The Sustainability of Debt

Debt is being lowered, the problem is credit is being created faster. Printing has recently created all time highs in many key metrics for total credit outstanding.

Most don't look at the final stage of hyper-inflation as a deflation. That's all it is, currency flames out completely and credit collapses completely. After the hyperinflation a deflationary depression ensues. The currency turned toilet paper no longer exists. In the new currency there is an economic depression. Economic depression and deflation are the same thing, and an organic phenomena, but the artificial mechanism of hyperinflation obscures this to some extent. It's artificial in the same sense as when we hear "prices are artificially set" these days.

True, with fiat currency a "hyperinflationary depression" occurs in the run up to the final credit bust. During that period the economy ceases to function well and folks can't get goods - it's a depression. After the bust a re-set (new currency) is necessary, and what comes after that is a continuation of the same economic depression that started during the hyper-inflationary phase. To citizens on the street there's no difference - couldn't get goods before or after. But in formal terms it is no longer a hyper-inflationary depression, now it is a deflationary depression.

Printing in the early case is political policy response to disinflation, to goose the economy. But when printing has less multiplier in the economy (which occurs as total levels of credit increase) more printing is required. The problem is liquidity trap dynamics create a situation of zero (or even negative) multiplier, and in the extreme case hyperinflation can ensue if Central Bankers continue ramping. In a negative multiplier economic conditions worsen even more quickly as printing goes parabolic. This is where the CB is only having negative impact on economy, but continues anyway.

There can only be two reasons a CB would continue in that case - psychological denial and/or ignorance of the soon to come unintended consequences, or willful destruction of currency (informal default on debt). In the latter case destruction of the currency would obviously be seen as the least bad choice available.

We live in a more complex world. For one thing a hyper-inflation in a major currency has never happened. For another, while it's easy to ascribe previous hyper-inflations to ignorance and denial, in this day of better economic measures that excuse can't credibly be used. Finally, as far as we know no one is deliberately trying to destroy USD, EUR or JPY. USD especially, at least as long as it is reserve currency, and why would US want to give up that advantaged position?

I think what B and the Boyz are doing is their best to preserve status quo. At some point the addiction to growth ruled out the sensible policy of allowing organic contractions to occur. There were and are many academic rationales supporting this stupidity.

But the base case is this: unsustainable debt levels by definition end in deflation, ie, the collapse of credit leading to economic depression. The mechanism of printing to create inflation (more credit) always fails sooner or later - if the debt is truly unsustainable. The game can go on as long as the debt is sustainable. It's that simple.

So a lot of people (me included) throw the term "unsustainable debt" around as if we know it's true. Well, that's wrong, we won't know it's unsustainable unless it collapses dynamically, in a rapid process policy has no effect on. As long as policy continues to be effective - debt is sustainable.

Hyper-inflation, when it occurs, is a sure sign debt is no longer sustainable. At that point it becomes obvious it will collapse in relatively short order.