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Pittsburg, Kansas | Yes, the default correction to a credit expansion is deflation. Inflation (of the money supply via credit expansion) then deflation. Inflation then deflation. Excessive credit (checking account currency created when a loan is taken out at a commercial bank) expansion creating a boom, then ultimately a bust when debts become unpayable. The boom is exacerbated by excessive credit creation (which is how most of our currency is created - by commercial banks as a loan taken out and newly created checking account currency shows up in our checking account balance) when the boom times makes credit easy to obtain, then when times get tough and credit contracts (money creation stops) velocity slows and as people tighten their belts and try to lessen their debt burden money supply contracts (money is created when loans are taken out and is destroyed as the principal portion of the loan is paid off). So the combination of money supply contraction and slowing velocity causes the deflation cycle.
You are correct, in my opinion, that deflation is the default to correct a credit expansion phase. The only other alternative is the destruction of the currency if the credit expansion is continued until the point the currency is debased so much people are no longer willing to hold the currency for any length of time because it is loosing its purchasing power so rapidly.
John
Edited by John Burns 1/29/2016 21:06
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John, another look at where we have come to
