Refuting the Deflation Scare, Jason Hommel

A reader asks: "Are defaults deflationary? When borrowers default on loans, does not the currency disappear in the same manner that it appeared?"

I answer:

That's the popular thought, they call that "deflation", but it's not what is happening.

When someone borrows money from a bank, that bank creates the money, lends money out, and that money gets spent, and thus, given to someone else. That someone else, the third party, still has the money, or they spend it, giving it to 4th, 5th, and 6th parties, and that money is NEVER destroyed. (more)