Simple economics questions
If greece leaves and then defaults on its debt would this be deflationary or inflationary on the euro?
Debt monetisation - Printing money then buying the debt then cancelling it - Inflationary
Debt cancellation (default) - Existing owners of debt forgiving debt - Deflationary
Example- I (bank) receive $1000 (total amount of money in economy) from depositors. I lend $100 to my friend who spends that money on clothes. They cannot pay back the $100 debt so the options are
1. We print $100 to monetise the debt - total amount of money in economy = $1100
2. We forgive the debt - total amount of money in economy = $1000?
The situation in southern europe is extremely deflationary due to the huge amount of debt (negative money) which is having the usual deflationary effect (high unemployment low growth).
If the debt was cancelled would this have a heavily inflationary or deflationary effect on the rest of europe?
If the debt was monetised have an inflationary or deflationary effect on the rest of europe?