Jain, Bagus and Deflation

Some believe that the huge level of debt that has been built up in the global economy will be 'cleansed' away by a deflationary depression. In regard to this concept Jas Jain has written that:

"The worst of the Deflationary Depression phase takes place when the Private Debt begins to liquidate, by force if not by volition. The most damaging interval for the economy takes place when the Consumption Debt... starts declining because it directly affects the demand side, which in turn affects the [level of] employment and creates the snowball effect."

To better understand the 'snowball effect' consider the following example. As one indebted person finds it increasingly difficult to earn an income as the deflationary depression takes hold he will find it hard to pay off his debts. In turn, the person who is owed money will also find it difficult to pay off the debts that he owes. And so on and so forth.

Philipp Bagus has written an interesting article in which he mentions some well known advocates of free markets who would, despite this preference, be willing to see some sort of governmental intervention if a genuine deflation (i.e. a contraction of the supply of money) were to occur.

"Curiously, with these interventions they want to prevent the liberating deflation, i.e., the free market reaction to an abstention of all government interventions into the monetary system, especially the fractional reserve banks’ privileges and amnesty. They fail to see that deflation is a fast, smooth, direct, and ethical way to a sound financial system."