When we talk about politics unfortunately everything is possible.

And as you said, the people is even more indebted today than during the 30´s. Sadly, politicians’ decissions are usually detrimental for the people and beneficial only for a few. Considering high private indebtness and that goventment debt is people´s debt (not Obama’a nor Bush´s Debt) high inflation would be very good for those who are very indebted.

After deflation runs it course, and all debts are finally paid or defaulted, then I would expect very high inflation.

Yo creo que es posible diferenciar entre dinero y crédito. Igual que en su momento la física consiguió diferenciar entre peso y masa. De hecho creo que Carlos Bondone lo consigue: Confusión entre Dinero y Crédito.

Estoy de acuerdo que si se compinchan todos los bancos centrales pueden hacer lo que dices.

Pero tendrían que empezar a actuar de forma totalmente distinta a lo que han hecho hasta ahora. La Fed no ha emitido un solo dólar que no fuese un pasivo (crédito) con su correspondiente partida en el activo, y esa contrapartida es siempre deuda de un tercero (un bono, hipotecas empaquetadas, otra divisa, etc…).

No obstante, yo sí pienso que se puede emitir todo el dinero que se quiera, y más si todos los bancos centrales están compinchados y actúan a la vez.

¿Qué es lo que queda? El oro pero hoy en día no cubre las necesidades de la gente. No es “legal tender”.

Is there anything else which might play out in the run-up to hyperinflation and how does the current scenario compare to the previous inflationary collapse of the 1930s.
As back then people were not indebted like they are today and what other factors (unique to this time) could potentially throw a spanner in the works of these politicians who will instruct their Central Bankers to take the path of least resistance.
What types of assets will more likely undergo liquidation in an effort to get back to price-correction?
Just trying to understand how far the deflation can go and what is likely to be the last stages of this period before governments attempt at reflation and makes everything ‘better’ which turns out to be worse albeit in a different manner.

I´ll try my best to stick as much as possible to your question.

“When biggest debtors default without providing collateral, cash hoarded by central banks and hedge founds isn’t needed much any more”

It those sovereign assets default and their value becomes zero, and they are located on the asset side of the Central Bank / Hedge Fund, means equivalent decrease on the liability side is mandatory (the Central Bank liabilities are account entries in Euros, not bills). Either the Central Bank / Hedge Fund defaults on his depositors / investors or otherwise they have to raise capital somehow, which means demanding Euros.

In Spain for instance, private debt is quite greater than sovereign debt. If Spain defaults, there still will be a great quantity of outsanding debt.

“Why would Euros belonging to Greek Citizens and stored in Swiss banks or even euros in Swiss National Bank disappear? It will not. Greeks will pay own debts in fresh new printed drachma dropped from helicopters, and travel to Germany to spend their Euro for cars and real estate causing Hyperinflation in Germany.”

If Greek citizens are able to pay their mortgages in drachmas, that means that Greek Banks will default in Euros, that´s more balance sheet contraction for the ECB and Greek creditor German Banks. If I were a Greek citizen and I had Euros in switzerland after Greece comes back to the drachma, I would wait the drachma to plunge, and then buy assets (houses or whatever has dropped more dramatically) in Greece with my Euros. That business would be much better than spending the Euros in Germany.

I think that defaulting without collateral makes the credit contraction even bigger. If there is collateral at least some value might be recovered, if there is no collateral the balance sheet contraction is quite greater.

“Nevertheless demand will remain high, because even when a bank fails, the mortgages will go to some other entity, and the mortgage debtors still will be demanding Euros to pay down their debts.”

Please understand my question – it was was not about “normal circumstances” when there are many debtors left creating demand.
When biggest debtors default without providing collateral, cash hoarded by central banks and hedge founds isn’t needed much any more.

“If PIIGS leave the Euro, all liabilities of PIIGS banks will tranform from Euros to Dracma, Pesetas, Lira, Escudos, etc… So those Euros will just disappear.”

