We discussed in an earlier article, how excess demand drives profit down the supply chain into industries with lack of capacity. This in turn can drive investment to increase the supply in those industries just like oil or semiconductors.
There is a second path. Suppliers may decide they are happy with the status quo. The extra profit can be invested somewhere else. There has always been a product that attracts this kind of investment. This is the share of the whole.
By nature this does not exist in modern economies. Bitcoin was one that tried to replicate the gold economy. It had limited success. Central banks are rarely interested in deflation. They usually play against such policies.
Why? The answer is simple. The US Constitution starts with We, and many other constitutions removed the power over the free will of citizens. Deflation effectively devalues labor over money supplies. Some economies can handle this with a limit, when the retired generations can buy more due to productivity growth. Eventually the productive generations retire as well smoothening the interest rate differences. The debt grows within a nation or economy in this case.
That kind of deflationary pressure creates a conflict, when money piles up abroad. Growing foreign cash reserves try to influence and buy more. The deflation that removes money from the system to generate a race to build assets does not have a match. It devalues the labor that would work for it. It may have a transient effect in this case as well. Foreign reserves may attract less productive workforce with better wages. This pressure may make an economy more efficient.
There is another problem that investing profits elsewhere may generate. When oil profits build up, they may attract investors interested in a share of the whole like 0.5% not the monetary value. Oil exports build such reserves, but if it is not invested in increasing that capacity the only goal becomes that 0.5% of the whole. Money becomes like the land of a feudal warlord. This often has the side effect of conflicts to get bigger or smaller share of a pile that does not exist.
The side effect of excess monetary supply is oftentimes conflict as a result. The benefactors are scarce, the imbalances are high, and the pressure on changing shares becomes a disruptor of a society with oligopolies. Commodity exports is a destabilizing factor with statistical confidence, whether it is Africa, Middle East, or North Asia.
The argument is then to remove the adjective of debtor from a nation. Nations cannot really be debtors. The decades when statistically this applied to some countries, they were infected with high levels of autocracy, imbalances, or oligopolies. The same books talking about debtor nations also admit that the US was not a victim of such issues in the 1980s due to its openness. What happens is rather that the foreign currency debt of special interests is written on a government's accounts.
Will a younger generation work more to pay off an older generation's debt? It is unikely, because it is impossible. Labor standards and management science already optimized the productivity of modern nations. What is more likely that the de debt will devalue a currency, or it will devalue the nation's assets if it is in a foreign currency.
This may even be useful for newer generations, if they use their civil rights wisely. Free capital markets can unblock the path of new businesses quickly. Trust can build from alumni, so that their technology can spread faster. Interest rates are good indicators. If they are high, the older generation's assets are too expensive. It is better to build yours. If interests are low, it is easier to get old and new compete. Customers win.