Currencies Threatened by A Credit Crisis
The comments below are an edited and abridged synopsis of an article by Alasdair Macleod
There is an assumption in economic circles that when the general level of prices changes, it is always due to changes in supply and demand for goods and services. Prices change all the time, but without a change in the public’s preference for or against holding money and with all else being equal, the general level of prices cannot change. Changes in the general level of prices are due to changes in the purchasing power of the money, which stems from the public’s preferences for or against it and do not emanate from goods and services.
This it calls into question the widespread assumption that price changes are only due to changes in supply and demand for goods and services. It is an error behind modern monetary theory (MMT).
This assumes that the purchasing power of a state-issued currency is objectively fixed, only varied by changes in its quantity. Preferences for or against money don’t exist. The evidence of hyperinflations is ignored. A myopic approach allows the belief that deflation can be offset by regulating the increase in the quantity of money to ensure price stability.
The solutions of MMT and other whacky ideas to address the evolving global credit crisis are likely to unite inflationists in their drive to buy off with yet more monetary inflation the consequences of their disruptive actions earlier in the credit cycle.
This article is the third in a series about a prospective credit crisis and its likely characteristics. It is about the consequences of accelerating inflationary policies for the purchasing-power of state-issued currencies. The comparison upon which the analysis is based is the credit cycle that terminated in the Wall Street crash of 1929 and the slump that followed.
Macleod discusses the 1930s experience; the next crisis could be on the scale of 1929-1934; the great depression informed today’s academics; and the likely progression of a new credit crisis.