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I was under the impression that the money supply can contract since most of it is in the form of debts and asset valuations and not in cash. If my house is worth $1 million but then because of a recession, less people are interested in buying houses and its price goes down to $500k, where did that money go?


>most of it is in the form of debts and asset valuations and not in cash

There are several definitions of money supply, but I don't think asset valuations are included in most of them.


Not only that, the initial $1 million you lend from the bank was literally created out of nothing. I.e. it never existed before you lent it.


Naive answer: your money never left you. Its velocity was reduced and your home's buying power has been adjusted to reflect that.




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