A contribution from Chris Cook
So a traveller is passing through the sleepy US Midwest town. Looking for somewhere to stay in the area he rings the bell at the Hotel A reception and asks to see the rooms. The owner (A) scowls and tells him to have a look around the rooms if he must, it’s all the same to him, and the traveller puts a $20 note on the reception desk as a token of good faith while he views the rooms.
A promptly crosses the road to hairdresser B and settles his $20 account, and B goes next door to Bar C to bring his own account up to date. C in turn slips $20 due to Ms D the local lady of easy virtue, as she leaves for an assignation at Hotel A; she in turn puts the $20 note back on the reception desk to bring her account up to date. At this moment, the traveller returns to the reception not impressed by the rooms, observes Ms D’s transaction which confirms his view of Hotel A, grabs his $20 and leaves for the next town. What lessons can be learned from this little fable?Promises, Promises
A credit instrument is a promise issued by a promissor in exchange for value received from an acceptor, and it is returnable in exchange for value to be provided by the promissor in the future. If the credit also carried a legal obligation to provide currency/money then it would be a debt instrument; if it carried an obligation to deliver money’s worth of value then it would be a derivative (forward) instrument; and if it carried absolute rights of ownership over future streams of value from the promissor, then it would be an equity instrument.
Credit instruments – which are based purely upon trust between promissor and acceptor – pre-date modern finance capital by millennia – and remain as the unseen Dark Energy in the global financial market universe, particularly in the developing world.
Credit instruments are visible to this day in the language of finance: the Tax Return was the accounting event at which acceptors of disco...