Why do falling prices hurt debtors? Announcing the arrival of Valued Associate #679: Cesar Manara Unicorn Meta Zoo #1: Why another podcast?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

using NDEigensystem to solve the Mathieu equation

France's Public Holidays' Puzzle

Coin Game with infinite paradox

What's the difference between using dependency injection with a container and using a service locator?

How would it unbalance gameplay to rule that Weapon Master allows for picking a fighting style?

How to prevent the friend class from instantiating whose constructor is private in a friend class?

What's parked in Mil Moscow helicopter plant?

Why did Israel vote against lifting the American embargo on Cuba?

Israeli soda type drink

When I export an AI 300x60 art board it saves with bigger dimensions

Does a Draconic Bloodline sorcerer's doubled proficiency bonus for Charisma checks against dragons apply to all dragon types or only the chosen one?

Will I lose my paid in full property

Why doesn't the university give past final exams' answers?

What is the numbering system used for the DSN dishes?

Why aren't road bicycle wheels tiny?

Why does the Cisco show run command not show the full version, while the show version command does?

In search of the origins of term censor, I hit a dead end stuck with the greek term, to censor, λογοκρίνω

Are there existing rules/lore for MTG planeswalkers?

/bin/ls sorts differently than just ls

Does every subgroup of an abelian group have to be abelian?

When speaking, how do you change your mind mid-sentence?

Are `mathfont` and `mathspec` intended for same purpose?

Getting AggregateResult variables from Execute Anonymous Window

Is it OK if I do not take the receipt in Germany?



Why do falling prices hurt debtors?



Announcing the arrival of Valued Associate #679: Cesar Manara
Unicorn Meta Zoo #1: Why another podcast?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










2












$begingroup$


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?










share|improve this question











$endgroup$
















    2












    $begingroup$


    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?










    share|improve this question











    $endgroup$














      2












      2








      2


      1



      $begingroup$


      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?










      share|improve this question











      $endgroup$




      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






      share|improve this question















      share|improve this question













      share|improve this question




      share|improve this question








      edited Apr 6 at 18:41









      Brian Romanchuk

      4,0471416




      4,0471416










      asked Apr 6 at 17:23









      KastrupKastrup

      111




      111




















          4 Answers
          4






          active

          oldest

          votes


















          4












          $begingroup$

          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.






          share|improve this answer









          $endgroup$












          • $begingroup$
            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
            Apr 6 at 20:52











          • $begingroup$
            @Kastrup Krugman is not universally acclaimed for his consistent reasoning.
            $endgroup$
            – chrylis
            Apr 6 at 20:58










          • $begingroup$
            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
            Apr 6 at 22:09











          • $begingroup$
            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
            Apr 6 at 23:00










          • $begingroup$
            @Kastrup: Krugman does say that there is downward nominal wage ridigity. This means that it's difficult for nominal wages to fall, but not that it's impossible. Here is his exact quote: in a deflationary economy, wages as well as prices often have to fall – and it’s a fact of life that it’s very hard to cut nominal wages — there’s downward nominal wage rigidity. What this means is that in general economies don’t manage to have falling wages unless they also have mass unemployment, so that workers are desperate enough to accept those wage declines.
            $endgroup$
            – Kenny LJ
            Apr 7 at 1:38


















          2












          $begingroup$

          On 1st Jan 2020, D borrows $1000 from C for one year. (So, D must repay C $1000 on 1st Jan 2021.)



          Suppose that apples are the only good that is produced and consumed, and that on 1st Jan 2020, the price of each apple is $1. Then D has borrowed the equivalent of 1000 apples from C.



          Suppose there is 50% deflation over the course of 2020, so that on 1st Jan 2021, the price of each apple is $0.50. Then D, who must still repay $1000, must repay the equivalent of $1000 ÷ $0.50 = 2000 apples. The cost of D's debt has gone up.




          (Conversely, suppose there is 100% inflation over the course of 2020 so that on 1st Jan 2021, the price of each apple is $2. Then D, who must still repay $1000, must repay the equivalent of $1000 ÷ $2 = 500 apples. The cost of D's debt has gone down.)






          share|improve this answer









          $endgroup$




















            1












            $begingroup$

            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.






            share|improve this answer









            $endgroup$




















              0












              $begingroup$

              Another reason it can hurt debtors is if the debt is secured, meaning that there is an asset held against paying the debt. If you want to sell the asset, you find that its price fell (deflation). So it may not cover the debt.



