Why do falling prices hurt debtors?Why isn't there an “ideal value” for a given currency?What benefits does Bitcoin (i.e. cryptocurrency) offer?Why didn't the money printing by the US Federal Reserve since 2008 lead to inflation?Why does deflation cause banks to increase their interest rates?Why is deflation not considered the opposite of inflation?Why does falling global bond yields signal coming deflationWhy not just print money to combat deflation?Deflation and positive real interest rateWhy do central banks print money?Currencies fixed to gold
Accidentally leaked the solution to an assignment, what to do now? (I'm the prof)
Why do I get two different answers for this counting problem?
LaTeX closing $ signs makes cursor jump
Why can't I see bouncing of a switch on an oscilloscope?
Pattern match does not work in bash script
How does one intimidate enemies without having the capacity for violence?
"You are your self first supporter", a more proper way to say it
Arthur Somervell: 1000 Exercises - Meaning of this notation
Is it possible to do 50 km distance without any previous training?
How is the claim "I am in New York only if I am in America" the same as "If I am in New York, then I am in America?
Theorems that impeded progress
Fencing style for blades that can attack from a distance
Did Shadowfax go to Valinor?
Why was the small council so happy for Tyrion to become the Master of Coin?
How to format long polynomial?
How did the USSR manage to innovate in an environment characterized by government censorship and high bureaucracy?
Do I have a twin with permutated remainders?
can i play a electric guitar through a bass amp?
What do you call a Matrix-like slowdown and camera movement effect?
What's the output of a record cartridge playing an out-of-speed record
Voyeurism but not really
Approximately how much travel time was saved by the opening of the Suez Canal in 1869?
Schoenfled Residua test shows proportionality hazard assumptions holds but Kaplan-Meier plots intersect
Why are 150k or 200k jobs considered good when there are 300k+ births a month?
Why do falling prices hurt debtors?
Why isn't there an “ideal value” for a given currency?What benefits does Bitcoin (i.e. cryptocurrency) offer?Why didn't the money printing by the US Federal Reserve since 2008 lead to inflation?Why does deflation cause banks to increase their interest rates?Why is deflation not considered the opposite of inflation?Why does falling global bond yields signal coming deflationWhy not just print money to combat deflation?Deflation and positive real interest rateWhy do central banks print money?Currencies fixed to gold
$begingroup$
The argument goes that if there is deflation, the real interest rate rises, and so the burden on debtors increase (Paul Krugman says so in https://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/).
I understand why the real rate rises, since $r = i - pi$, but why does that mean there's more of a "burden" on debtors?
If I take out a loan for 1000 dollars today, and have to pay it back a year from now, why would it affect me negatively if suddenly everything became cheaper? Sure, the money I'd be paying back (1000 dollars + interest) is "worth more", in the sense of being able to buy more stuff, but ... so what? Those 1000 dollars + interest had to be paid back no matter what. Who cares if its "worth more"? It's not my money anyways, and is due to be paid back? How exactly has my "burden" increased?
deflation
edited 4 hours ago
Brian Romanchuk
3,8291316
asked 6 hours ago
KastrupKastrup
111
New contributor
Kastrup is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
$endgroup$
add a comment |
$begingroup$
The argument goes that if there is deflation, the real interest rate rises, and so the burden on debtors increase (Paul Krugman says so in https://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/).
I understand why the real rate rises, since $r = i - pi$, but why does that mean there's more of a "burden" on debtors?
If I take out a loan for 1000 dollars today, and have to pay it back a year from now, why would it affect me negatively if suddenly everything became cheaper? Sure, the money I'd be paying back (1000 dollars + interest) is "worth more", in the sense of being able to buy more stuff, but ... so what? Those 1000 dollars + interest had to be paid back no matter what. Who cares if its "worth more"? It's not my money anyways, and is due to be paid back? How exactly has my "burden" increased?
deflation
edited 4 hours ago
Brian Romanchuk
3,8291316
asked 6 hours ago
KastrupKastrup
111
New contributor
Kastrup is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
$endgroup$
add a comment |
$begingroup$
The argument goes that if there is deflation, the real interest rate rises, and so the burden on debtors increase (Paul Krugman says so in https://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/).
I understand why the real rate rises, since $r = i - pi$, but why does that mean there's more of a "burden" on debtors?
