Pittsburg, Kansas | A 50% devaluation would be highly inflationary. The spoils of inflation goes to the early users of the new money supply. When new money first hits the economy, assuming the population is not expecting inflation and protecting themselves from it, the first users get to spend it at full value. As the money supply circulates through the economy, since there is more of it compared to the supply of goods, prices will start rising. At some point it reaches equilibrium again. If there is a new infusion of money, the same process repeats. The velocity determines how quickly the equilibrium is reached. Right now money velocity is extremely low so the effects of inflation (rising prices) are minimal. Velocity can pick up very quickly and will catch most by surprise. It will not be expected when it hits.
It would devalue he banks assets, that is the downside. The much more important upside is it would make loans easier to pay off possibly keeping foreclosures to a manageable level. If too many default and the banks are insolvent (which a lot are now if assets were marked to market value instead of to fantasy value), game over. Better to take a hit and keep going than end the game. John
Edited by John Burns 9/8/2010 01:41
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