Imagine the whole world has 1,000,000 dollars right now. This is made up of all cash.
You have 100,000 of those dollars. You decide to buy a car for $10,000 from a friend. You go look at the car, like it, and agree to buy it. You sign the necessary paperwork and you tell your friend that you will bring him the 10,000 cash tomorrow. You drive home.
You just created 10,000 out of thin air. The world right now has 1,010,000 of money. It is made up of all that cash, and the debt you owe your friend. The debt you owe your friend is an asset. If it was drawn up more formally, it can be used to buy things, similarly to how the greenbacks in your pocket buy thing.
Now you might be thinking that this money does not exist because of the offsetting liability. You are right that in a ledger it nets out to zero. However, “money” is not the net balance. Money is the cash, and unpaid loans side of the ledger.
Every dollar that exists was “loaned out” into existence by the government, banks, companies, and people. It will be destroyed the moment it gets paid back.
Don’t confuse money with net balances or with pieces of paper with green ink on them. Those are the things that we colloquially think of as money. But when you dig to really understand money, you eventually get to the fact that it’s all stacks of debt.
It might be helpful to expand the example to make it even clearer.
Until you repay the debt to your friend, you can spend the 10,000, because you hold it in your pocket. But your friend can also spend the debt you own him, for example, by asking another person to get a loan on that loan.
So yeah, "free money"! Until one creditor somewhere in that long chain asks the debitor to pay up their debt...
Imagine the whole world has 1,000,000 dollars right now. This is made up of all cash.
You have 100,000 of those dollars. You decide to buy a car for $10,000 from a friend. You go look at the car, like it, and agree to buy it. You sign the necessary paperwork and you tell your friend that you will bring him the 10,000 cash tomorrow. You drive home.
You just created 10,000 out of thin air. The world right now has 1,010,000 of money. It is made up of all that cash, and the debt you owe your friend. The debt you owe your friend is an asset. If it was drawn up more formally, it can be used to buy things, similarly to how the greenbacks in your pocket buy thing.
Now you might be thinking that this money does not exist because of the offsetting liability. You are right that in a ledger it nets out to zero. However, “money” is not the net balance. Money is the cash, and unpaid loans side of the ledger.
Every dollar that exists was “loaned out” into existence by the government, banks, companies, and people. It will be destroyed the moment it gets paid back.
Don’t confuse money with net balances or with pieces of paper with green ink on them. Those are the things that we colloquially think of as money. But when you dig to really understand money, you eventually get to the fact that it’s all stacks of debt.