              A recent concrete example was in the United States (and other countries) in 2008. Housing prices fell. This left mortgages underwater, meaning that selling the house would not pay off the debt. People would lose the entire value of the house in foreclosure but still have left over debt.



              Beyond this, even with unsecured loans, you might want to sell off assets to pay debt. But in deflation, the assets themselves have lost value.



              It also may be difficult for wages to fall in deflation. But consider that wages falling can be better than the alternative: layoffs. A lower wage is often better than no wage. And in deflationary periods, layoffs are more likely than normal. Because the contracted wages may be too expensive to pay or simply because there is insufficient demand. And having to make debt payments with no income is itself difficult, making those debt holders much worse off.



              Another way wages can fall is that hours might decrease. So your rate stays the same, but you get it for fewer hours, making your paycheck smaller.



              That's a problem with deflation. It makes some people effectively richer (same income but lower expenses), but it makes a lot of people effectively poorer. This is particularly bad for debt holders, as the loan price often doesn't decrease (variable rate mortgages are an example of an exception).



              If your source of income stays the same, then yes, it makes no difference to your debt (and lower consumption costs may leave you with more money to pay off the debt). But for many people, income does not stay the same. For those people, the debt becomes harder to service. So on average over all debt holders, the debt becomes harder to service.






              share|improve this answer









              $endgroup$













                Your Answer








                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
                );



                );













                draft saved

                draft discarded


















                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

























                4 Answers
                4






                active

                oldest

                votes








                4 Answers
                4






                active

                oldest

                votes









                active

                oldest

                votes






                active

                oldest

                votes









                4












                $begingroup$

                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.






                share|improve this answer









                $endgroup$












                • $begingroup$
                  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
                  Apr 6 at 20:52











                • $begingroup$
                  @Kastrup Krugman is not universally acclaimed for his consistent reasoning.
                  $endgroup$
                  – chrylis
                  Apr 6 at 20:58










                • $begingroup$
                  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
                  Apr 6 at 22:09











                • $begingroup$
                  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
                  Apr 6 at 23:00










                • $begingroup$
                  @Kastrup: Krugman does say that there is downward nominal wage ridigity. This means that it's difficult for nominal wages to fall, but not that it's impossible. Here is his exact quote: in a deflationary economy, wages as well as prices often have to fall – and it’s a fact of life that it’s very hard to cut nominal wages — there’s downward nominal wage rigidity. What this means is that in general economies don’t manage to have falling wages unless they also have mass unemployment, so that workers are desperate enough to accept those wage declines.
                  $endgroup$
                  – Kenny LJ
                  Apr 7 at 1:38















                4












                $begingroup$

                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.






                share|improve this answer









                $endgroup$












                • $begingroup$
                  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
                  Apr 6 at 20:52











                • $begingroup$
                  @Kastrup Krugman is not universally acclaimed for his consistent reasoning.
                  $endgroup$
                  – chrylis
                  Apr 6 at 20:58










                • $begingroup$
                  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
                  Apr 6 at 22:09











                • $begingroup$
                  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
                  Apr 6 at 23:00










                • $begingroup$
                  @Kastrup: Krugman does say that there is downward nominal wage ridigity. This means that it's difficult for nominal wages to fall, but not that it's impossible. Here is his exact quote: in a deflationary economy, wages as well as prices often have to fall – and it’s a fact of life that it’s very hard to cut nominal wages — there’s downward nominal wage rigidity. What this means is that in general economies don’t manage to have falling wages unless they also have mass unemployment, so that workers are desperate enough to accept those wage declines.
                  $endgroup$
                  – Kenny LJ
                  Apr 7 at 1:38













                4












                4








                4





                $begingroup$

                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.






                share|improve this answer









                $endgroup$



                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.







                share|improve this answer












                share|improve this answer



                share|improve this answer










                answered Apr 6 at 18:51









                Brian RomanchukBrian Romanchuk

                4,0471416




                4,0471416











                • $begingroup$
                  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
                  Apr 6 at 20:52











                • $begingroup$
                  @Kastrup Krugman is not universally acclaimed for his consistent reasoning.
                  $endgroup$
                  – chrylis
                  Apr 6 at 20:58










                • $begingroup$
                  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
                  Apr 6 at 22:09











                • $begingroup$
                  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
                  Apr 6 at 23:00










