Earlier quoted context omitted.
It works like this: imagine we create some new Bank. Customer A deposits his life savings of 1 million hackerbucks. Now our Bank loans out 50,000 of those hackerbucks to Customer B. It does this by crediting her account with 50,000 hackerbucks, but notice that Customer A still has 1 million in his account - so now there's 1,050,000 hackerbucks in apparent existence - we've created 50,000 hackerbucks from thin air. If…
Thank you for clarifying. So the bank's speculative asset loses value: I struggle to see this as money being destroyed as it wasn't actually money, it was an asset with a price attached to it which has now changed. In contrast to money sat in your bank account, the price was never redeemable (you couldn't go spend it on beer) unless you used that asset to get the debtor to pay you back (or convinced someone else it w…
When that loan asset is written down the bank has to make up the difference from its equity - this ends up reducing the amount of loans it can write, so you get a contraction in the monetary supply.
So in the end, I guess the shorter answer is that a default destroys money in the same way that writing a loan creates it - you might well complain that no actual currency has been created or destroyed, but the argument is that it has a similar overall effect.