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Source link: http://archive.mises.org/10878/an-unsustainable-path-of-debt-expansion/

An Unsustainable Path of Debt Expansion

October 21, 2009 by

Once (hyper)inflation is publicly seen as being the lesser evil of all options available for the government meeting its debt service, it cannot be dismissed out of hand that (hyper)inflation would be the consequence. FULL ARTICLE

{ 14 comments }

Sally C. October 21, 2009 at 7:16 am

Ludwig von Mises was clearly a genius. If only he were alive today – what would he say about the Euro, Thorsten? There are enough prominent Americans who are warning about the inflationary practices of the Fed. This should act as a brake on much more money printing in the USA. But what about the Eurozone?
Ludwig von Mises said in your quote ‘Once the people generally realize that the inflation will be continued on and on and that the value of the monetary unit will decline more and more, then the fate of the money is sealed.’ When the currency in question applies to just one country, people may realise quite quickly that the central bank is debasing the currency and may take action to stop it. But it may take much longer for people to realise and understand what is happening to their currency when that currency is used in many different countries and where the central bank is actually in a different country and seems very remote from the day to day activities of ordinary people. Who will speak for them Thorsten? How can they stop the ECB from ruining them?

Thomas October 21, 2009 at 9:07 am

In the short run, I would say, that since the Dollar inflation is far worse than the Euro inflation, people will sell their Dollars for Euros. Hence, the rise in demand for Euros will mop up most of the Euro inflation.

In the long run on the other hand…I guess we’re all dead?

Nick Bradley October 21, 2009 at 10:23 am

I do not foresee a collapse of fiat monetary systems when all the currency exits are blocked. In other words, in the face of massive inflation, an individual has three “exit options”:

1. Buy hard assets and hold them until the inflation stops
2. Barter
3. Buy into another fiat currency

In the face of coordinated, global inflation, most individuals will shift their money into currencies with the lowest rates of monetary inflation. This will provide an incentive for all major central banks to slow down monetary growth until the system stabilizes at an acceptable level of total global inflation.

Individuals are unlikely to convert their fiat notes into hard assets on a massive scale due to (1) the risk of price collapses in certain asset categories and (2) hard assets do not serve (normally) as a medium of exchange.

But just for curiosity, what would happen if hyperinflation occurred — particularly in the US? Based on historic examples, hyperinflation destroys fiat currencies and the nation-state then introduces a hard currency to reinstill confidence. This happened after the collapse of the American Continental and the German Papiermark in the 1920s.

In Germany, a two-step process was pursued to end hyperinflation. First, Rentenmarks were introducted, backed by mortgaged land and industrial goods. After about a year or so, a new gold mark was introduced — confidence was restored.

So if hyperinflation occurred, I would expect the US to issue a new hard currency to instill confidence in the dollar. Perhaps an interim currency backed by home mortgages, followed by a new gold-backed currency.

Nick Bradley October 21, 2009 at 10:25 am

I do not foresee a collapse of fiat monetary systems when all the currency exits are blocked. In other words, in the face of massive inflation, an individual has three “exit options”:

1. Buy hard assets and hold them until the inflation stops
2. Barter
3. Buy into another fiat currency

In the face of coordinated, global inflation, most individuals will shift their money into currencies with the lowest rates of monetary inflation. This will provide an incentive for all major central banks to slow down monetary growth until the system stabilizes at an acceptable level of total global inflation.

Individuals are unlikely to convert their fiat notes into hard assets on a massive scale due to (1) the risk of price collapses in certain asset categories and (2) hard assets do not serve (normally) as a medium of exchange.

But just for curiosity, what would happen if hyperinflation occurred — particularly in the US? Based on historic examples, hyperinflation destroys fiat currencies and the nation-state then introduces a hard currency to reinstill confidence. This happened after the collapse of the American Continental and the German Papiermark in the 1920s.

