Here’s an example about how loans seem to currently work and what they mean to the society:

Suppose we have two persons (Ann and Bob) and a Bank. The Bank has no money at all, Ann has 10.000 euros (or dollars or whatever) and Bob has two cars which is willing to sell for 8.000 euros each.

Ann gives Bob 8.000 euros and she buys the first car. Now Ann has 2.000 euros and Bob has 8.000 euros. Bob goes to the bank and deposits the money, so the Bank now has 8.000 euros.

Ann goes to the bank and gets a 6.000 euros loan which she will repay as 7.000 euros in two years. Now Ann has 8.000 euros (6.000 from the loan and 2.000 pre-existing cash) which she uses to buy the second car. Bob gets the 8.000 euros and deposits them to the bank too.

At this point:

  • Ann has two cars and a dept of 6.000 euros to the bank that she may not repay
  • Bob has 16.000 euros in deposits
  • The bank has 10.000 euros and a loan for 6.000 euros (that will become 7.000 after two years)

The 1.000.000 dollars question is: Does bob have 16.000 euros ?

The fact is that Bob actually thinks that he has 16.000 euros which he can use but in fact he only has 10.000.

What’s going on?

This is a clever way to rename future money (the 6.000 euros) to current money. You can see this problem as an issue of tagging where money should be tagged either as “existing” or “loaned/future/not-yet-available” money. Currently this isn’t possible since loans are given in cash and not in another kind of debt bills and the fact is that we (the sum of all humans) currently have much less money than we actually think we have.