Explaining debt-deflation

Karl Denninger explodes the myth of “time-shifting” expenditures:

We have here a problem in understanding basic economics, a rather odd thing for someone who believes in the central premise that inflation is “always and everywhere a monetary phenomena.” Wenzel is not alone; classical economists (most of them anyway) ignore debt (that’s credit on the other side!) because they assume that the function of debt is simply to time-shift. That premise only holds true if you ever intend to (and do) pay the debt off. Of course there’s this problem — the American Government has never done that, and over the last 30 years (from 1980 forward) debt has grown faster than GDP has in every quarter until the crash and now it’s doing it again.

This puts the lie to “time shifting” and makes the additional credit in point of fact a naked short on the currency. And what is a naked short? It’s counterfeiting! What happens when you counterfeit something? It’s illegal to counterfeit shares of stock or money because the value of each instance of that thing goes down as you’re representing in the market that there are more of them.

Heh wait a second….. that’s exactly what unbacked emission of currency does, right!


This is a clever and succinct means of explaining what so many people find inexplicable. It should be obvious that credit is a form of money, for the obvious reason that you can exchange it for goods. I further note that it is presently of near-equal value with cash. (This is a reference to the zero-percent interest rate presently maintained by the Federal Reserve.)

The conventional response has been to claim that all credit does is shift demand forward… but that can only be true if the credit is repaid. A credit default is therefore the equivalent of burning paper currency. This is why I have often stated that the inflation/deflation question hangs on the matter of whether the governments can and/or will print faster than they default.

And a look at history shows literally hundreds of sovereign defaults and a very few attempts to print away the deficits, which means that the default option is the likely choice in the end.

This news may help explain how it works: “523 banks borrow €489bn from ECB – bonds and markets rise”.

Now ask yourself, what did those banks buy with those $640 billion borrowed? Stock and bonds, perhaps?