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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

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?

deflation

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edited 3 hours ago

Brian Romanchuk

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asked 4 hours ago

KastrupKastrup

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add a comment | 

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?

deflation

share|improve this question

edited 3 hours ago

Brian Romanchuk

3,8191316

asked 4 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

share|improve this question

edited 3 hours ago

Brian Romanchuk

3,8191316

asked 4 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.

$endgroup$

share|improve this question

edited 3 hours ago

Brian Romanchuk

3,8191316

asked 4 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.

share|improve this question

edited 3 hours ago

Brian Romanchuk

3,8191316

asked 4 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 3 hours ago

Brian Romanchuk

3,8191316

edited 3 hours ago

Brian Romanchuk

3,8191316

asked 4 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 4 hours ago

KastrupKastrup

111

1 Answer
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3

$begingroup$

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

answered 2 hours ago

Brian RomanchukBrian Romanchuk

3,8191316

$endgroup$

• 
  
  
  

  
  

  
  
  
  
  
  

  
  $begingroup$
  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
  51 mins ago
  
  

  
  
  
  


• 
  
  
  

  
  

  
  
  
  
  
  

  
  $begingroup$
  @Kastrup Krugman is not universally acclaimed for his consistent reasoning.
  $endgroup$
  – chrylis
  46 mins ago
  

  
  
  
  

add a comment | 

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3

$begingroup$

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

answered 2 hours ago

Brian RomanchukBrian Romanchuk

3,8191316

$endgroup$

• 
  
  
  

  
  

  
  
  
  
  
  

  
  $begingroup$
  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
  51 mins ago
  
  

  
  
  
  


• 
  
  
  

  
  

  
  
  
  
  
  

  
  $begingroup$
  @Kastrup Krugman is not universally acclaimed for his consistent reasoning.
  $endgroup$
  – chrylis
  46 mins ago
  

  
  
  
  

add a comment | 

3

$begingroup$

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

answered 2 hours ago

Brian RomanchukBrian Romanchuk

3,8191316

$endgroup$

• 
  
  
  

  
  

  
  
  
  
  
  

  
  $begingroup$
  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
  51 mins ago
  
  

  
  
  
  


• 
  
  
  

  
  

  
  
  
  
  
  

  
  $begingroup$
  @Kastrup Krugman is not universally acclaimed for his consistent reasoning.
  $endgroup$
  – chrylis
  46 mins 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.

share|improve this answer

answered 2 hours ago

Brian RomanchukBrian Romanchuk

3,8191316

$endgroup$

share|improve this answer

answered 2 hours ago

Brian RomanchukBrian Romanchuk

3,8191316

answered 2 hours ago

Brian RomanchukBrian Romanchuk

3,8191316

answered 2 hours ago

Brian RomanchukBrian Romanchuk

3,8191316