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Date: 2008-07-05 06:20 pm (UTC)But we're not done. That lending continues; less and less real value is added, until the amount of added real economic value becomes negative; the more money you lend, even if you get paid back, the more damage you do to the actual constant-value economy. The housing boom is an exact example of this type of inflationary blow-off.
And then you see the interest payments not being made anymore, and instead of monetary inflation, you see the destruction of money and money-like instruments (such as debt); willingness to lend evaporates (as do a large number of banks), the money supply contracts sharply (monetary deflation), and you see a deflationary crash. These happen in regular cycles. In the short form, it's just referred to as the economic cycle; in the longer form - there is a history of 80-year-ish meta-cycle of cycles. The last such deflationary blowoff was the Great Depression; the previous was the Panic of 1870, and so on back in time.
If this cycle is repeating, we are at that point in this cycle, and we are in an extremely dangerous position.
Now, the twofold animating idea of the gold standard is that gold is "true money" as recognised throughout history (which is a superstition, as far as I'm concerned), and, more usefully, that by tying money supply to a fixed-quantity item at a fixed rate, you retard monetary inflation and limit the amount of possible monetary expansion, so that as an economy produces more, you see price deflation throughout, and no monetary inflation.
It's lovely theory but it didn't work before, so I don't know why it'd work now, and it carries with it a lot of problems I don't have time to detail now. But that should get you started. ^_^