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Originally Posted by ASU2003
I just wonder what would happen to our economy if we willed $14 trillion into existence overnight to pay off the debt? How much would prices rise? Imported goods and foreign travelers would get hit hard, but I'm not sure what other repercussions it would have.
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The value of the dollar would plummet, and hyperinflation would indeed be the case. The money supply would spike (due to $14 trillion in new currency in addition to an expected major sell off of the greenback). In many ways, this is the opposite of a deflationary spiral. When prices skyrocket because of a diluted value of currency, wage pressure increases. Local production wants to pay these wages since prices are so high. They want to fill demand because of the money to be made. But the whole thing is unsustainable, as the currency value is shot and prices become out of reach. In the worst-case scenario, the currency would be abandoned altogether.
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And I don't have a problem with deflation. At least until I make more money and have it all in investments. I'm not sure deflation would be as bad as they think, some things just cost too much.
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You should have more of a problem with deflation than with moderate inflation. If deflation gets out of hand, companies cut back production to hold onto their money. Depressed prices mean less profit potential and less reason to produce more. Less production means fewer jobs. Fewer jobs means less spending. Less spending means less demand. Less demand means less reason to produce. It's a vicious cycle.
Deflation is usually a greater risk than moderate inflation, especially during a recession or trough. The last thing you want at these times is a reason for companies to cut back production (falling prices).
The last major deflationary period in the U.S. was during the early years of the Great Depression. It happened because too many people wanted cash (runs on banks/bankruptcies) but the government didn't do anything to make it available (via printing more). So what happened is everyone hoarded what cash they could, boosting the value of it and causing prices to plummet due to dropping demand. Dropping demand shuttered factories.
Surely this isn't something you want. The last deflationary period was during this past recession. Did you have a problem with that one?