Shoot the Rationalist #9: Deflation and Death by Debt

in #blog4 years ago

Can anyone tame the unending printing of money? The more money you print, the greater the risk for inflating that currency due to there simply being a greater supply. Without a great cost to the creation or extraction of such money, the value of the money will eventually decline to the intrinsic value of the cost of creation. And given that adding zeros to paper is trivial, printed money's intrinsic value is basically zero. But what's their alternative?


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The money printers aren't afraid of their money being worthless because they have significant incentive to decrease the value of that money over time. They have debt problems. Inflationary policy allows for deficit spending and the hope that future growth can achieve the necessary escape velocity to repay those debts. With inflation, one can take on debt and have some confidence that they can rotate that debt further and further in the future without entering a death spiral.

The death spiral being trapped in a situation where debt is continually expanded to pay off prior debts and not being able to pay those debts because money becomes more expense to obtain. This is the curse of deflation. It kills those with debt by making it harder to get out of the hole because the "value" of the hole increases as a currency grows stronger. Inflation is preferable because the hole becomes smaller as the currency grows weaker and the effective size of the debt shrinks. (Lesson here is that you shouldn't be in the position of owing Bitcoin, an asset that has a long term deflationary policy).

But if you control the printers, you would think that you could simply print money as much as you want until a desirable amount of inflation is reached. Since 2008, there has been a lot of money printing taking place but according to the official metrics, the inflation rate hasn't been that high and there have been concerns that the inflation that should be occurring with money printing hasn't been happening. What gives? Where did the inflation from all that money that was printed after the financial crisis go? Are the metrics wrong? Maybe we don't understand the mechanics of money as much as we thought?

Jump forward to the Coronavirus and the abrupt stop of the world's economies and markets. What happens when the world stops and holds it breath for months? What breaks and how does that impact the money printer? What if you simply turn off the value faucet for several months, then the money supply slows down and money becomes harder to move and get? While you aren't decreasing the money supply, you are increasing the value of currencies because everybody needs cash and a lot of folks now don't have their usual revenue streams. You get the effect of deflation even though the money stays the same. And all the people in debt are now in a very bad situation. And if a lot of people in debt are all competing to get the same currency to pay off their short term debts or roll them over, the demand temporarily increases the value of that asset at the time.

So what's the rational thing for the money printer to do if they have lots of debt they need to address and if they have interests in their debtor friends who are also in the same predicament? Print that money and stimulate the economy to try to alleviate the pressure of all these supply chains breaking down. And keep printing so that the debt can be addressed and debtors don't get trapped in the death spiral that the beast of deflation can bring out.

But the coronavirus is a temporary event. What happens when things return to normal ... if we ever get there? All that money that was used to bridge the gap is now in circulation, so if things return to normal and money behaves like it did prior to the massive stoppages, you would expect significant inflation simply due to more money being out there. But there's a caveat there. That's if we give money to people that would use it.

Remember 2008? How we never got inflation? That's not exactly true. One could argue that inflation was hidden in certain assets driving up their price (things like stocks and houses) and was used to service debt behind the scenes. It never went into the hands of ordinary people. But now when faced with the situation where ordinary people really need the cash and they have slowly been pressured into debt themselves, the money printer now has no choice but share with the ordinary folks who weren't in on the game.

While we might defeat inflation and save the skins of debtors and gamblers, it remains to be seen what potential consequences exist once we share the printed paper with Main Street. Although we could always screw the common man over and hopefully get away with it again...

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Or they can simply transfer the new supply overseas and have other economies deal with inflation.

True, that's one advantage of being the reserve currency. Although I'm sure some other countries will see the current crisis as a potential opportunity to get away from the dollar.