The Two Release Valves

Debt Reduction

Two Pathways

1️⃣

Default / Restructuring

If debt is foreign owned

Debt is written down or not paid

Immediate effects:

  • Credit contracts
  • Spending falls
  • Asset prices drop
  • Banks pull back

👉 Deflationary at first

Money disappears when loans are written off

2️⃣

Inflation / Monetization

If debt is domestically owned

Debt is paid back in weaker money

Immediate effects:

  • Money supply expands
  • Real value of debt falls
  • Nominal incomes rise
  • Savers lose purchasing power

👉 Inflationary by design

Central banks print to prevent default