Why do falling prices hurt debtors?
$begingroup$
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 1 hour ago
Brian Romanchuk
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$begingroup$
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 1 hour ago
Brian Romanchuk
3,8091316
asked 2 hours ago
KastrupKastrup
61
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 1 hour ago
Brian Romanchuk
3,8091316
asked 2 hours ago
KastrupKastrup
61
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 1 hour ago
Brian Romanchuk
3,8091316
asked 2 hours ago
KastrupKastrup
61
New contributor
Kastrup is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
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edited 1 hour ago
Brian Romanchuk
3,8091316
asked 2 hours ago
KastrupKastrup
61
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Kastrup is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
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edited 1 hour ago
Brian Romanchuk
3,8091316
edited 1 hour ago
Brian Romanchuk
3,8091316
edited 1 hour ago
Brian Romanchuk
3,8091316
3,8091316
asked 2 hours ago
KastrupKastrup
61
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 2 hours ago
KastrupKastrup
61
asked 2 hours ago
KastrupKastrup
61
61
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.
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$begingroup$
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 1 hour ago
Brian RomanchukBrian Romanchuk
3,8091316
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1 Answer
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1 Answer
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$begingroup$
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 1 hour ago
Brian RomanchukBrian Romanchuk
3,8091316
$endgroup$
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 1 hour ago
Brian RomanchukBrian Romanchuk
3,8091316
$endgroup$
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 1 hour ago
Brian RomanchukBrian Romanchuk
3,8091316
$endgroup$
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 1 hour ago
Brian RomanchukBrian Romanchuk
3,8091316
answered 1 hour ago
Brian RomanchukBrian Romanchuk
3,8091316
answered 1 hour ago
Brian RomanchukBrian Romanchuk
3,8091316
answered 1 hour ago
Brian RomanchukBrian Romanchuk
3,8091316
3,8091316
add a comment |
add a comment |
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