On Liquidity

Financial markets, as we all know, are complicated things. Nowhere is this fact clearer then when talking about the Peace Corps Volunteer debt market.

On any weekend when PCVs gather together in one of the lager cities of their country a sprawling network of financial trades and debts grows upon arrival. For instance, they might rent a house that costs Dh800. One of the PCVs will pay the sum up front at which time the others will become in debt to them. This situation is repeated for taxis, groceries, meals out and any other communal commodities purchased. Thus a spider’s web of debt is born.

This matter only becomes more complicated when, illiquidity is introduced into the market. Banks will only give bills out in Dh100 or Dh200 denominations.  So a PCV might owe Dh60 for rent but be unable to pay because the size of their notes leaves them insolvent. The solution to this is to trade debt until sufficiently moveable denominations are reached. For instance, if two different people owe one person Dh40 and Dh60 respectively, one might buy the other’s debt in order to square themselves with the initial creditor.

At a certain point, as is only natural, all this debt matures, which further complicates matters. A PCV might be leaving a day before the rest and need to settle their finances. The total amount of their debt will be entailed to circulate upon their largest creditor, along with the necessary funds to settle it. In this way a PCV might find they own the debt of someone whom they had never credited in the first place.

Such a situation came to a head last week in an ice cream store. One creditor, having loaned too generously, found himself broke, without even 5Dh for an ice cream. In trying to call in some of his debt in order to buy an ice cream he discovered that the original people whom he had financed had traded their debt away and now totally different people owed him money. None of these people had debts of the correct denomination to be solvent.  Nor could they themselves consolidate in order to reach such a denomination. Needless to say the store was not willing to break a Dh200 note on a Dh5 ice cream. The creditor left the store broke, dejected and hungry. The one consolation, his debtors let him have a bite of their ice creams.