities are disguised as new cash. Students of corporate balance sheets will look for these glaring examples of cash mismatch; unfortunately, most economists seem to misunderstand the difference between expenditure and liabilities.

In the above example, the dollar changing hands wasn't the payment - it was an exchange of liabilities; that is, each brother owed the pub a dollar for every pint drunk. Coming up with the aggregate of all the payments meant totaling up the liabilities, not simply exchanging the instrument of exchange, which is to say the dollar note, once again. All of this is particularly important because the brothers deferred their payment for their beer from the brewery - they had themselves benefited from credit.

How then would the brothers pay for the beer in a normal situation? Simply by selling more beer at a profit to their customers than their own consumption would warrant. In other words, as long as the sum total profits of the pub were in excess of the accrued liabilities of the two brothers, the pub remained solvent at the end of the month. If on the other hand the brothers had drunk more than their profits for the month, the pub was insolvent at the end of the month, liable to be taken over by the brewery while the brothers went from being owners to mere employees. .......(more)

The complete piece is at: http://www.atimes.com/atimes/Global_Economy/JK14Dj02.html

[Democrats_win]

1. Sadly, this wisdom is far from today's reality. Borrowing will quicken.

And if it doesn't, the mid-term elections will change that.

[razors edge]

2. Gather up all the Federal Reserve notes

in circulation and return them to the Fed, and then what do you pay the interest with?

But wait, most of the "money" we have borrowed from the Fed is nothing but digits on a computer, couldn't we just send them an email with a bunch of really big numbers in it and call the the whole debt repaid?

Its thoughts like this that kept me out of the better schools. (George Carlin)

[AntiFascist]

3. The pub would eventually resort to outsourcing...

beer would eventually be brewed by slave-labor in China, then all the brothers have to worry about is melamine poisoning.