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The Debt– In flation Cycle and the Global Financial Crisis
Author(s) -
Boettke Peter J.,
Coyne Christopher J.
Publication year - 2011
Publication title -
global policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.602
H-Index - 33
eISSN - 1758-5899
pISSN - 1758-5880
DOI - 10.1111/j.1758-5899.2011.00088.x
Subject(s) - economics , debt , deflation , monetary economics , inflation (cosmology) , context (archaeology) , internal debt , hyperinflation , payment , government debt , monetary policy , financial crisis , government (linguistics) , point (geometry) , keynesian economics , macroeconomics , finance , physics , theoretical physics , paleontology , linguistics , philosophy , geometry , mathematics , biology
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 article 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. Policy Implications• The fear of deflation on the part of policy makers has led to an inflationary bias which neglects or underestimates the costs of inflation. • The debt– in flation theory of economic crises must be considered as a viable alternative to the standard debt–deflation theory of economic crises. • In order to curtail the tendency of using the tools of monetary and fiscal policy to concentrate benefits and disperse costs, policy institutions must effectively tie the rulers’ hands. • After centuries of only fleeting success at curtailing the deficit, debt and debasement cycle of public policy, we may have to consider seriously the possibility that the only way successfully to constrain the state is to eliminate from its purview the task of monetary policy.