How is money destroyed?
One simple way is via investment losses. The US stock market lost about $7 trillion in total value between 2000 and late 2002, and that $7 trillion was actually destroyed as of late 2002. Note that this assumes the general definition of money here. Another would be if the Fed, during an open market operation, sold bonds in the Federal Reserve accounts back to the US Treasury without buying at least as many as they sold. Remember that when the Fed buys bonds from the Treasury during an open market operation, that creates money out of virtually thin air. Another is losses in the banking system itself. An example is the Saving & Loan crises in the early 1990s when there were huge losses recognized by a number of Savings & Loan associations who had hugely overextended themselves – much of that money just disappeared. If the Federal Reserve had not stepped in and provided support, the LTCM crisis in 1998 would also have destroyed a lot. Another is likely going on in early 2005 in Fannie Mae
