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Question about Debt Repudiation and Fiat Currency

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linguae posted on Tue, Jan 31 2012 1:00 AM

Hello.  This is my first post on the forums.  I have been reading the articles on this site for over five years now, and I have also been keeping up with libertarian and anarcho-capitalist news for about the same time.  I am familiar with the basics of Austrian economics and have read some Austrian works, although I'm still not familiar with everything yet, and so my economic understanding is incomplete.

I have a question regarding debt repudiation and the effects that it would have on fiat currency.  I am aware that the value of fiat currency is linked to two important factors: the issuer's ability to prudently use its printing presses, and the issuer's ability to pay off its debts.  For example, part of the reason why the Japanese yen is so strong today (relative to other currencies) is that the Bank of Japan has kept relatively tight control of its printing press compared to the US Federal Reserve and other central banks, even though Japan's debt as a percentage of the GDP is far higher than the issuers of other currencies' GDPs are.  With this in mind, suppose a nation decides to repudiate its debt.  What would happen to that nation's fiat currency?  Would the currency become virtually worthless since the nation has shown that it cannot pay off its debts?  Or would the resulting devaluation, if any, not be as drastic as compared to running the printing presses to pay off the debt (which results in hyperinflation)?

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