My Milton Friedman books on monetarism have yet to be cracked (I’m busy reading other things). This is sad because I’m fairly certain he thought of this particular problem. Right now, the government is trying to inflate (expand the money supply). They are battling against a tremendous contraction in credit (which dominates the money supply). Friedman would, I believe, argue that this is the correct behavior (though he might take issue, one way or another, with the rate of expansion). But, what if there was a complication? What if 50% of mortgages were denominated in euros instead of dollars? Devaluing the dollar, among other things, is an attempt to make debts less burdensome. It is a transfer of wealth from the lenders to the borrowers. But, that doesn’t work if someone is paid in dollars and their debts are in another currency. Now their pay has decreased relative to their debt (at least, initially… when general prices start rising, they’ll probably get a raise, but there can be a significant lag). Devaluing the currency has made their situation worse.

This isn’t just an academic question. This is the situation in Eastern Europe.