It’s not money but credit that makes the world go round!

After the recent collapse of the Silicon Valley Bank, US and domino effect that has started in the US and the world, a lot of messages have been floating on Social Media. I received one such message with a clip from “3 Stooges”, which is actually the subject of this post. The quote and video clip I received are as follows:

This is how current banking system works. Not sure what solution we can provide to fix this:

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Here was my response:

I don’t understand why the system needs a fix.

Each one owed the other person $20 in circular manner (i.e each person owed and owned $20) and thus the net exposure was $0.

Only the middle guy had hard cash of $10. That money actually moved (changed hands) and the transactions were closed.

The middle guy got his money ($10) back.

In the end, the other two have no liabilities and no cash. The middle guy has no liabilities and $10 cash.

Earlier, the 3-person banking system had a bigger monetary system – $60 in “credit” and $10 in cash. Now credit has shrunk/vanished and only the real $10 remains in the system.

Seeing this I remembered a quote by our finance Prof who said: “It’s not money but credit that makes the world go round.”

This video is a good example to understand how the financial system based on credit works.

Of course, if one argues that this credit based fiat system is evil and needs to be fixed (which is a typical argument of die-hard fans of crypto) then yes, the system needs to be “fixed”.