“A deadly mix of falling prices and high leverage could foment a “debt-deflation” of the type first described by Irving Fisher, an American economist, in 1933. In this schema, debt-laden firms and consumers rush to repay loans as credit dries up. That hurts demand and leads to price cuts. The deflation in turn increases the real cost of debt. It also means that real interest rates can’t be negative, and so are undesirably high. That spurs yet more repayment so that, in Fisher’s words, the “liquidation defeats itself.”
Fisher’s theory is of more than just academic interest. Recent lending surveys by the Federal Reserve and the ECB showed a larger share of banks tightened their lending criteria in October than in July. Such is the concern in America that on November 12th regulators said they would scrutinise the dividend policies of banks that did not increase lending.”
Fisher’s theory is of more than just academic interest. Recent lending surveys by the Federal Reserve and the ECB showed a larger share of banks tightened their lending criteria in October than in July. Such is the concern in America that on November 12th regulators said they would scrutinise the dividend policies of banks that did not increase lending.”