Comment: When i say liquidate bad debt, what i mean is:

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When i say liquidate bad debt, what i mean is:

If you lend me $6000 in a fractional reserve system, then there is $6000 more dollars then there was in the money supply. The problem is that i have to get that money from somewhere else in the economy to pay you back with interest. If i earn borrowed dollars to pay you back, that person who payed me in borrowed dollars now has to pay back his lender, with money from somewhere else. In this system everyone gets overextended, and the money supply gets flooded with credit. Eventually the bad investments liquidate, and the money supply shrinks. But the more lending there is the more we are able to prop up bad investments. This is what they mean by bubble. If the credit markets cant sustain the bubble you have a burst and all the money that was put into that bubble disappears.

This results in deflation. Deflation is not a way to deal with your bad debt, it is its inevitable result.