                • $begingroup$
                  @Kastrup: Krugman does say that there is downward nominal wage ridigity. This means that it's difficult for nominal wages to fall, but not that it's impossible. Here is his exact quote: in a deflationary economy, wages as well as prices often have to fall – and it’s a fact of life that it’s very hard to cut nominal wages — there’s downward nominal wage rigidity. What this means is that in general economies don’t manage to have falling wages unless they also have mass unemployment, so that workers are desperate enough to accept those wage declines.
                  $endgroup$
                  – Kenny LJ
                  Apr 7 at 1:38
















                • $begingroup$
                  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
                  Apr 6 at 20:52











                • $begingroup$
                  @Kastrup Krugman is not universally acclaimed for his consistent reasoning.
                  $endgroup$
                  – chrylis
                  Apr 6 at 20:58










                • $begingroup$
                  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
                  Apr 6 at 22:09











                • $begingroup$
                  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
                  Apr 6 at 23:00










                • $begingroup$
                  @Kastrup: Krugman does say that there is downward nominal wage ridigity. This means that it's difficult for nominal wages to fall, but not that it's impossible. Here is his exact quote: in a deflationary economy, wages as well as prices often have to fall – and it’s a fact of life that it’s very hard to cut nominal wages — there’s downward nominal wage rigidity. What this means is that in general economies don’t manage to have falling wages unless they also have mass unemployment, so that workers are desperate enough to accept those wage declines.
                  $endgroup$
                  – Kenny LJ
                  Apr 7 at 1:38















                $begingroup$
                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
                Apr 6 at 20:52





                $begingroup$
                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
                Apr 6 at 20:52













                $begingroup$
                @Kastrup Krugman is not universally acclaimed for his consistent reasoning.
                $endgroup$
                – chrylis
                Apr 6 at 20:58




                $begingroup$
                @Kastrup Krugman is not universally acclaimed for his consistent reasoning.
                $endgroup$
                – chrylis
                Apr 6 at 20:58












                $begingroup$
                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
                Apr 6 at 22:09





                $begingroup$
                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
                Apr 6 at 22:09













                $begingroup$
                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
                Apr 6 at 23:00




                $begingroup$
                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
                Apr 6 at 23:00












                $begingroup$
                @Kastrup: Krugman does say that there is downward nominal wage ridigity. This means that it's difficult for nominal wages to fall, but not that it's impossible. Here is his exact quote: in a deflationary economy, wages as well as prices often have to fall – and it’s a fact of life that it’s very hard to cut nominal wages — there’s downward nominal wage rigidity. What this means is that in general economies don’t manage to have falling wages unless they also have mass unemployment, so that workers are desperate enough to accept those wage declines.
                $endgroup$
                – Kenny LJ
                Apr 7 at 1:38




                $begingroup$
                @Kastrup: Krugman does say that there is downward nominal wage ridigity. This means that it's difficult for nominal wages to fall, but not that it's impossible. Here is his exact quote: in a deflationary economy, wages as well as prices often have to fall – and it’s a fact of life that it’s very hard to cut nominal wages — there’s downward nominal wage rigidity. What this means is that in general economies don’t manage to have falling wages unless they also have mass unemployment, so that workers are desperate enough to accept those wage declines.
                $endgroup$
                – Kenny LJ
                Apr 7 at 1:38











                2












                $begingroup$

                On 1st Jan 2020, D borrows $1000 from C for one year. (So, D must repay C $1000 on 1st Jan 2021.)



                Suppose that apples are the only good that is produced and consumed, and that on 1st Jan 2020, the price of each apple is $1. Then D has borrowed the equivalent of 1000 apples from C.



                Suppose there is 50% deflation over the course of 2020, so that on 1st Jan 2021, the price of each apple is $0.50. Then D, who must still repay $1000, must repay the equivalent of $1000 ÷ $0.50 = 2000 apples. The cost of D's debt has gone up.




                (Conversely, suppose there is 100% inflation over the course of 2020 so that on 1st Jan 2021, the price of each apple is $2. Then D, who must still repay $1000, must repay the equivalent of $1000 ÷ $2 = 500 apples. The cost of D's debt has gone down.)






                share|improve this answer









                $endgroup$

















                  2












                  $begingroup$

                  On 1st Jan 2020, D borrows $1000 from C for one year. (So, D must repay C $1000 on 1st Jan 2021.)