Why would Euros belonging to Greek Citizens and stored in Swiss banks or even euros in Swiss National Bank disappear? It will not. Greeks will pay own debts in fresh new printed drachma dropped from helicopters, and travel to Germany to spend their Euro for cars and real estate causing Hyperinflation in Germany.

The thesis is, that credit contraction by repayment or default with sufficient collateral is strongly deflationary.
But credit contraction by default without collateral, is inflationary.

The problem is not that savers hoard currency, the problem is that the quantity of Euros contracts dramatically, but still Euros are the only medium to pay debts. Besides, there are very few net savers left in the economy, most people are debtors.

Euros are mainly bank liabilities and most of them are account entries, not bills. If a bank that has sovereign debt in their asset, and the debt issuer defaults, the bank balance sheet gets automatically reduced, an so its liabilities, therefore less Euros in the system. If the loss is big, the bank will need to raise capital which means they are demanding euros.

But the important thing is that default and losses mean that the supply of euros contracts. The main cause of deflation would be a dramatic contraction of supply, not an increase on demand. Nevertheless demand will remain high, because even when a bank fails, the mortgages will go to some other entity, and the mortgage debtors still will be demanding Euros to pay down their debts. Also, if the purchasing power of the Euro increases and the economy is weak, agents will be more willing to keep euros rather than investing in stocks or buying houses or just consuming.

But all this will be conditioned by the dollar, I think that deflation in the dollar will be even stronger (there are much more dollar denominated debts), and if the dollar goes up against the Euro, and commodities are priced in dollars, that will soften Europe´s deflation for commodities, but not for assets and wages.

If PIIGS leave the Euro, all liabilities of PIIGS banks will tranform from Euros to Dracma, Pesetas, Lira, Escudos, etc… So those Euros will just disappear.

I agree with you that after deflation runs its course, then inflation or hyperinflation will set in.

All Austrians know basic lows: credit goes up – prices up, credit is payed back – pries down.

But I have a complex question: what happens with value of debt backed paper money (prices) if debtors default without providing any collateral (like sovereign governments)?

In case of commodity-money, we would see strong price deflation because of its intrinsic value encouraging hoarding.

But is that possible for debt backed fiat money? Why would savers hoard fiat money for a long time if debtors don’t need it anymore so much?

I think that deflationary collapse would be much lower as we know it from hard money systems, followed by strong inflation even without printing.

In a real macro-case, what would happen if PIIGS leave Euro giving middle finger to creditors (lowering demand for Euro) and core-europe (limited to Germany?) would be confronted with all the money quantity chasing its shores? I think, prices in Germany would skyrocket which isn’t deflationary at all inside the remaining currency regime.

Is that all basically correct? Please give a small comment or write an article about. In all the talking about deflation I’m strongly missing distinguishing between hard money and fiat money systems.

Thank you so much for this. I have downloaded those PDF’s from Carlos Bondone. I intend to read them and explore his website. I have been very much an individualist for many years and was aware of Mises and the Austrian school, but I have jumped into it after reading Paper Money Collapse by Detlev Schlichter.

The funny thing is that in 2008 I remarked to my brother, who is in the financial services sector, that money was simply broken. I did not realize then how correct I was – and it only gets worse.

Again thank you for the insight and the analogy. I love that metaphor and you have inspired me to read Carlos Bondone.

Monetarist don´t even think of classifying dollars or Euros as credit. Most Austrians are not clear (Bondone is also Austrian), Mises defined a type of currency calles “credit money”. Really confusing. And their position about “fiat money” is also not clear, they do not clearly specify if fiat money is a liabilitiy or a present good. Yoy might agree or disagree Bondone, but he can´t be more clear on this.

Imagine that architects and engineers are based on a theory that admits that ground and floor are equivalent, so you can build a building in either one of them, so theoretically you could build a new building on top of the 50th floor of another building.

Imagine that this is what is taught at schools, universities and everyone accepts that. Would it be surprising to end up with hundreds of shivering and instable buildings????

Buildings (credit) must be built on solid ground (money, understood as a present good) if you don´t want them to dramatically collapse.