ltokuda, perhaps I misspoke. I’m figuring this stuff out as I go along too. Im not an economist (professional bullshitter) just a programmer who reads a lot.
You are correct, I used the term inflationary when I should have used something like, “asset price increase.” We are so used to using the word inflation to describe prices rising, even though I don’t agree, that even I do it now and again.
Borrowing money is by its nature inflationary. The lovely counterpart to that is that paying back the borrowed money is deflationary! You’ve destroyed the debt, but in a good way. For my way of thinking, under normal circumstances they cancel each other out. The question is, what are you left with?
So like most people I too concentrate on the EFFECTS of borrowing. Housing doubling in San Diego in 5 years being an obvious effect. Productivity to me is a function of deploying money borrowed or otherwise in a way which tends to pay for itself, or offer some non-monetary benefit of equal value to the borrower.
So in a housing bubble it may seem to be an effective use of borrowed money to lever up and buy a house, but watch out, if the demand isn’t pretty constant, you’ll end up with a monster house payment (debt service) and no one to take the albatross off your hands. So there is a physical artifact, the house, sitting there. If you can’t make the payment the bank takes the house from you and sells it. In the process the debt it cannot recover is destroyed.
Once enough of this “deflation” has occurred people take notice and start to hoard the money they do have. They don’t want to borrow, they want to save.
