by Frank Shostak
Mises.org
Many economic commentators are of the view that the high level of debt poses a threat to the US economy. The debt-to-GDP ratio stood at 345.7 in Q3 2024 against 130.4 in Q1 1952 (see chart).
[…] This way of thinking originates in the writings of Irving Fisher who held that a major risk factor is the debt liquidation. According to Fisher, this can occur on account of a shock such as a decline in the stock market. As a result, this is likely to generate a decline in money supply. The decline in money supply, in turn, is likely to cause a decline in the prices of goods, labeled as “deflation” and this will produce an economic slump. Why, however, should the debt liquidation cause a decline in the money supply?
Take, for example, a producer of consumer goods, who consumes part of his produce and saves the rest. In the market economy, the producer can exchange the saved goods for money. He can then make a decision to deposit the money with a bank. He can also decide to lend his money to another producer through the mediation of the bank.