                  Suppose that apples are the only good that is produced and consumed, and that on 1st Jan 2020, the price of each apple is $1. Then D has borrowed the equivalent of 1000 apples from C.



                  Suppose there is 50% deflation over the course of 2020, so that on 1st Jan 2021, the price of each apple is $0.50. Then D, who must still repay $1000, must repay the equivalent of $1000 ÷ $0.50 = 2000 apples. The cost of D's debt has gone up.




                  (Conversely, suppose there is 100% inflation over the course of 2020 so that on 1st Jan 2021, the price of each apple is $2. Then D, who must still repay $1000, must repay the equivalent of $1000 ÷ $2 = 500 apples. The cost of D's debt has gone down.)






                  share|improve this answer









                  $endgroup$















                    2












                    2








                    2





                    $begingroup$

                    On 1st Jan 2020, D borrows $1000 from C for one year. (So, D must repay C $1000 on 1st Jan 2021.)



                    Suppose that apples are the only good that is produced and consumed, and that on 1st Jan 2020, the price of each apple is $1. Then D has borrowed the equivalent of 1000 apples from C.



                    Suppose there is 50% deflation over the course of 2020, so that on 1st Jan 2021, the price of each apple is $0.50. Then D, who must still repay $1000, must repay the equivalent of $1000 ÷ $0.50 = 2000 apples. The cost of D's debt has gone up.




                    (Conversely, suppose there is 100% inflation over the course of 2020 so that on 1st Jan 2021, the price of each apple is $2. Then D, who must still repay $1000, must repay the equivalent of $1000 ÷ $2 = 500 apples. The cost of D's debt has gone down.)






                    share|improve this answer









                    $endgroup$



                    On 1st Jan 2020, D borrows $1000 from C for one year. (So, D must repay C $1000 on 1st Jan 2021.)



                    Suppose that apples are the only good that is produced and consumed, and that on 1st Jan 2020, the price of each apple is $1. Then D has borrowed the equivalent of 1000 apples from C.



                    Suppose there is 50% deflation over the course of 2020, so that on 1st Jan 2021, the price of each apple is $0.50. Then D, who must still repay $1000, must repay the equivalent of $1000 ÷ $0.50 = 2000 apples. The cost of D's debt has gone up.




                    (Conversely, suppose there is 100% inflation over the course of 2020 so that on 1st Jan 2021, the price of each apple is $2. Then D, who must still repay $1000, must repay the equivalent of $1000 ÷ $2 = 500 apples. The cost of D's debt has gone down.)







                    share|improve this answer












                    share|improve this answer



                    share|improve this answer










                    answered Apr 7 at 2:08









                    Kenny LJKenny LJ

                    6,65222047




                    6,65222047





















                        1












                        $begingroup$

                        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.






                        share|improve this answer









                        $endgroup$

















                          1












                          $begingroup$

                          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.






                          share|improve this answer









                          $endgroup$















                            1












                            1








                            1





                            $begingroup$

                            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.






                            share|improve this answer









                            $endgroup$



                            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.







                            share|improve this answer












                            share|improve this answer



                            share|improve this answer










                            answered Apr 6 at 23:49









                            AcccumulationAcccumulation

                            30215




                            30215





















                                0












                                $begingroup$

                                Another reason it can hurt debtors is if the debt is secured, meaning that there is an asset held against paying the debt. If you want to sell the asset, you find that its price fell (deflation). So it may not cover the debt.



                                A recent concrete example was in the United States (and other countries) in 2008. Housing prices fell. This left mortgages underwater, meaning that selling the house would not pay off the debt. People would lose the entire value of the house in foreclosure but still have left over debt.



                                Beyond this, even with unsecured loans, you might want to sell off assets to pay debt. But in deflation, the assets themselves have lost value.



                                It also may be difficult for wages to fall in deflation. But consider that wages falling can be better than the alternative: layoffs. A lower wage is often better than no wage. And in deflationary periods, layoffs are more likely than normal. Because the contracted wages may be too expensive to pay or simply because there is insufficient demand. And having to make debt payments with no income is itself difficult, making those debt holders much worse off.



                                Another way wages can fall is that hours might decrease. So your rate stays the same, but you get it for fewer hours, making your paycheck smaller.



                                That's a problem with deflation. It makes some people effectively richer (same income but lower expenses), but it makes a lot of people effectively poorer. This is particularly bad for debt holders, as the loan price often doesn't decrease (variable rate mortgages are an example of an exception).



