Isn't debt deflation another term for inflation?
Some people believe that there is so much bad debt that you could not even print your way out of it.
No. The dollar increases in value due to debt deflation, which is one of the problems. It exacerbates the problems of those whose existing contracts are denominated in lower value dollars.
Not necessarily. “Debt deflation” just means that the outstanding credit in the monetary system is reduced. There are several ways that a debt bubble can be reduced:
1. Inflation, especially when the debt is owed externally. This is why South American and other third world nations choose their route when they have huge debts to the US or UK. Or why Germany underwent inflation when paying reparations to France and the UK.
2. The debt is written off and the lenders take a loss. This is what happens when a company or individual declares bankruptcy under Chapter 7. The company or individual has to liquidate what they have that isn’t essential, the creditors are paid off in order of their priority of claim. Some creditors get paid nothing, others might get only pennies on the dollar. Either way, the debt is no more, the debt is just gone.
3. Debt renegotiation - eg, spreading the debt load out, reducing interest payments, etc. Now the creditor is still taking a loss, but a lower loss than a Chapter 7 BK might afford the lender. The net present value of the loan (which banks categorize as an asset) is significantly reduced in many cases, especially if the loan had a high interest rate that is negotiated down.
Inflation won’t work this time. The Fed owns $1.2T of mortgage-backed debt, another $330B+ of US Treasury debt, and billions more of bank debt that they took off Wall Street’s hands (see the Maiden Lane transactions if you’re curious). If the Fed tries to inflate its way out of the debt crisis, the Fed itself takes huge losses. I’m not saying that Bernanke won’t try inflation, but he’d have to either have negotiated the devaluation of the Fed’s debt portfolio with member banks, or he has a villa in some far-off country to which he will escape when the bankers come for him with pitchforks and torches.
You are getting quite proficient at the new trickster vocabulary.
Nam Vet
notice he says we need savings.
And the fed is talking about inflation to stop people saving.
Bernsnke is a fool, so it is wise to consider getting out of cash.
Old habits die hard, however.