So my understanding is that the cash in circulation (inc. deposits) is only about $40T while the economy (inc. investments, derivatives, and cryptocurrencies) is about $1.3Q.
My question is …is it possible to ‘cash up’ the $1.3QT or is it ghost money? Are we in a virtual economy that would crash if we all cashed out?
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It depends, but there would *probably* be a catastrophic crash, yes.
So money is basically like a promise token. It promises you can get something in exchange for it, like food, or a car, or an iPhone, or something.
That’s why people like money. Most people don’t like it for how the paper feels or that it has funny pictures on it. Most people just care that they can exchange it to get stuff they like.
But if that promise gets broken — if say, for example, all the farmers in the world suddenly decided they don’t want to trade their food for your money — then suddenly money becomes pretty worthless. Remember, no one wants money for anything except for the fact that it *promises* to give you other stuff in exchange for it. So if that promise disappears, or even that trust gets shaken (“what if tomorrow I can’t pay rent with this money either?”), then suddenly money just becomes funny paper, and people will not want it anymore.
So in the scenario you described above, as long as everyone can maintain the trust that their money can always be exchanged for stuff they want, then nothing bad will really happen.
Because it’s not the paper itself that promises you can exchange it for stuff, it’s just the *concept* of money, whether it’s in paper form of in the form of a number on a computer screen or written in some bank’s book.
But *uuuuuuusually* if people try to get the paper form of their money and the bank says “ahh sorry, we can’t do that, we ran out of paper money”, odds are people will panic and lose trust in the money’s promise to get them stuff. Mostly because people don’t understand what I explained to you about money — most people believe money is the paper thing itself, so if they can’t get their paper thingies, they panic.
The value of money is in the promise, and the value of the promise is essentially in people’s fuzzy and squishy feelings towards it. If people start to feel strange about money or question its promise for whatever the reason, whether it is rational or not, then the money’s promise becomes shaky, and if the promise becomes shaky, then the economy will suffer or collapse.
The world economy is mostly shared money, or loaned money, or to better explain it:
You place $1000 in the bank, the bank does not expect you to withdraw all of them, so they write $1000 on your account but do then loan i.e. $800 out of them to another person.
These moneys are now officially become $1800.
Other money do the bank invest in stocks, these monies do also multiply, divide and so on. Or in short, from your $1000 can there easily be people who have loaned, invested, sold, bought and so on for maybe $5000.
Say you start with $1000. Then you purchase a laptop for $800. Now you have $200 and an $800 laptop. So if you cash out, are you thinking that someone “tops off” $800 – so now you have $1000 and an $800 computer. This makes no sense at all – there is no purpose to it.
Investments represents an ownership of something of value, the laptop in the example above. There is no meaning to “cash up” something that someone already owns.
>My question is …is it possible to ‘cash up’ the $1.3QT or is it ghost money? Are we in a virtual economy that would crash if we all cashed out?
Part of your intuition is right. There is only a finite amount of money in the world at any time. It’s not that hard to create more, though that can come with problems.
But that doesn’t mean that all these assets are simply “ghost money”. People hold assets and investments for reasons. One of which is that they expect to be able to get cash out of them. Or they might be able to trade them directly for something else. Even cash relies on our belief that we’ll be able to exchange it for something else.
If everyone did want to cash out, there would absolutely be an economic crash. This can be a lot like a bank run. People lose confidence that a bank will have the money to pay out when they need it, so they all rush to take their money out – but of course the bank doesn’t have enough money to pay out to everyone.
Something a lot like this was a problem during the 2007/8 financial crisis. Loads of financial companies and other big corporations had complex webs of different kinds of “financial instruments”. However when these started to lose value, very quickly there was a call for cash, and other very liquid kinds of money. Nobody wanted to hold investments, because they might suddenly lose value. Depositors pulled their deposits. Banks found that a lot of what they thought (or pretended) were really safe assets actually weren’t, and they had to replace them with something else really safe.
This is one reason why various central banks – most importantly the US – put so much money into circulation after the crash. It also shows how the money supply is finite at any point in time, but can be grown or shrunk, with various risks and costs for doing so.
Let’s assume every bank in existence around the world suddenly got the idea they wanted to shut down and close shop. Not only do they all decide to close, they also all get money printers/coin stampers from the governments that be to get people their money. And all the people of the world ALSO decide to balance out their books; they pay off their debts, they liquidate their assets, they shut their accounts. And this somehow magically takes place overnight even though this would probably take **years** in reality.
Then absolutely nothing would happen other than the fact that people now have their money.
Simple fact of the matter is that ‘virtual’ money that is not physical and only exists on the books, is still money. The primary reason so much of it is now not physical is purely a matter of convenience, no one wants to lug around suitcases full of cash whenever they need to make a major purchase.
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