Since money is no longer backed by gold or other real assets, governments can, in principle, borrow an unlimited number of times. In recent decades, governments have also made extensive use of deficit financing. This is how the welfare state is financed, the promises of truth and prosperity. And after each crisis, which has to be dealt with with new loans, the public debt continues to grow.
Central banks support the state in this. In recent years, those responsible for monetary policy have intervened so actively in the work of markets that it is mainly necessary to talk about the financing of the monetary state. And this is not part of the official mandate of the Fed or the ECB.
The big problem with this policy is that no state has yet succeeded in achieving lasting prosperity by constantly printing new money. According to modern monetary theory, this can go on for a long time. Ultimately, the gradual depreciation of money and the decline in the confidence of citizens, taxpayers, depositors and investors require at some point a reorganization of the entire monetary system.
What sounds like a formal process has serious implications for owners of financial assets. Whatever the name of this reorganization (reduction of the money supply, currency reform, money conversion, etc.), in the end we are talking about the fact that the state is significantly reducing its costs.
But in a purely credit system, one person's debt is another's credit. This is also called a zero-sum game. After all, there is a lender for every borrower.
The government can reduce its debt burden in a variety of ways, especially in order to regain confidence and strengthen its capacity to act. First, inflation lowers the real value of liabilities. Inflation increases nominal economic growth. The government collects more taxes and therefore can more easily meet the existing debt. However, rising interest rates also increase the cost of government funding.
Therefore, high inflation and low interest rates are ideal scenarios for debt relief, even if it can only be artificially created through monetary policy. Indeed, with a monetary policy that is truly focused on monetary stability, central banks must raise interest rates in parallel with inflation. They don't. However, the market already foresees such a development of events, increasing the effective rates on bonds.
At the next stage, the state can simply write off existing debts or postpone their repayment for the future. This is exactly what happened, for example, in Greece during the euro crisis. Lenders had to give up their claims against the state. And if these creditors include insurance companies, pension funds or banks, then citizens who have accumulated claims against these institutions usually suffer as well. This could be interest or capital losses on insurance policies, pensions, securities, or even bank deposits.