Deflation and the Pandemic

by Rick Ackerman

I appeared to occupy a unique place on the lunatic fringe when, many years ago, I started writing about the prospect of a short squeeze on the dollar. When I bounced this idea off a half-dozen finance professors, each had the same response: “Huh?” Their incredulity notwithstanding, it has always seemed a given to me that it would take a catastrophic deflation to wipe out debts, both public and private, that long ago exceeded our ability to repay them. The main feature of a debt deflation is an increase in the real burden of debt. Ultimately, and unfortunately for all who are fully invested in the politically popular idea of a free lunch, every penny of every debt must be paid — if not by the borrower, then by the lender. We kid ourselves to think we will escape it via hyperinflation. Realize that the biggest piece of what Americans owe, putting aside incalculable future liabilities from Social Security and Medicare, is mortgage debt. It is not simply going to go away, and that is why deflation, rather than hyperinflation, is far more likely to determine the financial endgame.

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