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Thanks Jack for your discussion of Japan. The unwillingness to allow companies (and especially banks to fail) makes sense as a driving force to force their economy into a deflationary cycle, where there are no willing buyers because prices are artificially inflated. However, now I wonder if we're really so different after all, because I doubt that the government would really allow Freddie Mac and Fannie Mae to fail if defaults and personal bankruptcies put them in danger.

I contest that later part of this statement. Debt is a legitmate tool in creating wealth. Its called leverage and can be a very powerful tool in creating wealth. I won't argue that there are inflationary pressures brought on by government debt. The flip side is that government debt in well developed markets is a safe heaven for money and thus preserves, hedges against, deflation.

I believe that there is a balance point for government debt in which we cycle around. There needs to be a certain amount of safe government debt to grease the wheels of private industry. Too much and interest rates rise because money becomes too cheap.

On the other hand, given the fact that the government deficits seem to be here to stay, it seems that you would agree that inflation is part of the forseeable future. Would you agree that it would take an unparalleled massive disaster then to create a lengthy period of deflation, rather than just a cyclical turnaround?
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