₿oogaloo
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Diogenes Shrugged: I agree with you right up to the very end. That’s where I see the Federal Reserve buying all of that failing debt for cash, 100 cents on the dollar, the currency be damned. That will be seen as the best way to alleviate the social unrest, and the banks will be happy because they will be the first in line to receive all that newly minted cash. The “helicopter” promise was a lie all along. Ben was never going to drop the money on the masses, though as Steve Keen argued, that probably would have been a whole lot more effective.
If interest rates stay close to zero, then asset prices need to keep going up at 7% per year. Otherwise the pension funds go bust, and that can never be allowed to happen. On a nominal basis this means policy makers will make sure that everything keeps going up. If credit collapses they will keep the game going with base money. The deflationists are right, right up to the very end, and then they get it wrong. Politically, deflation (and by this I mean a deflationary spiral and not the deflationary hiccup from 2008) is unacceptable. Policy makers will choose a hyper-inflationary reset every single time.
All money is borrowed into existence, except for physical cash, which is a tiny fraction of the money supply. If the debt money system collapses through cascading debt defaults, the asset values of everything must drop to (practically) zero. That is why there is zero chance that the experiment ends this way — and why there is a near 100% chance that the experiment ultimately ends in hyperinflation/destruction of the currency.
