Let's ignore for a moment the fact that the hotel proprietor used stolen money to pay off a debt and that he got stiffed out of the $100 the prostitute owed him. (She got her debt erased while the true owner of the bill got it back.) My question is where is the banker?
It's a cute story, but it's not really reflective of how a modern economy works. It's not complete.
I'm not so sure about that. We hear on the news how Greece owes $X, and how Spain owes $X and it sounds scary. But both of those countries owe some of that money to each other. If these countries simply canceled out their debts, the situation wouldn't seem quite to grave. I lot of the "sky is falling" mentality is the intentional manipulation of financial reporting in order to create a panic, and then for the rich and powerful to take advantage of the panic. Just like the banking bailout. It's amazing what you can do with accounting trickery.
We rely way to much on certain magic ratio's and benchmarks that actually mean nothing. Accounting is not controled by any laws of physics. In physics there are absolutes. Like nothing can travel faster than the spead of light, or nothing can be colder than absolute zero, or that water boils at 212 degrees. In economics, there are no magic absolutes. Companies can make money without ever producing products, we can have inflation without having an increase in demand, we can have deflation at a time that our government is printing money like crazy, companies can somehow benefit by increasing dividends even though they are loosing money, and they can be loosing money but yet have an increase in cash positions - all of these seem to defy generally accepted simple economic theory. There is nothing at all special about the ratio between our federal debt or the GDP. That is an artificially created benchmark created by those who have a political motive.
Getting back to my example, the hotel owner took a deposit and the entire town utilized that deposit to alter their accounting positions, and then the deposit was returned, nothing was created and quite straightforward, no one is any better off or worse off than they were to begin with. The real life world does work like this, people do place deposits on products, they use those deposits to facilitate financial transactions, and not all financial transactions create wealth. Yet most any banker or accountant would say that the towns financial position has improved because their debt/income, debt/net worth, and total debt benchmarks and ratios have improved. Thats because banking and accounting standards are fictional.
It's a claim on future production. If money didn't have value, why would anyone borrow it?
A bondholder lends money to company. How will the company pay it back? By selling widgets. How will a worker who buys a new car pay back his loan? By working. How will the United States pay back its debts? By taxing companies and workers who produce stuff. I'm sure the government is hopeful it can inflate its way out of debt, but credit destruction is occurring faster than the government's ability to "print" money. Much of the "money" in our economy today is based on credit. When credit contracts, so does the "money." If it happens too fast, we get deflation and all of a sudden those dollars the Chinese are holding are worth more than they were.
I am not so sure that the government has any limits to the speed that it can print money. While their physical printing presses may have a maximum speed that they can operate, the fed can just magically appear all the electronic money that it wants with just a few key strokes. I agree that our government should be wanting inflation, some inflation would solve some problems in our economy, I think it is more of a political issue. To create inflation, the government has to find ways to distribute that money in such a fashion that the masses get to use it, but the rich and powerful get ownership and control over it. The simple solution would be the gov forcing lenders to loan, but no point in that when consumers won't borrow. Stalemate.
