i’m just going through some basic financial philosophy discussions and i’m just trying to clarify the basics.
how much money is there in total, in the world?
up until yesterday i had assumed that the total amount of money in the world is zero ($0) because what one person has in bank account, another person has in debt at the same time, since money is literally nothing else than a codified form of debt.
now i’m wondering, is this even accurate? if a big bank takes out a loan from the central bank, say, it takes $1B in loan, then it has $1B in money on the account but also $1B in liability at the same time, so the sum is zero. However, there is an interest on the loan, let’s say 2%. Then the bank owes $1.02B actually, while only having $1B on the account. So the total amount isn’t zero, it’s negative. Is this correct?
Surely this would just be economics, no? Especially as your question pertains to the money supply, which is squarely in the domain of macroeconomics.
I can only summarize what my economics course at uni covered, but you’d have to start with defining what should be counted as money. Even if we looked at an isolated island nation, what is and isn’t money is not readily apparent. If I write out a check/cheque drawn against my bank account, is that money? Can my cheque be circulated as if it were currency? How about a banknote against the gold reserves of a national bank or treasury? What if that banknote isn’t directly redeemable for gold or anything, but is a floating currency? What if it’s neither redeemable nor is managed as if a currency, and yet it is readily accepted by Canadians and has actual buying power at a national retail chain.
Then we get to second-order candidates that could be money (or not): goods and services, land and houses, ongoing businesses, these all have some value and are tradable. Are these money? Are they at least a store of value? If a company is incorporated and is imbued with some starting investment, and then grows that value through business operations, does that create money?
To deal with this messy reality, economists have multiple definitions for money supply, found here: https://en.wikipedia.org/wiki/Money_supply. If two people use differing definitions, then of course they’ll conclude different values for the world’s total money supply.
Not correct, because: 1) this fails to account for the interest the bank can generate through re-lending the money, and 2) interest is not a front loaded charge but is an expense over time.
For #1, it would be some profligate mismanagement of money for a bank to just obtain a loan “for the lolz” and there would be some sort of plan to actually make it do work. In that sense, capital should be viewed as if it were a powderkeg: very capable if applied carefully, very dangerous if mishandled. As for whether or not a bank’s future revenue can be immediately reflected on their books – since the revenue is only theoretical yet the central bank loan is already a certainty – that’s a question for accountants.
For #2, the mistake is that interest – although continually accruing, or by other terms – is somehow entirely due at the very beginning, which is not how most loans are structured. At any given point in time, yes, the bank could have negative net value, but they could also have positive net value, depending on their cash inflows. And even with negative cash flow, accounts receivable could still boost their net value because future value is still value.
My recommendation would be to review some basics in economics or accountability, as these sorts of questions have been hashed out over the course of hundreds of years. And even when economic theories don’t exactly describe this reality, they are still useful as models, which is still more rigorous an approach than divination.
yeah i know that no bank just takes out a loan “for the lolz” but it helps to understand what would happen if it did.