zlacker

It's money in the same sense as the money that was created by the loan in the first place is money - it's not physical currency, but the insight is that the money created by financial means like this bids up prices in the same way as literally minting extra physical currency and distributing it would.

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.