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where is the error with this image?

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nomar posted on Fri, Jun 15 2012 11:35 PM

 

I know this might be very old, but based in the austrian economics theory, where is the error?


Thanks in advance and sorry for any english mistake.

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ToxicAssets:
It depends on the terms under which the "potential costumer" deposited the money with the "hotel owner".

If the hotel owner was supposed to keep the money in a safety vault and to return to the costumer if he decided not to stay, then yes, it was "stealing" from the costumer escrow account.

But he had just borrowed money from the costumer, than there was no fault, since the costumer knows he faces credit risk. Defaulting is not stealing.

Your final conclusion ("Defaulting is not stealing.") is correct, but the the image does not seem to imply that this was a credit transaction. It seems more like an agreement to return the money at any time, whenever the tourist returns.

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Peter Sidor:

ToxicAssets:
It depends on the terms under which the "potential costumer" deposited the money with the "hotel owner".

If the hotel owner was supposed to keep the money in a safety vault and to return to the costumer if he decided not to stay, then yes, it was "stealing" from the costumer escrow account.

But he had just borrowed money from the costumer, than there was no fault, since the costumer knows he faces credit risk. Defaulting is not stealing.

Your final conclusion ("Defaulting is not stealing.") is correct, but the the image does not seem to imply that this was a credit transaction. It seems more like an agreement to return the money at any time, whenever the tourist returns.

That's because you're taking the situation on the image literally as opposed to understanding the underlying phenomenon it attempts to simplify.

It does little good to over analyze such a ridiculously artificial situation in itself. It's interest is not the story of the hotel owner and the others, but the underlying mechanism of money and credit circulation.

In any case, what something "seems to imply" isn't necessarily what it really is.

Take for instance the online poker rooms that were shut down by federal government in the 2011 episode that became known as "black friday".

Many of these rooms were actually fractional reserve banks, that kept only a relatively small reserve of liquidity to account for the usual cash outflows. The rest of the money was used for advertising and offers to attract new players, and a part was even diverted into financial markets. When they were shut down, they turned out to be insolvent, and defaulted on many players. 

If you thought that your bankroll in chips implied that an equal amount of cash in a reserve somewhere, you were wrong. 

"Blood alone moves the wheels of history" - Dwight Schrute
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Albert replied on Fri, Mar 22 2013 11:51 AM

Arguments about what is wrong with fractional reserve banking and what is wrong with the Fed aside:

There really is no error in this image. In an extremely comical world where cartoon characters act on a screen this could actually happen.

The error is that the scenario presupposes it happens in such a short period of time (the time it takes him to inspect the rooms) that it is treated as if it happened instantly and there was no time cost calculated. It was as if an entity provided a short term loan at no interest. In real life people like you and me do not get interest free loans. It also disregards the "handling costs" of each person taking time off from work and physically tracking down the other person and manually paying him. Normally each step has costs incurred by middlemen.

 

If for instance you hacked a bank at night and made instant payments online and received back your money before morning and repaid the bank, exactly that could happen.

In real life there would be a time delay between when the funds are used to pay off the first debt, and then all through the chain, before it gets back to the hotel owner. If the lender returns before that and demanded his money back, or alternatively if the hotel owner insists on keeping the deposit for lets say one month, the cost will become evident. He will ask for interest on his money.

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Wheylous replied on Fri, Mar 22 2013 11:27 PM

Suppose, though, that the debt is circular like this. At the moment, countries owe tons of money to each other. The debts don't just cancel out, though.

And I'm not sure whether you can transfer someone else's debt to you over to someone else and clean your hands of your obligation. When you're in debt, you're responsible for the creditor getting his money - you can't offload the debt onto others even if the others owe you money. Because if you could, then you could just give the debt burden to a person who would never pay it back and wipe your hands clean.

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Marko replied on Sat, Mar 23 2013 3:55 AM

What is the cartoon trying to point out / arguing for?

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Albert replied on Sat, Mar 23 2013 10:02 AM

Of course debt between countries(or people or corporations) can cancel each other out. That is the basis of trade. As long as the same principle players are involved. Country A buys American corn from the agriculture department and sells agriculture chemicals  back to us. We may choose to offset each other and the bigger debtor can just pay the difference or ask for it to be held as a debt until they can produce more product- no problem. Only problem is that the word "country" is too big. If the Agriculture department is owed money but the tourism department or the military gets the repayment benefit, it does not offset.

Of course debt and repayment can be handed around in a circular fashion like described. That is all money does anyway, it serves as a visible representation of the value of your services or products so you can exchange. All money is, is a promise to pay.

They could just as easily have written each other a check and then take all the different checks to the bank and then the banker figures out it is all a wash. This works because each member of the circle has alreafy produced his labor. Nowhere in this circle is there a person who borrows the money without producing, thus breaking the cycle.

You cannot just hand it off to another person who has not yet performed his part and pray that he shows up though. In the scenario it works because each player had already previously provided a valuable product or service of acceptable equal value. The note was not given to anyone who was promising to deliver at a future date.

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And I'm not sure whether you can transfer someone else's debt to you over to someone else and clean your hands of your obligation.

Not unilaterally, but you can convince the creditor that the new debt is worth at least as much as your old one (you basically sell your rights for some other debt's collection to your creditor).

The Voluntaryist Reader - read, comment, post your own.
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Marko:
What is the cartoon trying to point out / arguing for?

Apparently the urgent need for more beefy German tourists with a lot of money. If only there was more of those, the world would be a much better place.

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