Debt crises usually end with massive money printing and inflation, as in Weimar Germany in the 1920's, or with deflation and depression as in the US and Europe in the 1930's.
inflating away troublesome debts seems to be the preferred option of the Nobel-prize-winning economists, but how exactly is that to be accomplished?
turn of the 21st Century, it was easy. Governments dropped interest rates and folks
borrowed, driving up the money supply and creating numerous housing bubbles
as a consequence.
But now most people are either not creditworthy or want to deleverage, as is evident from the more than $1 trillion in excess reserves that US banks have on deposit with the Fed.
That's why governments have engaged in stimulus spending, which
has generated thousands of projects for bridge repair, road improvement, and alternative energy that were unaffordable in good times.
The outcome has been investments of questionable value undertaken at
inflated prices by contractors with good connections accomplished at the cost of government-crippling debt.
So is continued massive stimulus spending a political option? Evidently not, as the present vogue for austerity makes clear.
How about keeping a tight rein on
government spending while cutting taxes and covering deficits by money
printing? That looks to be the best option, but for governments, giving up tax revenue is, well, giving
up. The bureaucracy will fight relentlessly any such a plan, and
remember how many votes the "public service" have.
So Japanesification of Western economies is perhaps what is in store, with chronic
though limited deficit spending, continuously growing public debt, and gradually declining real
incomes as food, and energy prices rise and taxes are ratcheted up in response to rising costs of debt service and of pensions and healthcare for an aging population.This is the deflation-inflation co-existence scenario. Money supply rising somewhat faster than the economy, real incomes and the cost of manufactured goods falling due to global wage arbitrage, automation and computerization, and house prices falling, despite low interest rates, due to declining disposable income.
Or, for something entirely new, governments might try helicopter money: everybody to get a government
cheque, say $100,000, on condition that they apply it first to the
payment of debts, mortgages, etc. -- this is the debt Jubilee advocated
by Steve Keen. It would be inflationary, but it would slash the debt load, and create conditions for a new debt-based round of economic expansion.