DennisK wrote:
If you were one of the parties involved and were able to pay off a debt for basically free,wouldn't you then have more money in your budget to spend?
No, because the debt hasn't been 'paid off', it's only been transferred to someone else. It's a basic misunderstanding of how a monetary system works.
You have to discount thinking about 'jobs' or other income or anything else while you examine this particular scenario. In this particular scenario, no matter what the total monetary wealth of the town was before the stranger got there, it was EXACTLY THE SAME after he left. No one can possibly be any richer or any poorer, in real terms, because the amount of money (e.g., wealth) has not changed. One person's debt has simply been passed around from merchant to merchant.
This kind of thing is really complex under the covers, and it's pretty much impossible to relate it to real world economics, because the real world doesn't work that way.
Let's look at this same situation another way - pretend the exact same thing happened, except that when the stranger re-appeared, the hotel owner refused to give him his money back, saying that he charged $100 to view a room. If the stranger agreed, and walked away, who in the town has benefited, in REAL terms?
The butcher - no, because although he was paid the $100 owed him, he paid $100 to his creditors - so he's a zero sum. His assets went down by $100 (the amount the hotel owed him) and his liabilities also dropped by $100.
The same is true for all the other merchants, EXCEPT the hotel owner. His liabilities dropped by $100 (the amount he paid the butcher), but his assets increased by $100, overall (after going down by $100 thanks to the hooker paying
him).
So if the hotel owner can be the only one with a real increase in worth, and only if he KEEPS the $100, if he does not keep the $100, there can be no one with a real increase in worth.