The debt-inflation cycle and the global financial crisis

Boettke, Peter and Coyne, Christopher (2011): The debt-inflation cycle and the global financial crisis.

Abstract

Writing over 230 years ago, Adam Smith noted the 'juggling trick' whereby governments hide the extent of their public debt through 'pretend payments.' As the fiscal crises around the world illustrate, this juggling trick has run its course. This paper explores the relevance of Smith’s juggling trick in the context of dominant fiscal and monetary policies. It is argued that government spending intended to maintain stability, avoid deflation, and stimulate the economy leads to significant increases in the public debt. This public debt is sustainable for a period of time and can be serviced through 'pretend payments' such as subsequent borrowing or the printing of money. However, at some point borrowing is no longer a feasible option as the state's creditworthiness erodes. The only recourse is the monetarization of the debt which is also unsustainable due to the threat of hyperinflation.

• Item Type: MPRA Paper
• Language: English
• Keywords: Deflation; Fiscal Imbalance; Inflation; Public Debt
• Subjects: H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt ; Debt Management ; Sovereign Debt; B - History of Economic Thought, Methodology, and Heterodox Approaches > B5 - Current Heterodox Approaches > B53 - Austrian; P - Economic Systems > P4 - Other Economic Systems > P44 - National Income, Product, and Expenditure ; Money ; Inflation

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