Can bankruptcy destroy money?
Here, “money” is used in the sense of wealth (not in the sense of medium of exchange and not in the sense of income) (a big part of the confusion of money is that, in the English language, “money” means three very distinct things).
Ignoring the cost of administering a bankruptcy (which cost can range from nearly zero to substantial), the answer is no. Bankruptcy “merely” re-arranges financial claims on wealth.
For example, before: liabilities (as measured) constitute 80% of a firm’s total assets (again, as measured), and equity (again, as measured) 20 percent. After, debt holders receive per dollar of claim 40 cents in new debt, and 40 cents in new equity, old shareholders receive zero, and assets are written down by 20 percent.
Nothing really has changed. Assets are written down to current value (and their loss of value since put into place is merely recognized); and, claims on these assets are brought into line with the current value of assets in a way that recognizes their priority of claim.
Getting back to money as a medium of exchange, if every new unit of the medium of exchange was “backed” by things of value, there couldn’t be inflation.
But when we have unbacked money (whether paper or digital), new money can be issued in excess of the availability of goods and service. Such issues are inflationary.
“if every new unit of the medium of exchange was “backed” by things of value, there couldn’t be inflation.”
Really? So if every dollar bill was backed by an oz of gold, and the US discovered 1 trillion ozs of and mined it, and 1 trillion dollars were printed, backed by all that gold, and introduced into the money supply, what do you thing would happen? Inflation.
Can bankruptcy destroy money?
Consider a bank that writes down a credit card account as uncollectible. That is a charge against the bank’s assets and it reduces the bank’s lending power, hence reducing the amount of money in the system.
But you are right that there is confusion about money of different types. If Musk’s wealth increased $1 billion it doesn’t mean that he acquired a stack of $100 bills 80,000 inches (~1.25 miles) high. On the other hand, he can go to an investment bank(s) and get assets converted into spendable cash to make an acquisition.
So the differences in kinds of money revolve around the difficulty and expense of conversions from one type to another.
“Can bankruptcy destroy money? Here, “money” is used in the sense of wealth”
“the answer is no.”
Wrong. You totally ignore the value of brand names (sense of wealth) that a company may have, or it’s goodwill value (sense of wealth) . Plus the value of it as a whole, may be have more value than the value of it’s separate parts sold off after bankruptcy. If Trumps declared bankruptcy and his buildings with the name Trump on them were sold, and instead had the name “Joe” on them, those buildings would almost certainly be worth less. Brand names sell much than the the dead identical product, made from the same assembly line or food plant. All those wealth components can drop to zero. That’s “sense of wealth” going bye, bye.