In this part let us take the negative possibilities, if Rich Man's friends and investors are not able to help him out.
One way of trying to help the Rich Man is for his loyal friends to buy up all the Promissory notes issued by the Rich Man, thereby increasing the credibility of the Rich Man's Notes, and supporting their own wealth, in exchange of some concessions and security conditions from Rich Man. In effect, the Merchants would have successfully "colonized" the Rich Man, or bought large pieces of land and revenue. Rich Man, anyway you look at it, has to pay.
There are many possibilities, of how things can go out of control. Some are here.
If the Merchants decide to encash their Promissory notes, Rich Man will loose all its richness. Because, as pointed out, there is not enough gold in the entire village. This is because of Inflation. Rich Man may have to sell off many assets to repay the creditors. This would be a disastrous consequence. It seems unlikely any country would fall like this. But there is an unfortunate precedence of Fall of Rome in ancient days. Meaning, one of the most powerful nations can fall, if due caution is not exercised. Suffice to say, it will hurt ALL.
Another method is to write down the value of the Promissory notes. This is otherwise called as "Devaluation". What this means, is the Rich Man may decree since he is not able to pay all the creditors/ Merchants in full, he will pay them in lesser value for Promissory notes. Meaning, if the Rich Man had to give 100 gold coins on a Promissory note, then he may decide to pay only 90 coins or 80 coins or any number as he may deem fit. This "Devalues" the promissory note [which in economic parlance is called "Currency Devaluation"].
In the practical world, the devaluation is not simple, especially the "mark down" part, as lot of people's wealth is concentrated in these promissory notes. They won’t take the bullet easily. This method does not solve the problem 100% but gives the Rich Man another opportunity to set things right. [Another method of buying time, refer Part 2. Hopefully this time he has learnt his lessons] Creditors in the end, will end up paying more, like the Poor Merchant [China Man] in end of Part 1. Merchants do not have much bargaining power in these situations because if they let the Rich Man go under, they won’t get Anything back [except for the secured loans]. All the unsecured loans become bad debts. It is similar to killing the hen. So it better to get 80 coins in place of 100, rather than not get anything at all.
Just to make a point. Is Rich Man justified in "devaluing" his Promissory notes? It is after all going back on his promise! In a way, Yes, he is justified. After all it was the foolishness [or whatever you may call] of the Merchants in the first place to lend [buy promissory notes] so much money to a person, who may not be able to give it back. It was Merchants greed of rise in his turnover, income, wealth and happiness that made him accept the Promissory notes either out of negligence of Rich Man's creditworthiness or greed to "keep the engine going" [Refer Part 1]. As they say "There is no free lunch". It is pay back time for the Merchants.
I will take another negative possibility in another part. Because it deals with an interesting concept as well as being very important.
:) Falkor
One way of trying to help the Rich Man is for his loyal friends to buy up all the Promissory notes issued by the Rich Man, thereby increasing the credibility of the Rich Man's Notes, and supporting their own wealth, in exchange of some concessions and security conditions from Rich Man. In effect, the Merchants would have successfully "colonized" the Rich Man, or bought large pieces of land and revenue. Rich Man, anyway you look at it, has to pay.
There are many possibilities, of how things can go out of control. Some are here.
If the Merchants decide to encash their Promissory notes, Rich Man will loose all its richness. Because, as pointed out, there is not enough gold in the entire village. This is because of Inflation. Rich Man may have to sell off many assets to repay the creditors. This would be a disastrous consequence. It seems unlikely any country would fall like this. But there is an unfortunate precedence of Fall of Rome in ancient days. Meaning, one of the most powerful nations can fall, if due caution is not exercised. Suffice to say, it will hurt ALL.
Another method is to write down the value of the Promissory notes. This is otherwise called as "Devaluation". What this means, is the Rich Man may decree since he is not able to pay all the creditors/ Merchants in full, he will pay them in lesser value for Promissory notes. Meaning, if the Rich Man had to give 100 gold coins on a Promissory note, then he may decide to pay only 90 coins or 80 coins or any number as he may deem fit. This "Devalues" the promissory note [which in economic parlance is called "Currency Devaluation"].
In the practical world, the devaluation is not simple, especially the "mark down" part, as lot of people's wealth is concentrated in these promissory notes. They won’t take the bullet easily. This method does not solve the problem 100% but gives the Rich Man another opportunity to set things right. [Another method of buying time, refer Part 2. Hopefully this time he has learnt his lessons] Creditors in the end, will end up paying more, like the Poor Merchant [China Man] in end of Part 1. Merchants do not have much bargaining power in these situations because if they let the Rich Man go under, they won’t get Anything back [except for the secured loans]. All the unsecured loans become bad debts. It is similar to killing the hen. So it better to get 80 coins in place of 100, rather than not get anything at all.
Just to make a point. Is Rich Man justified in "devaluing" his Promissory notes? It is after all going back on his promise! In a way, Yes, he is justified. After all it was the foolishness [or whatever you may call] of the Merchants in the first place to lend [buy promissory notes] so much money to a person, who may not be able to give it back. It was Merchants greed of rise in his turnover, income, wealth and happiness that made him accept the Promissory notes either out of negligence of Rich Man's creditworthiness or greed to "keep the engine going" [Refer Part 1]. As they say "There is no free lunch". It is pay back time for the Merchants.
I will take another negative possibility in another part. Because it deals with an interesting concept as well as being very important.
:) Falkor
Comments
Post a Comment