                                If your source of income stays the same, then yes, it makes no difference to your debt (and lower consumption costs may leave you with more money to pay off the debt). But for many people, income does not stay the same. For those people, the debt becomes harder to service. So on average over all debt holders, the debt becomes harder to service.






                                share|improve this answer









                                $endgroup$

















                                  0












                                  $begingroup$

                                  Another reason it can hurt debtors is if the debt is secured, meaning that there is an asset held against paying the debt. If you want to sell the asset, you find that its price fell (deflation). So it may not cover the debt.



                                  A recent concrete example was in the United States (and other countries) in 2008. Housing prices fell. This left mortgages underwater, meaning that selling the house would not pay off the debt. People would lose the entire value of the house in foreclosure but still have left over debt.



                                  Beyond this, even with unsecured loans, you might want to sell off assets to pay debt. But in deflation, the assets themselves have lost value.



                                  It also may be difficult for wages to fall in deflation. But consider that wages falling can be better than the alternative: layoffs. A lower wage is often better than no wage. And in deflationary periods, layoffs are more likely than normal. Because the contracted wages may be too expensive to pay or simply because there is insufficient demand. And having to make debt payments with no income is itself difficult, making those debt holders much worse off.



                                  Another way wages can fall is that hours might decrease. So your rate stays the same, but you get it for fewer hours, making your paycheck smaller.



                                  That's a problem with deflation. It makes some people effectively richer (same income but lower expenses), but it makes a lot of people effectively poorer. This is particularly bad for debt holders, as the loan price often doesn't decrease (variable rate mortgages are an example of an exception).



                                  If your source of income stays the same, then yes, it makes no difference to your debt (and lower consumption costs may leave you with more money to pay off the debt). But for many people, income does not stay the same. For those people, the debt becomes harder to service. So on average over all debt holders, the debt becomes harder to service.






                                  share|improve this answer









                                  $endgroup$















                                    0












                                    0








                                    0





                                    $begingroup$

                                    Another reason it can hurt debtors is if the debt is secured, meaning that there is an asset held against paying the debt. If you want to sell the asset, you find that its price fell (deflation). So it may not cover the debt.



                                    A recent concrete example was in the United States (and other countries) in 2008. Housing prices fell. This left mortgages underwater, meaning that selling the house would not pay off the debt. People would lose the entire value of the house in foreclosure but still have left over debt.



                                    Beyond this, even with unsecured loans, you might want to sell off assets to pay debt. But in deflation, the assets themselves have lost value.



                                    It also may be difficult for wages to fall in deflation. But consider that wages falling can be better than the alternative: layoffs. A lower wage is often better than no wage. And in deflationary periods, layoffs are more likely than normal. Because the contracted wages may be too expensive to pay or simply because there is insufficient demand. And having to make debt payments with no income is itself difficult, making those debt holders much worse off.



                                    Another way wages can fall is that hours might decrease. So your rate stays the same, but you get it for fewer hours, making your paycheck smaller.



                                    That's a problem with deflation. It makes some people effectively richer (same income but lower expenses), but it makes a lot of people effectively poorer. This is particularly bad for debt holders, as the loan price often doesn't decrease (variable rate mortgages are an example of an exception).



                                    If your source of income stays the same, then yes, it makes no difference to your debt (and lower consumption costs may leave you with more money to pay off the debt). But for many people, income does not stay the same. For those people, the debt becomes harder to service. So on average over all debt holders, the debt becomes harder to service.






                                    share|improve this answer









                                    $endgroup$



                                    Another reason it can hurt debtors is if the debt is secured, meaning that there is an asset held against paying the debt. If you want to sell the asset, you find that its price fell (deflation). So it may not cover the debt.



                                    A recent concrete example was in the United States (and other countries) in 2008. Housing prices fell. This left mortgages underwater, meaning that selling the house would not pay off the debt. People would lose the entire value of the house in foreclosure but still have left over debt.



                                    Beyond this, even with unsecured loans, you might want to sell off assets to pay debt. But in deflation, the assets themselves have lost value.



                                    It also may be difficult for wages to fall in deflation. But consider that wages falling can be better than the alternative: layoffs. A lower wage is often better than no wage. And in deflationary periods, layoffs are more likely than normal. Because the contracted wages may be too expensive to pay or simply because there is insufficient demand. And having to make debt payments with no income is itself difficult, making those debt holders much worse off.