If I take out a loan for 1000 dollars today, and have to pay it back a year from now, why would it affect me negatively if suddenly everything became cheaper? Sure, the money I'd be paying back (1000 dollars + interest) is "worth more", in the sense of being able to buy more stuff, but ... so what? Those 1000 dollars + interest had to be paid back no matter what. Who cares if its "worth more"? It's not my money anyways, and is due to be paid back? How exactly has my "burden" increased?
deflation
edited 4 hours ago
Brian Romanchuk
3,8291316
asked 6 hours ago
KastrupKastrup
111
New contributor
Kastrup is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
$endgroup$
The argument goes that if there is deflation, the real interest rate rises, and so the burden on debtors increase (Paul Krugman says so in https://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/).
I understand why the real rate rises, since $r = i - pi$, but why does that mean there's more of a "burden" on debtors?
If I take out a loan for 1000 dollars today, and have to pay it back a year from now, why would it affect me negatively if suddenly everything became cheaper? Sure, the money I'd be paying back (1000 dollars + interest) is "worth more", in the sense of being able to buy more stuff, but ... so what? Those 1000 dollars + interest had to be paid back no matter what. Who cares if its "worth more"? It's not my money anyways, and is due to be paid back? How exactly has my "burden" increased?
deflation
deflation
edited 4 hours ago
Brian Romanchuk
3,8291316
asked 6 hours ago
KastrupKastrup
111
New contributor
Kastrup is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
edited 4 hours ago
Brian Romanchuk
3,8291316
asked 6 hours ago
KastrupKastrup
111
New contributor
Kastrup is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
edited 4 hours ago
Brian Romanchuk
3,8291316
edited 4 hours ago
Brian Romanchuk
3,8291316
edited 4 hours ago
Brian Romanchuk
3,8291316
3,8291316
asked 6 hours ago
KastrupKastrup
111
New contributor
Kastrup is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
asked 6 hours ago
KastrupKastrup
111
asked 6 hours ago
KastrupKastrup
111
111
New contributor
Kastrup is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
New contributor
Kastrup is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
Kastrup is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
add a comment |
add a comment |
1 Answer
1
active
oldest
votes
$begingroup$
If the borrower is a firm, lower prices means your output is selling for less, so you need to sell more units in order to repay the debt (assuming a constant profit margin).
For an individual, the buried assumption is that wages are also falling in the deflation. In which case, the debt is increasing relative to your wages. However, if your wages have not fallen, falling prices will make it easier for you to repay the debt (you can consume the same amount, and have more money left over to repay debt).
It makes more sense at the macro level, as deflation is normally associated with lower growth and a higher unemployment rate.
answered 4 hours ago
Brian RomanchukBrian Romanchuk
3,8291316
$endgroup$
$begingroup$
The same article by Krugman mentions that wages don't fall due to downwards rigidity, so that can't be the buried assumption (at least not his).
$endgroup$
– Kastrup
2 hours ago
$begingroup$
@Kastrup Krugman is not universally acclaimed for his consistent reasoning.
$endgroup$
– chrylis
2 hours ago
$begingroup$
Krugman is not making both these arguments, so not sure why he should be accused of being inconsistent. He's only inconsistent if he agrees with the argument by Brian. And either way, I still don't understand the argument. Even if wages do fall, since prices are falling as well, my real wage may have increased (which would be especially true if my wage shows greater rigidity than the prices, as one might expect), so how could that possibly increase my debt burden?
$endgroup$
– Kastrup
1 hour ago
$begingroup$
The burden increase is the rise in the ratio of debt to income. Also, I don’t think Krugman’s argument is what you think. The rigidity means that there is a need for mass unemployment to get a fall in wages, as opposed to less effort needed for inflation. That is, wages do fall, and you need a lot of unemployment to get there. He’s not particularly clear on that front.
