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
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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 6 hours ago
Brian Romanchuk
3,8291316
asked 7 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 6 hours ago
Brian Romanchuk
3,8291316
asked 7 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 6 hours ago
Brian Romanchuk
3,8291316
asked 7 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 6 hours ago
Brian Romanchuk
3,8291316
asked 7 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 6 hours ago
Brian Romanchuk
3,8291316
asked 7 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 6 hours ago
Brian Romanchuk
3,8291316
edited 6 hours ago
Brian Romanchuk
3,8291316
edited 6 hours ago
Brian Romanchuk
3,8291316
3,8291316
asked 7 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 7 hours ago
KastrupKastrup
111
asked 7 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 |
2 Answers
2
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 5 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
3 hours ago
$begingroup$
@Kastrup Krugman is not universally acclaimed for his consistent reasoning.
$endgroup$
– chrylis
3 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
2 hours 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
1 hour ago
add a comment |
$begingroup$
In economics, the "cost" of A is ultimately the value of what you could have had if you hadn't gotten A. If you take out a loan of $1000 in 2018 and owe $1100 in 2019, then the cost of the loan is whatever $1100 buys in 2019. If it buys more in 2019, then the cost has gone up.
answered 55 mins ago
AcccumulationAcccumulation
27215
$endgroup$
add a comment |
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2 Answers
2
active
oldest
votes
2 Answers
2
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 5 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
3 hours ago
$begingroup$
@Kastrup Krugman is not universally acclaimed for his consistent reasoning.
$endgroup$
– chrylis
3 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
2 hours 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
1 hour 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 5 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
3 hours ago
$begingroup$
@Kastrup Krugman is not universally acclaimed for his consistent reasoning.
$endgroup$
– chrylis
3 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
2 hours 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
1 hour 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 5 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 5 hours ago
Brian RomanchukBrian Romanchuk
3,8291316
answered 5 hours ago
Brian RomanchukBrian Romanchuk
3,8291316
answered 5 hours ago
Brian RomanchukBrian Romanchuk
3,8291316
answered 5 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
3 hours ago
$begingroup$
@Kastrup Krugman is not universally acclaimed for his consistent reasoning.
$endgroup$
– chrylis
3 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
2 hours 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
1 hour 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
3 hours ago
$begingroup$
@Kastrup Krugman is not universally acclaimed for his consistent reasoning.
$endgroup$
– chrylis
3 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
2 hours 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
1 hour 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
3 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
3 hours ago
$begingroup$
@Kastrup Krugman is not universally acclaimed for his consistent reasoning.
$endgroup$
– chrylis
3 hours ago
$begingroup$
@Kastrup Krugman is not universally acclaimed for his consistent reasoning.
$endgroup$
– chrylis
3 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
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
2 hours 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
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
1 hour ago
add a comment |
$begingroup$
In economics, the "cost" of A is ultimately the value of what you could have had if you hadn't gotten A. If you take out a loan of $1000 in 2018 and owe $1100 in 2019, then the cost of the loan is whatever $1100 buys in 2019. If it buys more in 2019, then the cost has gone up.
answered 55 mins ago
AcccumulationAcccumulation
27215
$endgroup$
add a comment |
$begingroup$
In economics, the "cost" of A is ultimately the value of what you could have had if you hadn't gotten A. If you take out a loan of $1000 in 2018 and owe $1100 in 2019, then the cost of the loan is whatever $1100 buys in 2019. If it buys more in 2019, then the cost has gone up.
answered 55 mins ago
AcccumulationAcccumulation
27215
$endgroup$
add a comment |
$begingroup$
In economics, the "cost" of A is ultimately the value of what you could have had if you hadn't gotten A. If you take out a loan of $1000 in 2018 and owe $1100 in 2019, then the cost of the loan is whatever $1100 buys in 2019. If it buys more in 2019, then the cost has gone up.
answered 55 mins ago
AcccumulationAcccumulation
27215
$endgroup$
In economics, the "cost" of A is ultimately the value of what you could have had if you hadn't gotten A. If you take out a loan of $1000 in 2018 and owe $1100 in 2019, then the cost of the loan is whatever $1100 buys in 2019. If it buys more in 2019, then the cost has gone up.
answered 55 mins ago
AcccumulationAcccumulation
27215
answered 55 mins ago
AcccumulationAcccumulation
27215
answered 55 mins ago
AcccumulationAcccumulation
27215
answered 55 mins ago
AcccumulationAcccumulation
27215
27215
add a comment |
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.
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