Infation or Deflation: that is the question.

The whole deflation inflation debate is terrible interesting. Simplistically it is astounding that the debate is about two apparently opposite outcomes. One sort of simplistic argument that I have not heard made often goes like this… In a world where the majority of new money is conjured up by bankers when they make loans how can central bankers engineer inflation when the value of the assets backing the loans are falling in value? The reason this question is interesting is that when banks loan money into existence they do so at a leverage of 10 times. This means the banks are wiped out when the assets backing their loans fall by 10% plus whatever the borrowers initial equity was. When the loans are written off it creates a huge deflationary force.

To me the force seems assymetric to the downside. I could give reasons why but it would be very boring. Marc Faber who predicts hyper inflation uses the argument that you can have inflation in a weak economy just look at Zimbabwe. There are of course many differences between Zimbabwe and advanced western nations. Among them being the level of indebtedness. I imagine the average Zimbabwian did not have a mortgage on his house or massive credit card debt. These things don’t exist in poorer nations. Weimar Germany likewise probably was not a society of highly indebted people. My guess is it is much easier to generate inflationary pressures in a low Debt society than in a high Debt society.