Good thoughts in my opinion Bert.

I'll try to clarify for the questions you have. I sometimes take shortcuts in my thoughts trying to not write a book length post. If a post gets over a few short paragraphs long, few people take the time to really read it.

Bert said:  " I am not sure if you are actually implying that debt expansion needs to continue and that without out it a complete collapse occurs; not sure what you mean by an implosion caused by a deflationary spiral."

According to the Austrian economics way of thinking (which I believe is correct), there are two ways the malinvestments brought about by a credit boom can be resolved. One is for the bad investments (resulting in un-repayable debt) to default outright. When debts are either paid off or otherwise repudiated (defaulted), the money that was originally created via fractional reserve commercial banking goes away. In other words the increase in the effective money supply contracts. Thus the deflation of the money that was the original inflation of the money supply. What I was saying, that without a continual expansion of the money supply in AT LEAST a quantity that is sufficient to cover the interest burden on the preceding the money supply the effective money supply contracts. Because enough money was not created to cover the interest at the time the debt was created, the interest obligation has to come from previous money supply. Since all previous and future money is created via debt, debt has to expand to cover the current debt. It is a self reinforcing feedback loop that debt begets debt, because all of our currency is born of debt. So the debt has to continually expand (creating new effective money) to cover the interest load. If it does not, debt defaults. When debt defaults, currency is destroyed. When currency is destroyed it reduces the effective money supply. When the effective money supply shrinks it causes more defaults because the interest burden can not be sustained. This is the deflationary downward spiral that Greenspan, Bernanke and now Yellen is concerned about. Once the defaults start, the currency destruction that started out as commercial bank loans as an inflation of the money supply becomes a self reinforcing feedback loop of currency destruction that contracts the money supply into a deflationary spiral. One debt default destroys money supply that begets more defaults and more currency destruction.

So when the Fed says we need the 2% inflation they are telling the truth in as far as they want the truth to be known. If we do not have this continual expansion of the money supply via extending more credit (be it on central bank balance sheets, private debt, corporate debt or whatever debt) the system implodes in on itself in destruction of the credit money that was previously issued expanding the money supply and now is evaporating and contracting the money supply. This is the deflationary spiral they fear, for good reason. On this point they are telling the truth.

Where they lie is not as an outright lie, but as an obfuscation of the truth or by not telling the whole story. To keep their system going (a flawed system), the fractional reserve monetary system, they are correct that the money supply needs to keep expanding. What they don't tell us is that the system based on debt is a flawed system that eventually do to the math laws of exponential growth ALWAYS eventually fails. The debts become unsustainable in that not enough new money (created as debt) can be created to satisfy the increasing interest load. ZIRP slows down the process, but it always ends up on a graph view as a hocky stick where debt grows faster and faster to support the interest load till we can't keep track of the number of zeros on the currency (this is NOT hyperinflation, by the way [that is another story]. It is caused by something else. Exponential debt growth is a key component of the real cause of hyperinflation happening, but growth in the money supply is not the net cause, only a contributing factor. LOSS OF CONFIDENCE in the money happens long before the exponential growth can ever get to the point our money has multiple zero's on the end of the numbers. And LOSS OF CONFIDENCE is what causes the increase in velocity of the money that creates the hyperinflation). So eventually the debt load HAS to default. One way for that to happen (the best way if there is actually a "best" way to unwind an unsustainable system) is deflation. (the worst way is hyperinflation which is debt repudiation by making the currency worthless). This is the second part of your question about the deflationary spiral. Once debt starts defaulting, the resulting money supply destruction leads to more defaults, and on and on. This is what the Fed is worried about.

The other way a default can happen is to make the money worthless and inflate the debt away. Problem with this is, when all money is created by debt, the debt grows while trying to inflate. This is the expansion in the central bank balance sheet we are seeing. They can't get individual public to take on enough debt to expand the money supply so the Fed is taking on the debt. At some point the debt has to be repudiated. Maybe the Fed will just write it off as some have suggested. Problem with this is it lays bare the argument that we are not monetizing the debt. The argument we are not just printing money goes out the window. So what is the problem with printing new non-debt money to pay off the debt? Congress has the authority to do it. Some people suggest it. I would say it is a more honest approach. It may be what happens some day. But it is inflating the money supply, debasing the existing money supply.

But the crux of the problem is that inflation is a hidden tax. Printing money outright (as opposed to borrowing it with the implied intention that it might actually be paid back some day) is debasing the purchasing power of everyone currently holding the currency. If government prints money directly, they are taking value away from the populace that currently has money and using it for government purposes. It is an obvious tax. Thus the "pretending" that they are borrowing the money and not debasing it. When we create debt because the government overspends and pretend we are going to pay it back some day but have no intention, we might as well be printing non-debt money. Bill Still's and others argument.

The problem with this argument, is that as Denninger suggests, it does not address the real cause of the problem. Government deficit spending. As long as the government does not quit spending more than it is taking in, debt and the interest load that debt created will continually expand till the interest load can not be paid (when it will default).

So our current monetary system is an unsustainable system by its very design, and congress uses it to deficit spend with no limitations other than what the congress critters will restrain themselves.

But why do we use this unsustainable system? Follow the money. It 1. allows our government to spend beyond its means by easy new money creation (while pretending not to debase the money)and 2. it enriches the people closest to and who create the new money, namely the banking system that controls it. There are very large financial reasons the Fed, congress and Wall Street want to keep this unsustainable system going. In a nutshell, it is their gravy train. It is NOT because it is good for the common citizen. It is because it siphons off significant portions of the nations productive wealth into the hands of the few and powerfully connected.

IF debt is actually paid back, fractional reserve monetary system is not net inflationary. BUT, by the nature of the way the system is designed money supply HAS to expand to keep the system solvent to service the interest due. It is a catch 22. It is not inflationary as long as debt is paid back. But to pay back debt also requires to pay back interest. But interest payments require money. But when all new money is created via debt the money supply has to expand to service existing debt. Expanding money supply is inflationary because an increase in money supply debases existing money supply (reduces its purchasing power). It is an unsustainable Ponzi scheme (albeit one that is able to last at least a hundred years). New debt is required to pay off old debt, because debt is how the money supply is increased to service the old debt. Clear as mud? See why they really don't want us to understand how it works? Follow the money. Follow who benefits. Follow who is getting richer and who is getting poorer.

The public has been duped. It is nothing new. Been happening for eons. Or at least since the days the goldsmiths figured out they could write up more warehouse receipts for gold than what gold they actually had in their vaults and let the bogus warehouse receipts for gold trade the same as real gold. Till people wanted their gold.

John