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?
In: 0
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.
Latest Answers