Explaining Deflation, and Why It Is Bad
21 Nov 2008 in Regulatory Economics
Today's Wall Street Journal Real Time Economics Blog has an excellent summary of the insights of Irving Fisher concerning the perils of deflation. There is one apparently inadvertent error near the beginning, however:
[B]roadly falling prices would be bad news for a country up to its ears in debt. Consumers and businesses have to pay back debt with money that is worth less than the original credit, essentially increasing the debt.
This is exactly backwards. Inflation is the phenomenon in which money is worth less. Under deflation, money is worth more. That is the reason why it is more burdensome to pay off debt during deflation. Paying off the same amount of debt with dollars that are more valuable makes the debtor poorer.
Of course, it also makes lenders richer. So one's financial position relative to deflation is significantly affected by whether one is a net borrower or net lender
