The Debt-Inflation Cycle and the Global Financial Crisis

16 Pages Posted: 21 Dec 2010

See all articles by Peter J. Boettke

Peter J. Boettke

George Mason University - Department of Economics; Mercatus Center at George Mason University

Christopher J. Coyne

George Mason University - Department of Economics; George Mason University - Mercatus Center

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)

Mercatus Center at George Mason University ( email )

3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States

Christopher J. Coyne (Contact Author)

George Mason University - Department of Economics ( email )

4400 University Drive
Fairfax, VA 22030
United States

HOME PAGE: http://www.ccoyne.com/

George Mason University - Mercatus Center ( email )

3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States

HOME PAGE: http://ppe.mercatus.org/scholars/christopher-coyne

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
652
Abstract Views
3,260
rank
26,736
PlumX Metrics