I also say "fine" because I hope Bob realizes this was just to highlight the importance of the transfer itself - the initial government transaction - for the result. Bob and Nick specifically chose a debt-financed transfer from young to old. If you had chosen an investment that would have turned out differently, but since we were in an endowment economy I just wanted to flip the direction of the transfer.
My point, Gene's point, Steve's point, and Krugman's point still remains: you cannot find a future time period that is poorer as a result. You can find individuals in the future that are poorer. That's the whole point of debt - pushing the burdens into the future. The thing is, the way you do that is by pushing assets into the future too.
Anyway, if Bob is fine with endowments from nature but not endowments from parents, this gets tricky in a model with two people that only overlap in one period (that forces the direction in which you can make transactions). But perhaps this unannotated three period, three person example will be of interest to people (and if you can't figure out an unannotated version you've probably tired of the discussion by now anyway):
I'm not going to do the utility calculations Bob suggests.
Here in the last period two of the three people are coming out on top, one is bearing a cost. If we had investment instead of a pure endowment economy that one wouldn't have to bear a cost.
Maybe this still doesn't satisfy Bob because one person is still bearing a cost. I'm not sure if I can tweak it anymore - I just did that quickly. I would even be willing to say (until someone proves me wrong) "without inheritance the cost-bearer must be the last person even if there are also benefit-earners in the last period". I'm not entirely sure why that matters. We've always agreed that individuals in the future bear burdens that they otherwise wouldn't as a result of debt. That point was in Krugman's very first post. I don't understand what the significance is of this last person for Bob.
What I hope Bob understands is that in my opinion, he was making Krugman's point even with his own example 1 and 2. And it's not just my opinion - that's what Gene and Steve were telling him too.