                                    Another way wages can fall is that hours might decrease. So your rate stays the same, but you get it for fewer hours, making your paycheck smaller.



                                    That's a problem with deflation. It makes some people effectively richer (same income but lower expenses), but it makes a lot of people effectively poorer. This is particularly bad for debt holders, as the loan price often doesn't decrease (variable rate mortgages are an example of an exception).



                                    If your source of income stays the same, then yes, it makes no difference to your debt (and lower consumption costs may leave you with more money to pay off the debt). But for many people, income does not stay the same. For those people, the debt becomes harder to service. So on average over all debt holders, the debt becomes harder to service.







                                    share|improve this answer












                                    share|improve this answer



                                    share|improve this answer










                                    answered Apr 7 at 5:59









                                    BrythanBrythan

                                    1,064718




                                    1,064718



























                                        draft saved

                                        draft discarded
















































                                        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.




                                        draft saved


                                        draft discarded














                                        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





















































                                        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







                                        Popular posts from this blog

                                        Færeyskur hestur Heimild | Tengill | Tilvísanir | LeiðsagnarvalRossið - síða um færeyska hrossið á færeyskuGott ár hjá færeyska hestinum

                                        He _____ here since 1970 . Answer needed [closed]What does “since he was so high” mean?Meaning of “catch birds for”?How do I ensure “since” takes the meaning I want?“Who cares here” meaningWhat does “right round toward” mean?the time tense (had now been detected)What does the phrase “ring around the roses” mean here?Correct usage of “visited upon”Meaning of “foiled rail sabotage bid”It was the third time I had gone to Rome or It is the third time I had been to Rome

