If the debts cannot be repaid the banking system will fail

Inflation is caused when someone new (feels they) can spend money and so buying at the peak can be a cheap way to rent a house

Inflation is caused by being in debt, not spending alone. Someone new can spend money which they couldn't before getting into debt. It doesn't matter whether or not the loan is spent for it to create inflation, only that it could be spent. Money sitting in a box buried at the bottom of the garden still affects prices so long as we do not forget where it has been buried. So too, money loaned from a bank and not spent still affects prices just as it would have done if spent.

The key is that the person now feels as though they can afford to buy things which they might not have done before, they aren't (yet) worried about paying it back.

When we spend money to moves from our bank account into that of another person. What difference then does it make (to prices) that we have spent the money and it is no longer in our account?


It can be argued that a person with debts (which must be repaid) will be inclined to hoard the money as the repayment date approaches. We can consider this to be money taken out of the economy. So it is someone who is in the red (and unable to find the money to pay the debts) that contributes to inflation given that someone with cash to spare will tend to pay down the debts and return the "extra" money to the bank.

Being in debt means that, when it is repaid, money is to be destroyed at some point in the future. If someone new can (and is inclined to) spend money then inflation has been created. As the deadline for the repayment of the debt approaches, fewer people can spend the money.

Borrowing (often) makes people feel rich, it is when the repayment date approaches that they feel less rich.

We can assume that once a credit bubble has formed a massive default of debts will be inevitable. If we assume the money loaned by the banks will never be returned that inflation is permanent if deposits get bailed out.

To say that only 5% (or even 1%) of bank deposits are backed by cash is to assume none of the debt is repaid. If the debt is repaid (default of debts is not inevitable) then the bank credit disappears, meaning that a greater and greater proportion of the bank deposits are fully-backed. This means the people in debt do sufficient work to pay off their creditors in the economy. The people in debt would be purchasing (exchanging for labour) the bank credit of their creditors which they would use to cancel their debt to the bank.


If you sell a house after the price has risen you have locked-in the gains...

If you sell a house at the top and deposit your money in a bank you may not get all of your money back. If the State does not bail the bank out, you may only be compensated with the original house which you sold now worth a lesser amount. You do not receive the "work" owed to you by the person who purchased the house.


A default of the banking system equalises cash-holders (no one has any cash because credit is now worth nothing) and writes off the debts because no one can pay them; we all default. And once the credit has gone we are left with the narrow money supply (cash) plus whatever the Government chooses to print... The system is doomed to fail given that the "work" required to repay the debt cannot be provided which means that, unless the State prints sufficient money for the depositors, the entire (banking) system will fail. Even if the depositors are saved the debts become worthless (to the banks) because of widespread default.

If enough money is printed before widespread default, perhaps some of the debt could be restored.

A crash (when widespread default is involved) is, by definition a failure of the banking system... and without sufficient preventative measures to allow debt-repayment (adding new money to the economy) it will be inevitable.

21st Feb'09