Explain to me the mechanism on how debt is deflationary. I am genuinely curious since I have always read the opposite where deficit spending was inflationary. In this country in 1945 our Debt was 120% of GDP, worse than our current 60 - 70% of GDP and we had inflation that peaked at 14% (avg) by 1947 and took a few more years to come back down to normal.
Japan issued tons of debt but if you look at their banking sector from their lost decade to present, they pretty much sat on that debt. There was no place for it to go. You can’t say they had deflation (mostly low inflation), high debt, therefore debt causes deflation. You have to explain how they are connected, if at all.
I do agree however that we are doing exactly what the Japenese did and will probably have a lost decade just like them. Their policies both monetary and fiscal were half assed and they just sat around hoping for the best. The uncertainty created by their indecisiveness may have triggered deflation but as far as deficit spending causing it, I’d have to hear a specific mechanism and an historical corollary to the sentiment before I understand it.
Actually there is a simple explanation for this, but like most simple solutions, no one likes it so it becomes complex and then the debate about Angels dancing on the head of the pin begins.
The Marginal Productivity of Debt, you can Google it, explains why money is sloshing around but you can't get any of it. It is a fascinating read. As it pertains to us, it means that no one is going to lend because no matter what happens, they will lose their capital. And, more debt just makes it worse. Ergo, capitalism locks up, no one has money to spend, so prices fall, there is your deflation. The kicker is that all the remedies that Team Kenya has tried and contemplate only serves to make all worse.
Keep your money handy is the short version. When Yugoslavia broke apart the money was worthless, right? Absolutley not; the currency collapsed but then came roaring back as you need some form of money for trade. Same thing happened in Iran, currency collapsed but then came roaring back. It wasn't until the Euro was widely available that those currencies went out of circulation. And since we are the reserve currency, there is no way that cash will continue to be king.