Fantasy Default Scenarios

Imagine the following scenario. John, Paul, Ringo and George are the only members of a society and each has amassed a pile of currency over his lifetime. John and Paul each have 100 utils, Ringo has 300 utils and George has 500 utils. All told, the size of the entire system is 1000 utils.

John and Paul decide to enter into a private contract. Under the terms of their agreement and in exchange for an apartment on the ultra-hip Upper West Side, John will pay Paul 40 utils up-front, 1 util a month for 5 years, and 1,000 utils in a lump sum at year 5. While the insanity of such a contract is undisputed, there are two approaches for a government to take once the impossibility of its satisfaction becomes clear.

The first, simpler and more sane approach allows the two parties to work out an eventual default between themselves. In fact, most economic systems, like ours, anticipate these types of failures and have time-honored methodologies for dealing with them once they occur.

Approach two -- the one that seems to be favored by our government at every turn -- turns on the printing press, prints enough additional money and hands it to Paul (the non-defaulting party) in satisfaction of John's (the defaulting party) obligation. While the second approach appears charitable and seems noble enough, it has ramifications throughout the entire society. John and Paul might both be satisfied that their contract can be completed. Ringo and George, however, will each have their share of the society's resources seriously diluted by the government's action.

By virtue of the government's actions in our little story, George's ownership of the society's resources falls by half from 500 of 1000 utilts at the beginning of our story to 500 of 2000 utils at the end -- all by virtue of the bad behavior of other societal actors and the government's choice of response.

I bet that, upon reflection, George might favor of the first approach!