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A friend paid a travel company €3000 for a holiday in Australia. However the travel company went bankrupt so now her €3000 is lost. She has been informed by the liquidator that the company had such debt that she will not be getting any of her money back.

To me she is a victim of a system that requires the customer to pay in advance - we get that you have to pay for a service, but if she paid in arrears like you would, say, a plumber, then she wouldn't have this problem. It seems unfair that some industries require advance payments and so present this problem even though the capitalist system is supposedly based on the idea you pay money for goods and services. She's down money but didn't receive the service.

So my (somewhat hypothetical) question is, why is it not feasible to just "restore" her money, if we assume it's undisputed that she has the right to it? The obvious answer is that since the company is bankrupt, there's nowhere for that money to come from, but why does it have to come from somewhere, isn't money just a representation of your current worth which you have to pay to receive goods and services? And since money is no longer tied to gold or anything - it would seem it's technically possible for the bank to simply add that money back to her balance.

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That’s how bankruptcy law works. Every entity that is owed money - including firms that sold products to the bankrupt, workers - wait inline to get paid back according bankruptcy laws.

The state cannot make everyone whole, as that would just encourage fraud. E.g., create a shell company, get rich friends to lend it money, take the money out and declare bankruptcy. Your friends get their money back from the government, and you get their hands on the proceeds as well. You make it worth their while by passing them money back under the table.

The state could bail out certain groups, but that’s an entirely a judgement call by the legislative body.

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Money can’t be created at no cost to society. This is true even in case the money is not backed by gold but just piece of paper. By standard monetary equation the following holds:

$$MV=PY$$

Translated to English, the quantity of money in economy (M) times velocity of money (V) must be equal to price level (P) multiplied (Y) which is the real output of an economy.

Creating new money (M) in situations such as you describe would lead to inflation (increase in P) because V is empirically most of the time not very responsive to M and in situation you describe economic output would not change.

Inflation means that all prices across economy increase which means all money in the economy are now worth less - it dilutes people’s savings and makes people who rely on inflation non-adjusted income like retirees worse off. It also makes creditors worse of and debtors better of how as now real value of their debt is less.

Moreover, I won’t go into technical details, but usually in order to promote economic growth, soften recessions and keep unemployment down governments specifically target certain levels of inflation and creating new money for purposes like this would conflict with their targets.

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My argument is in the form of redactio ad absurdum.

What if your friend had lent their car to an acquaintance and then they sadly crashed the car and died in the crash. Should the factory give your friend a new car? Clearly that does not come from nothing, it costs resources. Or should the bank give your friend enough money to buy a new car, if they can "simply add that money"?

Come to think of it, why are we waiting for the crash/loss? Why don't they just give your friend money now? I mean money is free, and surely your friend will find some use for it.


Perhaps your friend should be restored, I am not arguing against that. But doing so is a choice that carries costs.

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