A serious bout of inflation is rarely caused by normal business activity, such as commercial bank lending and private debt.
In almost every case that I have studied, a very serious monetary inflation is triggered by excessive government debt obligations, and not private debt, that can no longer be adequately serviced by a productive real economy and domestic taxation.
That unserviceable debt becomes 'monetized' and a serious inflation results. It is a form of debt default.
Devaluation of a currency is a form of inflation which specifically addresses external debt obligations, as well as default on bonds which is a form of selective national bankruptcy.
The reason that the output gap is no sure barrier to this type of inflation is that it ironically serves to feed it in the presence of profligate government spending, since it dampens tax revenues and domestic GDP.
Private debt bubbles, asset bubbles, stock bubbles all seem to be the symptoms, the side effects, of an over easy monetary policy from a central monetary authority. In some instances they have been caused by exogenous events, even in the face of a hard monetary standard, by events such as a precipitous decline of the population from disease, or a sudden influx of a new wealth from discovery, such as the influx of silver and gold to Spain from the New World.
But the notion that banks must always lend to create inflation, or employment must be at robust levels, absolutely flies in the face of all historical experience.
And it does raise the issue, despite his protestations of innocence, impotence, and confusion, that Fed chairman Greenspan and the Federal Reserve itself, owns a unique culpability in the creation of several bubbles, from tech to housing, and the eventual outcome.
