KINDLY HELP UNDERSTAND THIS !!!
An Italian tourist arrives in Nyeri town looking for a place to sleep. He gets into Kirathimo Lodge, slaps Kshs. 3K on the counter & heads straight upstairs to select a 3rd-floor room. Mr. Kigwaru the cashier, grabs the 3K, dashes out to pay the butcher 3K for the meat supplied. The butcher rushes out to pay the goat farmer 3K for supplies. The farmer settles his 3K debt at the Agro-feeds & Vet shop. The Vet shopkeeper Sneaks out to pay 3K to Kirathimo lodge & clears his debt for the rooms he used earlier that week. As he happily leaves for the door, the Italian tourist returns downstairs & asks Mr. Kigwaru for his 3K, stating he didn’t like any of the unkempt rooms & will try Nanyuki town before dusk. As he takes back the money he has no idea how he has set everyone free of debt but no money has been left circulating in town… But at least, debts have been settled.
The Big Question is… How do you explain that about 5 debts of 3k each was cleared by only 3k which in fact was never spent? Is this Accounting? Is it Economics? Or is it an illusion of Commerce?
Those couldn’t be the only people doing business in that town.
What if am out of that circle but I also do business with Wakanyama and on hearing that he’s been paid I go to him and ask him to clear my debt.
What will be the explanation?
Assume the same happens to all those in the cycle.
This is fallacious logic.
There must have been 3k to start, otherwise Mr. Kigwaru could not have been able to refund the tourist after paying the butcher. You can’t pay out 6k if you only have 3k
This is double entry accounting at a basic level; each individual’s assets & liabilities are balanced…Kirathimo might have had zero in the register, but he had a debt owed to the butcher, and a receivable owed to him by the Agrovet. Similarly, the Agrovet man had a debt owed to Kirathimo and areceivable due from the farmer. This is repeated throughout the cycle.
To answer your question about Kirathimo ending up with -3,000 that day, you have not considered thatthe agrovet paid him 3,000, which he then refunded to the Italian client.
You have a point mwalimu. I have reexamined the case and I have an alternate answer. This is a debt illusion. There was no debt in the first place before the tourist walked in, and it is true that Kigwaru didn’t have any cash. The vet owed Kigwaru 3k directly. Kigwaru owed the vet 3k INDIRECTLY. The debts cancel out but since Kigwaru’s debt to the vet was indirect, it couldn’t be settled without money actually going through the system. In the real sense,if everyone in this case, except the tourist were locked in a room, the result would have been that their debts cancel out, but since they probably didn’t know each other, actual cash had to flow through the system. This is the reason why banks have clearing houses, to avoid the need for actual cash payments when they owe each other.