Eric Englund has some thoughts on Potential Inflation.
“As has happened with all previous fiat currency experiments, government debt is repaid by simply printing the money to pay back the government’s debt obligations (i.e., bonds). Of course, as more money is printed, its value falls just like the gun safe plunging from ten stories above the ground.”
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I agree with most sensible people (austrian thinkers) that inflation is just the increase in money supply and that its results will come. But what if all the credit that the fed has helped to create is deflated. Money created by home-refi would be wiped out if credit started to collapse and the home market lost value. People would owe more on their home than its worth, sell the home, and create a credit deflationary cycle. The result is the same as inflation-money is destroyed. But the monetary fixes are much different for both. It affects the way we position ourselves for economic safety. ie., gold or bonds, or dollars…
“But what if all the credit that the fed has helped to create is deflated. Money created by home-refi would be wiped out if credit started to collapse and the home market lost value. People would owe more on their home than its worth, sell the home, and create a credit deflationary cycle.”
Why would there be a loss of value in the home market? That doesn’t make sense to me. More available cash would drive nominal home prices up. In inflationary times, the nominal cost of the home would be rising, but the real value would remain unchanged. At worst, I could see where people would have to re-finance again (since the home is worth more in nominal dollars) to re-capture more nominal cash, in order to keep up with inflation.
In fact, this has me thinking I should invest in more real estate, and lock in a fixed mortgage rate as a hedge. Down the road, as inflation increases my wage, the value of the home represents a smaller portion of my overall income.
All of your points are true, if the credit cycle can sustain itself. In the inflationary 70′s household credit was not the issue as it is today. If rates go up because of inflation which they likely will then people will not be able to pay off debt with more debt, they will have to pay off debt by selling the asset behind it, their home. I think debt financed assets and products will experience deflation (if this all occurs) and cash based products like food, and consumer non-cyclicals will experience inflation.
There is another way that this fiat currency experience could end. As was suggested by Murray Rothbard, the government could choose to repudiate the debt. Given the fact that it has grown so large, it would make more sense to repudiate it than to depreciate it. The problem is simple: Unlike the situation in the 1970s, printing money can actually be deflationary! With Total Credit Market Debt running over 300% of GDP, a small increase in interest rates can create a large decrease in the value of the debt. In other words, if the FRB monetizes half a trillion dollars, they may raise interest rates a half a percent, and that could lower the value of the asset on the lender’s books by more than half a trillion.
jc the cg
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