Just wanted to say that I really enjoyed reading these most recent posts. Everyone had a good argument, and I think there are pretty passionate beliefs on both sides because both inflation and deflation are perfectly viable outcomes.
Though I understand what you’re saying, Rich, it still seems that when someone’s wealth (assets, not cash holdings) goes from $100,000 to $10,000 that it will have a deflationary effect on prices, even if official “money supply” is up.
In your island example, though the $10 is true money and can be used to buy things, people can trade assets; so, theoretically, one of the lenders who has $10 in a “bond”/accounts receivable could trade that asset for a tree house, if the tree house maker realizes that he would make more money/wealth by taking these assets in exchange for his goods. The people with “wealth” (as opposed to cash) can still buy the same goods as the person with cash. As long as everyone on the island continued to believe that the debts would be paid, then the collective wealth with which everyone could trade/buy things would grow or remain stable. So, we could grow “wealth” that can be used to trade for other assets, while money supply remains the same. Even if we don’t change the money supply, if that “wealth” disappears, it would have a deflationary effect on prices, no?
And then there’s the leverage mentioned above that can come from the $10 bond if the bondholder can use that asset as collateral for a new loan (where money could be “printed up” from another bank/lender).
It’s certainly going to be interesting to see how things are handled going forward. They are finally beginning to acknowledge on CNBC that it’s the lack of demand for credit (insolvency), not the lack of credit, that is the problem.
