On the Inflation-Debt-Bubble “Vicious Cycle” in Times of Evolving Money—A Memorandum of Forward-Looking Lessons

Abstract

The global financial crisis (2008–2009) represents a notable example of a generally unpredicted crisis in economic history. Nevertheless, it presented features comparable to almost any previous (monetarily related) crisis episode. For instance, it was characterized by a “vicious cycle” made by over-issued money and/or over-granted loans nourishing private and public indebtedness and—eventually—affecting asset prices with stable consumer price indexes. While the post-COVID-19 inflation presents different characteristics because of being a crisis “exogenous” to the economic system, the present Communication claims that future crises (if endogenous to the economic system) are likely to follow usual patterns. The approach used to analyse the transmission channels contributing to economic and financial crises is theoretical. Nevertheless, the present Communication still contains statistical evidence in support of the predictability of such crises as soon as their usual dynamics is understood. The statistical analysis carried out is rather descriptive than causal in nature. Finally, this Communication reminds that “typical” economic and financial crises in advanced economies behave along some consolidated patterns. At their origins, there are mostly over-issued money and/or over-granted loans by central and/or commercial banks financing private and public debt. This phenomenon exacerbates risks in the economy and—while it incentivises money issuers and credit granters in good times to over-issue money and over-grant credits to earn extra-profits—it over-exposes economic agents to the risk of (even greater) economic losses in negative times. As soon as the bubble to be defined as over-proportionally grown prices of specific assets due to over-issued money and over-granted credits pops and funds are rapidly divested, prices collapse and drive the economy into a severe crisis.