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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>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.
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