Rich Russian

[I_Love_Me_Vol.I]

This is pretty simple.

The hotelier, for some weird reason, (probably for yuks, I guess) decided to use the Russian’s $100 note to really quickly pay his butcher bill while the Russian was upstairs. Meanwhile, a prostitute walks into the hotel and pays back some money she owes. When the Russian comes back downstairs, the hotelier has secretly replaced the Russian’s note with one of his own from the till. Tee-hee-hee! Some people get their jollies in strange ways, I guess.

Effectively, it’s as if five people are sitting in a circle. A hotelier, a butcher, a meat wholesaler, a farmer, and a prostitute. A rich Russian approaches them, hands a $100 note to the hotelier and asks them to pass the note around the circle until it returns to the hotelier who then gives the note back to the Russian.

The OP says:

There was no profit or income. But everyone no longer has any debt.

But there *was *income. Each businessperson in the story had an income of $100. They also had a “outcome” (outlay) of $100. Everyone broke even.

NOTE: The OP’s story didn’t mention a currency so I just used dollar$ for convenience.

[friedo]

@DMark

Thank you - hopefully your explanation clarifies to others what I have been trying to say, but apparently not getting across.

The hotel got ripped off by exactly $100. Period.

No, they didn’t. At the beginning of the story they had debt of $100 (to the butcher) and were owed $100 by the prostitute, for a balance of zero. At the end they have no debt and are owed nothing, for a balance of zero.

The Russian essentially loaned the hotel $100, which was paid back by the settlement of the prostitute’s debt. Even Steven.

[Jragon]

Right, imagine if instead of some guy leaving $100 on the table, the Hotelier went to his bank and got a zero-interest $100 loan, and then the events transpired. Followed by him paying the $100 back. Nothing has happened. Nobody lost anything.

You may say, “but if he got $100 somewhere else, he’d get to keep it!” Well, yes, but that would be in exchange for a good or service. And it would still be removed eventually.

Imagine if the hooker got her $100 by… well, banging someone I guess. She gets the $100 back from the ring, and then blows it on coke. While it’s true that in this case she spent the $100 on a product rather than it going back to its source, she also had to provide a service in order to get it. Value (her hookerly services) flowed out of the debt ring in order to bring that $100 in. And $100 flowed out to bring $100 worth of coke in.

The crux with the hotelier is that he never provided a service, value never flowed out. When the hotelier had that $100 from the prostitute in his hands, he had two choices: provide a service worth $100 to the Russian, in which case he can blow money on a giant disco ball for the lobby, or return the $100 to void the promise of a service. He ended up doing the latter (since the Russian didn’t want the service after all), $100 flows out of the system regardless of whether it’s as a service valued at $100 or the money itself.

The only case where the value flow is only one way and the ring’s wealth truly increases by $100 is if the money is a gift (assuming you’re not modelling a gift as “payment for the service of friendship/loyalty/etc” or some such thing).

[sub]I’m sure an economist will be along shortly to tell me why my model is stupid[/sub]

[Colophon]

@DMark

Thank you - hopefully your explanation clarifies to others what I have been trying to say, but apparently not getting across.

The hotel got ripped off by exactly $100. Period.

No they didn’t. The hotel ripped the Russian off for $100 in the first place (by taking his $100 when he didn’t end up owing them anything for a room). At the end, the Russian was simply taking back his own cash.

This whole “riddle” really isn’t hard to understand. If you have debts of $100 but are owed $100, you’re even. You don’t have debts. (Assuming nobody is charging interest, of course.)

[Evil_Captor]

@DMark

Let’s try this one more time.
If guest gave hotel 100, and then came back down and got the 100 back, it would be a wash and all is OK.

However, the hotel SPENT the 100. It is gone now. Credit and then debit. No money left in the till.

So, when he comes back and asks for his 100, they have to take the money from somewhere - meaning, from their other income. So the profit of 100 they would have made from the prostitute is now gone, as they have to pay the guest.

So in essence, they never got a PLUS from the prostitute’s payment, and are back to zip profit for the day. It is as if the prostitute never paid, as that 100 went bye bye before it was considered a 100 profit for the day’s work.
The hotel got paid twice - 100 from guest, and 100 from prostitute.
If they give the 100 back to the guest, theoretically, they should still have the 100 from the prostitute.
They don’t. They got screwed, and not in a fun way.

The hotel did not get paid twice, they refunded the money and did not provide a room, so that’s a wash … they only got paid once, by the prostitute.

[friedo]

The moral of the story is: credit enhances liquidity.

[pancakes3]

The Russian is not part of the debt ring. He only supplies the initial $100 to knock down the dominoes and at the end he stops by to take it back. The ring is:

Hotel -> Supplier -> Farmer -> Prostitute -> Hotel again.

Each owes $100 and is owed $100. If the Hotel paid $100 without the Russian, it will find its way back just the same.

[Malthus]

@Colophon

No they didn’t. The hotel ripped the Russian off for $100 in the first place (by taking his $100 when he didn’t end up owing them anything for a room). At the end, the Russian was simply taking back his own cash.

This whole “riddle” really isn’t hard to understand. If you have debts of $100 but are owed $100, you’re even. You don’t have debts. (Assuming nobody is charging interest, of course.)

… assuming perfect liquidity.

Which is really the moral of the story: cash is useful. Without cash, it isn’t always possible to transfer debts and assets.

Each person in the story had one debt and one asset, but they were (presumably) unable to even it all out without the Rich Russian’s cash.

[Colophon]

@Evil_Captor

The hotel did not get paid twice, they refunded the money and did not provide a room, so that’s a wash … they only got paid once, by the prostitute.

Yes - DMark, you’re wrong on this. The hotel still got the $100 from the prostitute - they just got it earlier than they would have done, because the Russian effectively advanced it to them. The $100 they had to pay to the meat supplier is the $100 they were owed by the prostitute, in accounting terms. The books still balance.