In Germany, a two-step process was pursued to end hyperinflation. First, Rentenmarks were introducted, backed by mortgaged land and industrial goods. After about a year or so, a new gold mark was introduced — confidence was restored.

So if hyperinflation occurred, I would expect the US to issue a new hard currency to instill confidence in the dollar. Perhaps an interim currency backed by home mortgages, followed by a new gold-backed currency.

Ohhh Henry October 21, 2009 at 12:05 pm

The counterpoint to this article would be Ben Bernanke’s recent speech, of which this is a sample:

“Admittedly, just as increasing private saving in the United States is challenging, promoting consumption in a high-saving country is not necessarily straightforward. One potentially effective strategy is to reduce households’ precautionary motive for saving by strengthening pension systems and increasing government spending on health care and education. Of course, such measures are likely to improve welfare and productivity as well as to contribute to more balanced, robust, and sustainable economic growth.”

North America, Europe, Australia and Japan are going broke due to their welfare spending and are facing a Soviet style collapse or worse, after which they will presumably continue to maintain an empty shell of a welfare state by paying pensions, etc. in vastly devalued currency units. The cure for this, apparently, is for developing Asian economies to also spend themselves broke with similar programs. I suppose that’s a balanced approach, in the same the sense that a suicide pact is balanced. But robust? Sustainable? LOL

Ohhh Henry October 21, 2009 at 12:12 pm

BTW on the blog.mises.org front page it says this article is by William Anderson but it is apparently written by Thorsten Polleit. Could you please differentiate more clearly between who writes articles and who merely posts them on the blog?

No More October 21, 2009 at 12:24 pm

Nick Bradley,

“Perhaps an interim currency backed by home mortgages,”

LOL ! where have you been those past 2 years ?

The latest thing that was “backed” by mortgages nearly killed us all. Please, no more mortgages “backed” junk.

Thorsten Polleit October 21, 2009 at 3:35 pm

Sally C.,

Thanks very much for your comment.

I guess it is fair to say that the blueprint of the monetary system is the same in all western countries – and the situation in the EU (or anyhwere else) would be any better than in the US.

I am no longer sure whether people would want to listen; so many poeple think that they would benefit from the system keeping churning ever higher amounts of credit and money.

Marco Saba October 21, 2009 at 7:39 pm

An interesting article on China’s monetary system:

Reprinted from THE INDIVIDUALIST June 1942
PROBLEMS OF MONETARY REFORM IN CHINA
By Walter Zander
http://leconomistamascherato.blogspot.com/2009/10/problems-of-monetary-reform-in-china.html

Nate October 21, 2009 at 7:40 pm

Nick Bradley,

While restoration to a hard currency is the option I would hope for, it is likely the political elite will crawl to the UN, IMF, etc. begging for help. This would likely lead to the establishment of a true world (fiat) currency.

Clint Athey October 21, 2009 at 8:24 pm

Nick Bradley,

“Perhaps an interim currency backed by home mortgages…”
We already have that, it’s called Maiden Lane I & II! John Law must be rolling in his grave…

Gerry Flaychy October 22, 2009 at 5:50 pm

To Thorsten Polleit: ” In fact, it is money demand that would set a limit. “
Do you really mean ‘money’ demand, or do you mean ‘credit’ demand ?

Thorsten Polleit October 25, 2009 at 5:01 pm

Gerry Flaychy

To Thorsten Polleit: ” In fact, it is money demand that would set a limit. ”
Do you really mean ‘money’ demand, or do you mean ‘credit’ demand ?

Gerry,

yes, it is money demand that sets the limit.

In our monetary system, banks’ credit expansion increases the money supply. Money is the means of exchange/payments. If people do no longer want to hold money (in the way produced), the system would break down.

Gerry Flaychy October 27, 2009 at 1:35 pm

To Thorsten Polleit: By ‘money demand’, do you mean the demand for short-term loans, or do you mean the demand for ‘cash holding’, ‘cash balance’, or do you mean something else ?

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