Thursday, February 5, 2015

Towards a General Theory of Credit

[What follows is plainly wrong. No debt is forgiven. Destroying these generally accepted IOUs does not reduce any debt burden because these IOUs cannot be directly linked to any debtor. Perhaps some sort of hubris got the better of me.]

Please watch this short video (for a 3-second summary, go to 0:45).

Now, does the Joker, by burning a huge pile of cash, confirm that he is a madman? If we look at the legal code of many countries (including the United States), we could think that burning "money" is, if not always a criminal, then at least a deplorable act.

For people familiar with macroeconomics this is a much more controversial question. Wikipedia says:

Burning money decreases the wealth of the owner without directly enriching any particular party. However, according to the quantity theory of money, because it reduces the supply of money it increases by the same amount the collective wealth of everyone else who holds money.

 After reading this, you might think the legal code is based more on superstition than reason.

I would like to do better than the Wikipedia article when it comes to the accuracy of the statement. Here is what I see on the video:

A creditor forgives a debt owed to him by the society.

The Joker does exactly what many people -- and even economists -- today suggest that rich creditors should do. He destroys a mountain of IOUs and so relieves many debtors of their debt to him.

Note: This is not a technicality or a "funny fact". It is not something that is "true, in a sense". It is an accurate description of the act ("money burning"), and it is based on a sound theory. The Joker is leading us towards a general theory of credit.

Do you think you can prove me wrong?

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