quetzalcoatl wrote:That's getting pretty close. A few nitpicks, though. It needs to be made very clear that it is not sovereign debt that causes debt deflation, it is private borrowing.
Yes, because private debtors have to get money from somewhere to repay their debts, while governments can issue money.
And the offset to private deleveraging is not government debt per se, it is government spending in the private sector.
No, government spending financed by taxation or borrowing of existing money will not offset private debt deleveraging. Only when government borrows new debt money from banksters does it offset the annihilation of debt money by private debt repayments.
We are accustomed to government spending being accompanied by the issuance of debt instruments, but there is no operational necessity for this. It is merely a legal/institutional arrangement. It is perfectly feasible for sovereign governments to spend in excess of taxes without the issuance of debt instruments.
Correct.
So this is how it works. Private debt increases the broad measure of money in circulation, which increases private spending to some degree. This stimulates production and employment. Once the increase of private debt runs up against debt service costs, the debt bubble will burst.
Right.
The printing presses are now running in reverse as trillions of dollars are annihilated by falling asset prices.
No. The printing presses are running in reverse because repayments of debt, which annihilate debt money, are not offset by new borrowing.
The government can offset this annihilation of money in two ways; decreasing taxes or increasing spending.
No. Decreasing taxes by itself does no good, as it does not affect the deflationary spiral. It has to support the money supply, by either borrowing more debt money into existence or issuing money itself.
These are the primary options by which governments create money to offset its annihilation in the private sector. The issuance of debt instruments does nothing to alleviate debt deflation.
False. See above. Issuing debt money -- not borrowing existing money -- directly alleviates debt deflation.
QE is misguided as well, as it supports asset prices but creates comparatively little actual activity in the economy.
Correct. But that is what QE is
for.
In any case, the Fed simply reacts to these broad forces rather than causing them.
No, the Fed largely causes these forces, albeit indirectly. Low interest rates encourage borrowing, which leads to the debt money spiral.