You don’t have to be a bank to inflate or deflate.

Jimmy Songwriter sitting at the bar has a flash of inspiration and quickly writes down a new song.  His somewhat inebriated friend, Joey Songsinger hears the song once and enthusiastically offers to buy it for a price equal to “whatever it takes – even if it’s the whole income of the United States”.   Jimmy Songwriter, as a joke and to teach his friend a lesson, tells Joey he will sell the song for $13 Trillion and that he would finance it and Joey signs a note to Jimmy for $13 Trillion.  This single transaction goes on record as the highest price ever paid for a song… drives up the average price of all songs by a factor of thousands…and doubles nominal GDP  and the average price of all goods and services in the United States.  The next year at Christmas, when the note comes due, Jimmy sends his friend Joey an email offering to “settle” the note for $500.  Joey gladly agrees.  After all they both knew that’s what the song was truly worth …and what Joey could pay.  That year, nominal GDP falls from the previously inflated level by roughly 50% with a 50% deflation in the price level as there are no more songs sold (and financed) for such exorbitant prices.

Notice:

1. We didn’t need banks or the Federal Reserve to create the price inflation or the price deflation which followed.  All we needed was debt creation and then the subsequent de-leveraging and return to “normalcy”.

2. Neither Jimmy nor Joey had the legal power to “print” or coin “money” and they did not need it to affect the price level.

3. Most importantly, what Jimmy and Joey do can offset and overwhelm whatever the Federal Reserve and the banks do.