Australian (ASX) Stock Market Forum

Inflation or Deflation?

Sep 26, 2007
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?
May 20, 2011
In terms of the Euro it would go up since Greece is a weak link dragging it down.

In terms of Eurozone CPI, it would go up (a little) because Greece is a country in (significant) deflation which drags down the overall CPI (allabit not that much since it is such a small economy).

In terms of debt monetisation - well it wouldn't be, it would be written off by the banks, and hopefully they can recoup most of it with CDS contracts which they damn well better have.

Banks in the southern Eurozone countries are already zombies, so I doubt it will have much effect on credit down there. What I think will be interesting is how it will affect the capital positions of strong (or should I say relatively stronger) banks in Germany, Austria and the Netherlands in particular and what effect that will have on credit and inflation in those countries. Since as I just mentioned those banks are stronger to begin with, I am sure that the ECB will take action immediately if it thinks that it will be a problem. Indeed, I would not be surprised if there was a massive LTRO3 if Greek defaults on the rest of it's debt.

Hope that answers your question.

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