Without Inflation, the Status Quo Collapses; with Hot Inflation, it Also Collapses

July 12, 2023

by Charles Hugh Smith Of Two Minds

Eventually policy-makers turn the dials to 11 and nothing happens.

Many others have explained why inflation is part-and-parcel of the status quo. In the simplest terms, where’s why inflation is essential:

1. Our economy and financial system are totally dependent on the expansion of credit/debt. Banks make money by issuing new loans, and financiers make money by buying and selling debt and instruments that leverage debt. Consumers can only buy big-ticket items with credit.

As a thought experiment, let’s consider what would happen to the US economy and financial system if credit was outlawed and the economy was a cash-only marketplace. The government couldn’t run deficits by borrowing money, no one could buy a vehicle except with cash, banks could no longer issue $19 of new loans for every $1 of cash they held.