You file for bankruptcy, a debt agreement or a personal insolvency agreement. All or some of the money gets “written off”, but where does it actually go? Well, it doesn’t actually disappear, it just gets transferred. Think of money like energy and imagine that it can neither be destroyed nor created but just transferred.
Keynes refers to “a revolving fund of liquid finance”. The money that you borrowed and spent is in the hands of businesses and other people, so it hasn’t been destroyed. Where did the bank get the money for your loan though? Generally, there are two sources for loans: (1) businesses or other people and their savings and (2) money borrowed (or “bought”) from other banks and institutions.
When debt is written off under bankruptcy, debt agreements or personal insolvency agreements, the money comes out of banks’ profits. Banks still have to put due money into depositors’ accounts and repay other banks and institutions on time.
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