The Debt-Inflation Cycle and the Global Financial Crisis

Global Policy, Vol. 2, No. 2, pp. 184-189, 2011

GMU Working Paper No. 11-06

6 Pages Posted: 2 Feb 2011 Last revised: 28 Feb 2012

See all articles by Peter J. Boettke

Peter J. Boettke

George Mason University - Department of Economics

Christopher J. Coyne

George Mason University - Department of Economics

Date Written: February 1, 2011

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 (February 1, 2011). Global Policy, Vol. 2, No. 2, pp. 184-189, 2011; GMU Working Paper No. 11-06. Available at SSRN: https://ssrn.com/abstract=1753345 or http://dx.doi.org/10.2139/ssrn.1753345

Peter J. Boettke (Contact Author)

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

George Mason University - Department of Economics ( email )

4400 University Drive
Fairfax, VA 22030
United States

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