$endgroup$
– Brian Romanchuk
33 mins ago
add a comment |
Your Answer
StackExchange.ifUsing("editor", function ()
return StackExchange.using("mathjaxEditing", function ()
StackExchange.MarkdownEditor.creationCallbacks.add(function (editor, postfix)
StackExchange.mathjaxEditing.prepareWmdForMathJax(editor, postfix, [["$", "$"], ["\\(","\\)"]]);
);
);
, "mathjax-editing");
StackExchange.ready(function()
var channelOptions =
tags: "".split(" "),
id: "591"
;
initTagRenderer("".split(" "), "".split(" "), channelOptions);
StackExchange.using("externalEditor", function()
// Have to fire editor after snippets, if snippets enabled
if (StackExchange.settings.snippets.snippetsEnabled)
StackExchange.using("snippets", function()
createEditor();
);
else
createEditor();
);
function createEditor()
StackExchange.prepareEditor(
heartbeatType: 'answer',
autoActivateHeartbeat: false,
convertImagesToLinks: false,
noModals: true,
showLowRepImageUploadWarning: true,
reputationToPostImages: null,
bindNavPrevention: true,
postfix: "",
imageUploader:
brandingHtml: "Powered by u003ca class="icon-imgur-white" href="https://imgur.com/"u003eu003c/au003e",
contentPolicyHtml: "User contributions licensed under u003ca href="https://creativecommons.org/licenses/by-sa/3.0/"u003ecc by-sa 3.0 with attribution requiredu003c/au003e u003ca href="https://stackoverflow.com/legal/content-policy"u003e(content policy)u003c/au003e",
allowUrls: true
,
noCode: true, onDemand: true,
discardSelector: ".discard-answer"
,immediatelyShowMarkdownHelp:true
);
);
Kastrup is a new contributor. Be nice, and check out our Code of Conduct.
Sign up or log in
StackExchange.ready(function ()
StackExchange.helpers.onClickDraftSave('#login-link');
);
Sign up using Google
Sign up using Facebook
Sign up using Email and Password
Post as a guest
Required, but never shown
StackExchange.ready(
function ()
StackExchange.openid.initPostLogin('.new-post-login', 'https%3a%2f%2feconomics.stackexchange.com%2fquestions%2f27662%2fwhy-do-falling-prices-hurt-debtors%23new-answer', 'question_page');
);
Post as a guest
Required, but never shown
1 Answer
1
active
oldest
votes
1 Answer
1
active
oldest
votes
active
oldest
votes
active
oldest
votes
$begingroup$
If the borrower is a firm, lower prices means your output is selling for less, so you need to sell more units in order to repay the debt (assuming a constant profit margin).
For an individual, the buried assumption is that wages are also falling in the deflation. In which case, the debt is increasing relative to your wages. However, if your wages have not fallen, falling prices will make it easier for you to repay the debt (you can consume the same amount, and have more money left over to repay debt).
It makes more sense at the macro level, as deflation is normally associated with lower growth and a higher unemployment rate.
answered 4 hours ago
Brian RomanchukBrian Romanchuk
3,8291316
$endgroup$
$begingroup$
The same article by Krugman mentions that wages don't fall due to downwards rigidity, so that can't be the buried assumption (at least not his).
$endgroup$
– Kastrup
2 hours ago
$begingroup$
@Kastrup Krugman is not universally acclaimed for his consistent reasoning.
$endgroup$
– chrylis
2 hours ago
$begingroup$
Krugman is not making both these arguments, so not sure why he should be accused of being inconsistent. He's only inconsistent if he agrees with the argument by Brian. And either way, I still don't understand the argument. Even if wages do fall, since prices are falling as well, my real wage may have increased (which would be especially true if my wage shows greater rigidity than the prices, as one might expect), so how could that possibly increase my debt burden?
$endgroup$
– Kastrup
1 hour ago
$begingroup$
The burden increase is the rise in the ratio of debt to income. Also, I don’t think Krugman’s argument is what you think. The rigidity means that there is a need for mass unemployment to get a fall in wages, as opposed to less effort needed for inflation. That is, wages do fall, and you need a lot of unemployment to get there. He’s not particularly clear on that front.
$endgroup$
– Brian Romanchuk
33 mins ago
add a comment |
$begingroup$
If the borrower is a firm, lower prices means your output is selling for less, so you need to sell more units in order to repay the debt (assuming a constant profit margin).
For an individual, the buried assumption is that wages are also falling in the deflation. In which case, the debt is increasing relative to your wages. However, if your wages have not fallen, falling prices will make it easier for you to repay the debt (you can consume the same amount, and have more money left over to repay debt).
It makes more sense at the macro level, as deflation is normally associated with lower growth and a higher unemployment rate.
answered 4 hours ago
Brian RomanchukBrian Romanchuk
3,8291316
$endgroup$
$begingroup$
The same article by Krugman mentions that wages don't fall due to downwards rigidity, so that can't be the buried assumption (at least not his).
$endgroup$
– Kastrup
2 hours ago
$begingroup$
@Kastrup Krugman is not universally acclaimed for his consistent reasoning.
