Deflation is not benign
In an economy where the money supply depends on the production of debt, deflation can never be a good thing. In fact as any cyclist can tell you, deflation means you aren't going anywhere.
More on this here.
The Bitcoin Standard - a critical review
For over a century now, the world has lacked a genuinely international means of payment. This is partly due to decisions made at the Bretton Woods conference in 1944, when the US dollar was adopted as the principal international settlement currency, rather than John Maynard Keynes's suggestion of an independent global currency that he called "bancor". Although the Bretton Woods gold-backed structure ended in 1971, the US dollar became ever more dominant.
In 2008, the dollar's global reach enabled an American financial crisis to spread to the entire world, causing a deep recession and long-lasting malaise. Ever since, there has been a deep longing for a more stable international financial system, one which didn't depend on debt, wasn't dominated by the US and was immune to political whims. Some have called for a new Bretton Woods, or even for the return of the classical gold standard.
Bitcoin emerged from the financial crisis as a fledgling international dig…
In 2008, the dollar's global reach enabled an American financial crisis to spread to the entire world, causing a deep recession and long-lasting malaise. Ever since, there has been a deep longing for a more stable international financial system, one which didn't depend on debt, wasn't dominated by the US and was immune to political whims. Some have called for a new Bretton Woods, or even for the return of the classical gold standard.
Bitcoin emerged from the financial crisis as a fledgling international dig…
Not on topic to your post: but I have a question. Why is it that government interest payments as a percent of GDP are not quoted as a figure for understanding the effects of debt levels (flow vs flow scenerio). And why do we not see popularly discussed any theories about why this value may change over time (its velocity)?
ReplyDeleteMaybe you'll say such a figure is unimportant (I have no idea myself). But I think it would be a lot easier for the public to understand, and to frame policy choices about, than the popular debt/gdp framework that has provoked much unenlightened discussion.
I prefer to compare interest cost to gdp, rather than debt/gdp. As you say, it is better to compare like with like. Debt/gdp compares stocks and flows and therefore needs to used with caution, I would say.
DeleteRegarding the problem of deflation increasing the value of outstanding debts. Hypothetically that could be overcome if the credit system was changed and so the value of the debt was constantly recalculated by factoring in the inflation rate, if in reality the money supply effect on prices could really be measured accurately enough to do that though.
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ReplyDelete> Frances
considering your post would you agree that paying off debt increases the value of money, and so not paying off debt decreases the value of money the value of money, and so defaults on debt are inflationary.
No, I would not. Defaulted debts are written off and therefore destroy money in exactly the same way as if they were paid off. In effect, the lender pays the debt from profits. The effect is therefore contractionary. Additionally, widespread debt default destroys the value of assets, and that also has a contractionary effect - see Irving Fisher on this.
DeleteSo those debts are paid from commercial lender profits. If however the Central bank is the Lender, how is that scenario handled.
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