The Solmon Scenario
A Simple-Minded Example
Imagine the following scenario. A bunch of lawyers and economists
busily write documents and file them with the appropriate agencies, simultaneously
creating three brand-new companies: Company A, Company B, and Company
C. Suppose that Company A immediately receives one million dollars
in venture capital. The lawyers and the economists had everything
prepared in advance and the venture capital was invested in Company A immediately
upon its creation. Then suppose that, immediately upon the creation
of the three companies, the lawyers and the economists execute three loans:
Company A loans one million dollars to Company B, which loans one million
dollars to Company C, which loans one million dollars to Company A.
Company A originally had one million dollars in assets, phoney though they
might have been, before it loaned them. However, the other two companies
didn't have any assets at all. After the loans, each company claims
assets of one million dollars. Three million dollars exist where,
previously, only one million dollars existed. The loans are a good
example of how the various substitutes for money violate yet another of
the Rules of Money. That is, they are available in unlimited quantity.
Accounts Receivable
In my simple-minded example, it's easy to see that the assets are phoney.
In the vast and complex financial system in existence today, that kind
of thing isn't so obvious, but it's just as true. One aspect of the
present accounting system that makes the deception possible is the way
in which accounts receivable is viewed. That is, accounts receivable
is viewed as an asset. Thus, after the loans, each company in my
simple-minded example was able to claim assets of one million dollars because
it was owed one million dollars by another company.
In fact, accounts receivable isn't legitimately an asset. Accounts
receivable is legitimately a potential asset. The funds counted as
being an asset in accounts receivable will become an asset if they're actually
received and if they actually have any value. Prior to that, they
aren't in the possession of the party to whom they're owed and, legitimately,
they can't be counted as an asset. They're a potential asset.
In fact, Company B and Company C in my example don't actually have any
assets at all. The only assets that exist are in the form of the
venture capital that was originally invested in Company A. It was
loaned in a complete circle and ended up back at Company A. In the
process, it created phoney ledger entries suggesting equal assets at Company
B and at Company C. The really phoney aspect of the whole situation
is that the venture capital probably had a pedigree that was just as phoney
as the phoney ledger entries that it created as it passed through the other
companies.
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