$endgroup$
– chrylis
2 hours ago
$begingroup$
Krugman is not making both these arguments, so not sure why he should be accused of being inconsistent. He's only inconsistent if he agrees with the argument by Brian. And either way, I still don't understand the argument. Even if wages do fall, since prices are falling as well, my real wage may have increased (which would be especially true if my wage shows greater rigidity than the prices, as one might expect), so how could that possibly increase my debt burden?
$endgroup$
– Kastrup
1 hour ago
$begingroup$
The burden increase is the rise in the ratio of debt to income. Also, I don’t think Krugman’s argument is what you think. The rigidity means that there is a need for mass unemployment to get a fall in wages, as opposed to less effort needed for inflation. That is, wages do fall, and you need a lot of unemployment to get there. He’s not particularly clear on that front.
$endgroup$
– Brian Romanchuk
33 mins ago
add a comment |
$begingroup$
If the borrower is a firm, lower prices means your output is selling for less, so you need to sell more units in order to repay the debt (assuming a constant profit margin).
For an individual, the buried assumption is that wages are also falling in the deflation. In which case, the debt is increasing relative to your wages. However, if your wages have not fallen, falling prices will make it easier for you to repay the debt (you can consume the same amount, and have more money left over to repay debt).
It makes more sense at the macro level, as deflation is normally associated with lower growth and a higher unemployment rate.
answered 4 hours ago
Brian RomanchukBrian Romanchuk
3,8291316
$endgroup$
If the borrower is a firm, lower prices means your output is selling for less, so you need to sell more units in order to repay the debt (assuming a constant profit margin).
For an individual, the buried assumption is that wages are also falling in the deflation. In which case, the debt is increasing relative to your wages. However, if your wages have not fallen, falling prices will make it easier for you to repay the debt (you can consume the same amount, and have more money left over to repay debt).
It makes more sense at the macro level, as deflation is normally associated with lower growth and a higher unemployment rate.
answered 4 hours ago
Brian RomanchukBrian Romanchuk
3,8291316
answered 4 hours ago
Brian RomanchukBrian Romanchuk
3,8291316
answered 4 hours ago
Brian RomanchukBrian Romanchuk
3,8291316
answered 4 hours ago
Brian RomanchukBrian Romanchuk
3,8291316
3,8291316
$begingroup$
The same article by Krugman mentions that wages don't fall due to downwards rigidity, so that can't be the buried assumption (at least not his).
$endgroup$
– Kastrup
2 hours ago
$begingroup$
@Kastrup Krugman is not universally acclaimed for his consistent reasoning.
$endgroup$
– chrylis
2 hours ago
$begingroup$
Krugman is not making both these arguments, so not sure why he should be accused of being inconsistent. He's only inconsistent if he agrees with the argument by Brian. And either way, I still don't understand the argument. Even if wages do fall, since prices are falling as well, my real wage may have increased (which would be especially true if my wage shows greater rigidity than the prices, as one might expect), so how could that possibly increase my debt burden?
$endgroup$
– Kastrup
1 hour ago
$begingroup$
The burden increase is the rise in the ratio of debt to income. Also, I don’t think Krugman’s argument is what you think. The rigidity means that there is a need for mass unemployment to get a fall in wages, as opposed to less effort needed for inflation. That is, wages do fall, and you need a lot of unemployment to get there. He’s not particularly clear on that front.
$endgroup$
– Brian Romanchuk
33 mins ago
add a comment |
$begingroup$
The same article by Krugman mentions that wages don't fall due to downwards rigidity, so that can't be the buried assumption (at least not his).
$endgroup$
– Kastrup
2 hours ago
$begingroup$
@Kastrup Krugman is not universally acclaimed for his consistent reasoning.
$endgroup$
– chrylis
2 hours ago
$begingroup$
Krugman is not making both these arguments, so not sure why he should be accused of being inconsistent. He's only inconsistent if he agrees with the argument by Brian. And either way, I still don't understand the argument. Even if wages do fall, since prices are falling as well, my real wage may have increased (which would be especially true if my wage shows greater rigidity than the prices, as one might expect), so how could that possibly increase my debt burden?
$endgroup$
– Kastrup
1 hour ago
$begingroup$
The burden increase is the rise in the ratio of debt to income. Also, I don’t think Krugman’s argument is what you think. The rigidity means that there is a need for mass unemployment to get a fall in wages, as opposed to less effort needed for inflation. That is, wages do fall, and you need a lot of unemployment to get there. He’s not particularly clear on that front.
