Averagejoe, Inflation did happen in the past under the gold...

Averagejoe,

Inflation did happen in the past under the gold standard, therefore it is not an unique fiature of a monetary fiat system.

Debt growth does not necessairely cause inflation. As GDP, or income if you prefer, increases so does people's capacity to save in aggregate terms, and with extra savings flowing to the banking system and bond markets higher levels of debt become possible.

By far the most important type of assets by value are financial instruments, whose values are dependent on interest rates, which in real terms have historically averaged 3%, if I am not mistaken.

A bond paying year after year $100.00 would have a value of $5,000.00 at a discount rate of 2% irrespectively of the GDP, while that same bond would have a value of $3,333.33 if the discount rate raised to 3%.

Now, let's imagine that initially the the government debt to GDP ratio reached 100%, the interest payable 3% of GDP, and the total savings of the economy 20% of the GDP. Under this scenario government would command 3%/20% or 15% of all savings with the rest or 75% going into private investors.

Let's imagine now that the interest rate continues at 3% while GDP is growing also at 3%. Under this scenario after one year the government's bill in terms of the pervious year's GDP would be 3% of 103% or 3.09% and total savings 20% of 103% or 20.6% . THIS MEANS that again the government would have ended by commanding 15% of the total savings and the private investors 75%. This is in my opinion what appears to be THE CRUX OF THE MATTER.

In order to see this, lets put GDP growing only at 1%. Under this scenario after one year government's bill would still be 3.9% of GDP but the savings would only be 20.2%, which means that government would be commanding 3.9% of 20.2% or 19.3% of the total savings of the economy. IN SHORT, THE SHARE OF THE TOTAL SAVINGS OF THE ECONOMY REQUIRED TO SERVICE THE
DEBT WOULD BECOME GRADUALLY A ENORMOUS BURDEN


"So people using the example of a property purchased in 1960s' for $5K and now being sold for say $1M although on paper has made multi bagger return on investment would probably cost on average the same amount of time to pay off the principal. However in between paying off the principal, an exponential rise in valuation also equates to exponential rise in income so the rate of debt reduction of that debt principal speeds up. Seems to be a timing issue from what I can see. If a property investor time it incorrectly ie buy at top of short term valuation, the temporary value destruction will take longer to pay back debt principal as income shrinks usually or not grow as fast as property valuation"

The property market tends to growth in value at a rate above that of the nominal interest rates applicable to home loans and peoples' wages tend also to grow with the passing of time, making the service of the loans less stressful.

But in order to determine the net profit or loss, one has to calculate with reference to a single point in time. Let's say I bought a ptroperty in 1970 for X, paid a total interest bill of Y, sold it in 2000 without improvements for Z, and RECEIVED a net income or an IMPUTED INCOME of H (owner occupiers receive an imputed income). Then my profit would be Z + H - X - Y but after having recalcuated those values with reference to, let's say the date that I sold it because payments were made and income received at different points in time.