                                        Slayer Innehåll Historia | Stil, komposition och lyrik | Bandets betydelse och framgångar | Sidoprojekt och samarbeten | Kontroverser | Medlemmar | Utmärkelser och nomineringar | Turnéer och festivaler | Diskografi | Referenser | Externa länkar | Navigeringsmenywww.slayer.net”Metal Massacre vol. 1””Metal Massacre vol. 3””Metal Massacre Volume III””Show No Mercy””Haunting the Chapel””Live Undead””Hell Awaits””Reign in Blood””Reign in Blood””Gold & Platinum – Reign in Blood””Golden Gods Awards Winners”originalet”Kerrang! Hall Of Fame””Slayer Looks Back On 37-Year Career In New Video Series: Part Two””South of Heaven””Gold & Platinum – South of Heaven””Seasons in the Abyss””Gold & Platinum - Seasons in the Abyss””Divine Intervention””Divine Intervention - Release group by Slayer””Gold & Platinum - Divine Intervention””Live Intrusion””Undisputed Attitude””Abolish Government/Superficial Love””Release “Slatanic Slaughter: A Tribute to Slayer” by Various Artists””Diabolus in Musica””Soundtrack to the Apocalypse””God Hates Us All””Systematic - Relationships””War at the Warfield””Gold & Platinum - War at the Warfield””Soundtrack to the Apocalypse””Gold & Platinum - Still Reigning””Metallica, Slayer, Iron Mauden Among Winners At Metal Hammer Awards””Eternal Pyre””Eternal Pyre - Slayer release group””Eternal Pyre””Metal Storm Awards 2006””Kerrang! Hall Of Fame””Slayer Wins 'Best Metal' Grammy Award””Slayer Guitarist Jeff Hanneman Dies””Bullet-For My Valentine booed at Metal Hammer Golden Gods Awards””Unholy Aliance””The End Of Slayer?””Slayer: We Could Thrash Out Two More Albums If We're Fast Enough...””'The Unholy Alliance: Chapter III' UK Dates Added”originalet”Megadeth And Slayer To Co-Headline 'Canadian Carnage' Trek”originalet”World Painted Blood””Release “World Painted Blood” by Slayer””Metallica Heading To Cinemas””Slayer, Megadeth To Join Forces For 'European Carnage' Tour - Dec. 18, 2010”originalet”Slayer's Hanneman Contracts Acute Infection; Band To Bring In Guest Guitarist””Cannibal Corpse's Pat O'Brien Will Step In As Slayer's Guest Guitarist”originalet”Slayer’s Jeff Hanneman Dead at 49””Dave Lombardo Says He Made Only $67,000 In 2011 While Touring With Slayer””Slayer: We Do Not Agree With Dave Lombardo's Substance Or Timeline Of Events””Slayer Welcomes Drummer Paul Bostaph Back To The Fold””Slayer Hope to Unveil Never-Before-Heard Jeff Hanneman Material on Next Album””Slayer Debut New Song 'Implode' During Surprise Golden Gods Appearance””Release group Repentless by Slayer””Repentless - Slayer - Credits””Slayer””Metal Storm Awards 2015””Slayer - to release comic book "Repentless #1"””Slayer To Release 'Repentless' 6.66" Vinyl Box Set””BREAKING NEWS: Slayer Announce Farewell Tour””Slayer Recruit Lamb of God, Anthrax, Behemoth + Testament for Final Tour””Slayer lägger ner efter 37 år””Slayer Announces Second North American Leg Of 'Final' Tour””Final World Tour””Slayer Announces Final European Tour With Lamb of God, Anthrax And Obituary””Slayer To Tour Europe With Lamb of God, Anthrax And Obituary””Slayer To Play 'Last French Show Ever' At Next Year's Hellfst””Slayer's Final World Tour Will Extend Into 2019””Death Angel's Rob Cavestany On Slayer's 'Farewell' Tour: 'Some Of Us Could See This Coming'””Testament Has No Plans To Retire Anytime Soon, Says Chuck Billy””Anthrax's Scott Ian On Slayer's 'Farewell' Tour Plans: 'I Was Surprised And I Wasn't Surprised'””Slayer””Slayer's Morbid Schlock””Review/Rock; For Slayer, the Mania Is the Message””Slayer - Biography””Slayer - Reign In Blood”originalet”Dave Lombardo””An exclusive oral history of Slayer”originalet”Exclusive! Interview With Slayer Guitarist Jeff Hanneman”originalet”Thinking Out Loud: Slayer's Kerry King on hair metal, Satan and being polite””Slayer Lyrics””Slayer - Biography””Most influential artists for extreme metal music””Slayer - Reign in Blood””Slayer guitarist Jeff Hanneman dies aged 49””Slatanic Slaughter: A Tribute to Slayer””Gateway to Hell: A Tribute to Slayer””Covered In Blood””Slayer: The Origins of Thrash in San Francisco, CA.””Why They Rule - #6 Slayer”originalet”Guitar World's 100 Greatest Heavy Metal Guitarists Of All Time”originalet”The fans have spoken: Slayer comes out on top in readers' polls”originalet”Tribute to Jeff Hanneman (1964-2013)””Lamb Of God Frontman: We Sound Like A Slayer Rip-Off””BEHEMOTH Frontman Pays Tribute To SLAYER's JEFF HANNEMAN””Slayer, Hatebreed Doing Double Duty On This Year's Ozzfest””System of a Down””Lacuna Coil’s Andrea Ferro Talks Influences, Skateboarding, Band Origins + More””Slayer - Reign in Blood””Into The Lungs of Hell””Slayer rules - en utställning om fans””Slayer and Their Fans Slashed Through a No-Holds-Barred Night at Gas Monkey””Home””Slayer””Gold & Platinum - The Big 4 Live from Sofia, Bulgaria””Exclusive! Interview With Slayer Guitarist Kerry King””2008-02-23: Wiltern, Los Angeles, CA, USA””Slayer's Kerry King To Perform With Megadeth Tonight! - Oct. 21, 2010”originalet”Dave Lombardo - Biography”Slayer Case DismissedArkiveradUltimate Classic Rock: Slayer guitarist Jeff Hanneman dead at 49.”Slayer: "We could never do any thing like Some Kind Of Monster..."””Cannibal Corpse'S Pat O'Brien Will Step In As Slayer'S Guest Guitarist | The Official Slayer Site”originalet”Slayer Wins 'Best Metal' Grammy Award””Slayer Guitarist Jeff Hanneman Dies””Kerrang! Awards 2006 Blog: Kerrang! Hall Of Fame””Kerrang! Awards 2013: Kerrang! Legend”originalet”Metallica, Slayer, Iron Maien Among Winners At Metal Hammer Awards””Metal Hammer Golden Gods Awards””Bullet For My Valentine Booed At Metal Hammer Golden Gods Awards””Metal Storm Awards 2006””Metal Storm Awards 2015””Slayer's Concert History””Slayer - Relationships””Slayer - Releases”Slayers officiella webbplatsSlayer på MusicBrainzOfficiell webbplatsSlayerSlayerr1373445760000 0001 1540 47353068615-5086262726cb13906545x(data)6033143kn20030215029