Let’s say there is a big hole in the solvency of a banking system. Left unaddressed, that is radically deflationary. Demand (and other) deposits will disappear, crushing aggregate demand. Cascading financial failures will occur elsewhere, again with negative demand effects. If a government “prints money,” or more likely creates new electronic bookkeeping entries, that offsets
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Let’s say there is a big hole in the solvency of a banking system. Left unaddressed, that is radically deflationary. Demand (and other) deposits will disappear, crushing aggregate demand. Cascading financial failures will occur elsewhere, again with negative demand effects. If a government “prints money,” or more likely creates new electronic bookkeeping entries, that offsets the deflationary pressures. These bailouts may have other negative effects, such as on future moral hazard and rent-seeking, but they won’t bring hyperinflation. If you wanted to create hyperinflation, the bailout would have to look something like “for every dollar you used to have in your bank account, the Fed says you now have five!” But that is not on the agenda.
The post Bailouts of insolvent banks don’t lead to hyperinflation appeared first on Marginal REVOLUTION.
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