To illustrate what name_here said, picture this:Stahlseele wrote:Something i really don't understand about global economics:
if everybody has debts to somebody else, then who has all the money?
You have 100¤, which you deposit in a bank account for safe keeping. In exchange for the use of your money, your bank promises to pay you 1% interest, and to make the bank safe the government promises to insure the money if it gets lost or stolen.
The bank then loans out 99¤ to somebody else for 2% interest. Ideally, at the end of the year the bank is paid their interest and pays you your interest and has enough money left over to pay its operating costs and profits.
As far as you are concerned, you have 100¤ in the bank, and if you go to get some cash from an ATM it will give you cash from its reserves. If it cannot give you the cash from its reserves, then the bank goes bankrupt. This usually happens when they keep too little cash on hand, or a loan is not paid back so the income they planned to have does not materialize.
However, most people don't use cash for normal transactions. They write a check or use a debit or credit card. These are not actual transfers of cash, these are transfers of credit - different banks talk to each other and move numbers back and forth without creating any more physical cash.
So it's a kind of shell game, where the bank needs to make loans to make a profit, but keep enough cash on hand to satisfy its requirements to the account holders. They usually run on very small margins, but if you get enough volume those margins still give a very large return - and, in the US and some other countries, the government partially subsidizes large banks to prevent their collapse if they overextend themselves.
As you can guess, a chain of loans means the actual value of the money can be spent several times - and be effectively irrecoverable - by the time you get to the end of the line. If Joe-Bob bought a car with the bank loan using the car as collateral and then crashed the car, they still expect Joe-Bob to pay off the loan, and if he can't they're screwed (which is why most banks insist on insurance on collateral loan agreements, just in case). Now imagine if Joe-Bob owned a car rental agency and leased vehicles out to customers, and you can sort of get the idea.if you have a debt because somebody loaned you money, then you have the money he loaned you. if you spend it somewhere else, like loaning it to somebody else, then they have that money, it does not just disappear right?
Again, it's important to think of this in both present and future terms. The total amount of a loan is how much money is required to pay it off, but it does not mean that amount of money actually exists. Loaners are betting on future income to cover a debt issued in present terms. These days money is mostly virtual - there are not enough greenbacks in existence to count for every US dollar currently in circulation. So if, say, you don't get the raise then you may owe money you do not have and that was never given to you - the money never existed! This is because the economy is generally expected to have a positive rate of inflation where the money supply will constantly grow.so if everybody is indebted to everybody else, then where is the money everybody loaned to everybody else?
