Chapter 17. THE GREAT FORK IN THE ROAD: INFLATION OR DEFLATION?
The crisis soon brings us to a great fork in the road: Will the government, in its zeal to end it at all costs, bring about unbridled inflation, driving nearly all prices sharply higher? Or will austerity and the sinking economy bring deep deflation, driving nearly all prices sharply lower? Before I answer that question, let me first show you the true consequences of each scenario.
The true consequences of unbridled inflation:
Inflation may ease the pain of debtors temporarily, help provide the semblance of a recovery, and even give the illusion that "the crisis is over." But such benefits are almost invariably short lived. They are limited to a privileged few. And even if they're more widespread or last a bit longer, they almost inevitably backfire in the form of new bubbles, new busts and, ultimately, an even deeper recession with more financial losses, more bankruptcies, and more layoffs. In a nutshell, unbridled inflation brings:
Still more bad debts. Individuals and companies are once again encouraged to borrow, spend, and speculate, adding a new layer of burdensome debts to an already-overburdened economy.
The ultimate moral hazard: Speculators, among the primary culprits of the boom and bust, are rewarded with even more cheap money and credit; while savers, essential to help finance a true recovery, are punished. After deducting inflation, they earn less than nothing for their money. Or worse, the value of their ...