The debt-inflation cycle and the global financial crisis

Peter Boettke and Christopher Coyne

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Deflation; Fiscal Imbalance; Inflation; Public Debt (search for similar items in EconPapers)
JEL-codes: B53 H63 P44 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (5)

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