What Is Debt Deflation?

Debt-based deflation means that the two factors of excessive debt and deflation of economic entities will interact and strengthen each other, leading to economic recession and even severe depression.

Debt deflation

Debt-based deflation means that the two factors of excessive debt and deflation of economic entities will interact and strengthen each other, leading to economic recession and even severe depression.

Chinese name

Debt deflation

put forward

1933

Theory

Deflation "

as a result of

Leading to a recession or even a severe depression

the difference

Unlike Keynes's theory of effective demand, Fisher researched deflation from the perspective of supply and connected with the economic cycle. He put forward the "debt-deflation" theory in 1933 through the study of the world economic crisis in the 1930s . He believes that excessive corporate debt was the main cause of the Great Depression in the 1930s. During the economic boom, entrepreneurs will be overly indebted to pursue more profits, and when the economic situation deteriorates, entrepreneurs will lower prices and dump commodities in order to pay off debts, leading to falling prices and deflation. The emergence of deflation will also reduce corporate profits, stagnate production and increase unemployment. And the increase of unemployment will make people's emotions low, pessimism, loss of confidence in the economy and life, and more willingness to hold more money. This behavior of residents and enterprises will reduce the speed of currency circulation. And the decrease in profits due to falling prices and the rise in real interest rates mean that the real debt of enterprises will expand, making lenders unwilling to borrow and borrowers unwilling to borrow. Excessive debt and deflation will interact. Due to the existence of excessive debt, deflation will occur during the transition of the economic cycle. In turn, deflation caused by debt will affect the debt, and the result will be more debt. The more you have to sell at a lower price, the more your own assets are devalued at a lower price, and the more your assets are devalued, the heavier the debt becomes. In the end, there will be a crisis of bankruptcy and bankruptcy. The theory actually regards the process of deflation as the process of the destruction of commercial credit and the crisis caused by the banking industry.