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The Debt-Inflation Cycle and the Global Financial Crisis

16 Pages Posted: 21 Dec 2010  

Peter J. Boettke

George Mason University - Department of Economics

Christopher J. Coyne

George Mason University - Department of Economics

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Date Written: December 21, 2010

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

Suggested Citation

Boettke, Peter J. and Coyne, Christopher J., The Debt-Inflation Cycle and the Global Financial Crisis (December 21, 2010). Available at SSRN: https://ssrn.com/abstract=1729228 or http://dx.doi.org/10.2139/ssrn.1729228

Peter J. Boettke

George Mason University - Department of Economics ( email )

4400 University Drive
Fairfax, VA 22030
United States
703-993-1149 (Phone)
703-993-1133 (Fax)

Christopher J. Coyne (Contact Author)

George Mason University - Department of Economics ( email )

4400 University Drive
Fairfax, VA 22030
United States

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