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September 08, 2008
Debt-Deflation
Paul Krugman explains the phenomena of debt-deflation:
"As the economist Irving Fisher observed way back in 1933, when highly indebted individuals and businesses get into financial trouble, they usually sell assets and use the proceeds to pay down their debt. What Fisher pointed out, however, was that such selloffs are self-defeating when everyone does it: if everyone tries to sell assets at the same time, the resulting plunge in market prices undermines debtors' financial positions faster than debt can be paid off. So deflation in asset prices can turn into a vicious circle. And one consequence of what he called a "stampede to liquidate" is a severe economic slump. That's what's happening now, with debt deflation made especially ugly by the fact that key financial players are highly leveraged - their assets were mainly bought with borrowed money."
--Mark Price
Posted by Price at September 8, 2008 12:21 PM