How can the US national debt be over $23 trillion if that much money doesn’t even exist in the world?
In: Economics
There’s different types of money. But talking about debt specifically, a lot of the world’s money is created as debt. Depending what you think of as money then actually most of the world’s money is created that way.
This happens through something called the Money Multiplier Effect. The money multiplier works like this. Say I have $100 and I put it in the bank. The bank then makes money by loaning out some of that money to other people. So say you come along and ask for a $50 loan and the bank says sure and lends you my $50. But then say you buy something off me for $50. I then put my $50 in the bank. I now have $150 in the bank and the total amount of money in the world has increased from $100 to $150. It’s basically been created out of nothing by debt. And now say someone else comes along and asks to borrow $100, and the bank can lend them $100 because they have my $150 in the bank. And then if they use that to buy something off me for $100 then now I have $250 in the bank. And this can go on indefinitely, and leads to the creation, out of thin air, of almost all money. And it works fine provided we don’t all ask for our money back from the bank at the same time. When we do that creates a run on the bank and the bank collapses. But as long as everyone has confidence that the bank does have at least some real actual money to cover the number of people who might want their money back in any given day then the system can keep on going.
Money that’s created in this sense, out of debt through the money multiplier, is called M1. So in my example above there’s $250 in the world, $100 of it is real money and $150 of it is M1.
Anyway [here’s how much money there is in the world](http://money.visualcapitalist.com/worlds-money-markets-one-visualization-2017/)
– Narrow money ie notes, coins, savings accounts, gold etc… $37 trillion
– Broad money ie stocks shares and bonds: $90 trillion
– M1: $215 trillion
– the notional value of real estates, land, assets, and all the actual “stuff” in the world, if we were somehow able to sell it all to a passing alien and get a good price for it: $217 trillion
– derivatives. Derivatives are weird. They’re essentially the notional value contained within all contracts, promises, and legal instruments in the world. As well as the market of exotic financial instruments that are used to gamble on these notional values, insure against breach of contract, trade risk against other risk, buy now pay later, pay now buy later at a guaranteed price etc… If you want to google these terms: futures, options, securities, and forward contracts are all forms of derivatives. And they’re just the most normal ones. The total notional value of the derivatives ecosystem is incredibly hard to quantify but is somewhere in between $500 trillion and $1.2 quadrillion
So the US national debt is 67% of the real money in the world, but because they’re not needing to repay it (and indeed repaying it would be a disaster for the world because it would basically vanish 67% of all money out of existence) it doesn’t matter what percentage of real money it is. And it’s only a tiny percentage of money in a broader sense: somewhere in between 8% and 1% of broad money depending on if you count derivatives etc…
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