Deflation increases the real burden of nominal debt for indebted governments
the verdict
CONTESTED
contested - evenly split
refutedsupported
the weight of evidence
3 sources for · 1 against
The retrieved evidence presents mixed perspectives, with some sources supporting the theory that deflation increases real debt burdens while a simulation study on government bonds suggests other factors complicate or counter this effect.
Several explanations for the depth of the Great Depression presume that the -30% deflation of 1930-32 was unanticipated. For example, the debt-deflation hypothesis originally put forth by Irving Fisher is based on the notion that unanticipated deflation increases the burden of nominal debt, adversely affecting the banking system and the aggregate economy. Other theories imply on ex ante real interest rates being low during the period, and so it is essential that the deflation was unanticipated. This paper measures inflationary expectations from data on prices, interest rates and money growth in order to investigate whether the deflation could have been anticipated. Current econometric techniques are used to compute expectations implied both by the univariate time series properties of the price level, and by the information contained in nominal interest rates. The major conclusion is that price changes were substantially serially correlated, and so once the deflation began, people expected it to continue. This implies both that the deflation was anticipated, and that real interest rates were very high during the initial phases of the Great Depression. These results call into question the validity of theories that rely on contemporary agents' belief in reflation during the early 1930s, and provide further support for the proposition that monetary contraction was the driving force behind the economic decline.
This paper is intended as an investigation of the trend of real central government debts, considering the relationship between inflation rates and fiscal sustainability. Hyper-inflation would decrease the real government debts drastically, but if it is not the case then price stability is an important element for fiscal sustainability. This paper argues that a government cannot use inflation as a method to reduce the real burden of debts. This result comes from the theoretical reasoning that variability of price changes brings higher nominal interest rates by adding a risk premium to them under uncertain fiscal conditions. We discuss that if nominal interest rates have more than one-for-one effects on the expected inflation rate then high inflation rather increases real debts. Such effects are especially important in Japan where most government debts are issued in fixed nominal terms. This paper also shows asymmetric effects of deflation and inflation on real government debts. In a deflationary economy, nominal interest rates have a zero bound so that real interest rates would be higher with deflation. We also show the fiscal condition quantitatively for cases of Japan’s central government debts, using simulation methods. The recent trend of government debts since 2002 is equivalent to the case of about 1.0% to 1.5% deflation, with 15 trillion yen primary deficits on average. As for the future trend, a primary surplus of about 14 to 25 trillion yen per year would be required
Debt deflation is a theory that recessions and depressions are due to the overall level of debt rising in real value because of deflation, causing people
Debt deflation is a theory that recessions and depressions are due to the overall level of debt rising in real value because of deflation, causing people to default on their consumer loans and mortgages. Bank assets fall because of the defaults and because the value of their collateral falls, leading to a surge in bank insolvencies, a reduction in lending and by extension, a reduction in spending.
Fisher's idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macroeconomic effects.
Building on both the monetary hypothesis of Milton Friedman and Anna Schwartz as well as the debt deflation hypothesis of Irving Fisher, Bernanke developed an alternative way in which the financial crisis affected output. He builds on Fisher's argument that dramatic declines in the price level and nominal incomes lead to increasing real debt burdens, which in turn leads to debtor insolvency, thus leading to lowered aggregate demand and further decline in the price level, which develops into a debt deflation spiral. According to Bernanke a small decline in the price level simply reallocates wealth from debtors to creditors without doing damage to the economy. But when the deflation is severe, falling asset prices along with debtor bankruptcies lead to a decline in the nominal value of assets on bank balance sheets. Banks will react by tightening their credit conditions. That in turn leads to a credit crunch that does serious harm to the economy. A credit crunch lowers…
highlight the role of debt deflation, in which falling prices increased the real burden of debt on households and businesses. In addition to the Keynesian
The causes of the Great Depression in the early 20th century in the United States have been extensively discussed by economists and remain a matter of active debate. They are part of the larger debate about economic crises and recessions. Although the major economic events that took place during the Great Depression are widely agreed upon, the finer week-to-week and month-to-month fluctuations are
Debt…
Everything we examined (4) — 3 independent sources
This check searched the claim as stated. It did not run a separate search for evidence against it.