$endgroup$
– Brian Romanchuk
33 mins ago
$begingroup$
The same article by Krugman mentions that wages don't fall due to downwards rigidity, so that can't be the buried assumption (at least not his).
$endgroup$
– Kastrup
2 hours ago
$begingroup$
The same article by Krugman mentions that wages don't fall due to downwards rigidity, so that can't be the buried assumption (at least not his).
$endgroup$
– Kastrup
2 hours ago
$begingroup$
@Kastrup Krugman is not universally acclaimed for his consistent reasoning.
$endgroup$
– chrylis
2 hours ago
$begingroup$
@Kastrup Krugman is not universally acclaimed for his consistent reasoning.
$endgroup$
– chrylis
2 hours ago
$begingroup$
Krugman is not making both these arguments, so not sure why he should be accused of being inconsistent. He's only inconsistent if he agrees with the argument by Brian. And either way, I still don't understand the argument. Even if wages do fall, since prices are falling as well, my real wage may have increased (which would be especially true if my wage shows greater rigidity than the prices, as one might expect), so how could that possibly increase my debt burden?
$endgroup$
– Kastrup
1 hour ago
$begingroup$
Krugman is not making both these arguments, so not sure why he should be accused of being inconsistent. He's only inconsistent if he agrees with the argument by Brian. And either way, I still don't understand the argument. Even if wages do fall, since prices are falling as well, my real wage may have increased (which would be especially true if my wage shows greater rigidity than the prices, as one might expect), so how could that possibly increase my debt burden?
$endgroup$
– Kastrup
1 hour ago
$begingroup$
The burden increase is the rise in the ratio of debt to income. Also, I don’t think Krugman’s argument is what you think. The rigidity means that there is a need for mass unemployment to get a fall in wages, as opposed to less effort needed for inflation. That is, wages do fall, and you need a lot of unemployment to get there. He’s not particularly clear on that front.
$endgroup$
– Brian Romanchuk
33 mins ago
$begingroup$
The burden increase is the rise in the ratio of debt to income. Also, I don’t think Krugman’s argument is what you think. The rigidity means that there is a need for mass unemployment to get a fall in wages, as opposed to less effort needed for inflation. That is, wages do fall, and you need a lot of unemployment to get there. He’s not particularly clear on that front.
$endgroup$
– Brian Romanchuk
33 mins ago
add a comment |
Kastrup is a new contributor. Be nice, and check out our Code of Conduct.
Kastrup is a new contributor. Be nice, and check out our Code of Conduct.
Kastrup is a new contributor. Be nice, and check out our Code of Conduct.
Kastrup is a new contributor. Be nice, and check out our Code of Conduct.
Thanks for contributing an answer to Economics Stack Exchange!
- Please be sure to answer the question. Provide details and share your research!
But avoid …
- Asking for help, clarification, or responding to other answers.
- Making statements based on opinion; back them up with references or personal experience.
Use MathJax to format equations. MathJax reference.
To learn more, see our tips on writing great answers.
Sign up or log in
StackExchange.ready(function ()
StackExchange.helpers.onClickDraftSave('#login-link');
);
Sign up using Google
Sign up using Facebook
Sign up using Email and Password
Post as a guest
Required, but never shown
StackExchange.ready(
function ()
StackExchange.openid.initPostLogin('.new-post-login', 'https%3a%2f%2feconomics.stackexchange.com%2fquestions%2f27662%2fwhy-do-falling-prices-hurt-debtors%23new-answer', 'question_page');
);
Post as a guest
Required, but never shown
Sign up or log in
StackExchange.ready(function ()
StackExchange.helpers.onClickDraftSave('#login-link');
);
Sign up using Google
Sign up using Facebook
Sign up using Email and Password
Post as a guest
Required, but never shown
Sign up or log in
StackExchange.ready(function ()
StackExchange.helpers.onClickDraftSave('#login-link');
);
Sign up using Google
Sign up using Facebook
Sign up using Email and Password
Post as a guest
Required, but never shown
Sign up or log in
StackExchange.ready(function ()
StackExchange.helpers.onClickDraftSave('#login-link');
);
Sign up using Google
Sign up using Facebook
Sign up using Email and Password
Sign up using Google
Sign up using Facebook
Sign up using Email and Password
Post as a guest
Required, but never shown
Required, but never shown
Required, but never shown
Required, but never shown
Required, but never shown
Required, but never shown
Required, but never shown
Required, but never shown
Required, but never shown
