Deflation and Debt repayments esp Gov.

Anakin

Newbie
3 0
Greetings all. My Question is why does deflation effectively increase debt repayments?

Ive been reading up alot about this and still cant get my head around the examples.
I want to especially know why deflation would be bad for the US government in relation to them servicing their debt. Could this lead to a default of the Biggest economy in the world?

Please could someone give me layman example of how to understand deflation and debt. and also what this scenario could mean for the US.

Thank you
 

Jason101

Experienced member
1,372 215
Easy. Just think about it in the opposite form. i.e. - Why does inflation decrease your debt repayment?
 
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gerryg

Established member
900 6
It is more convenient to examine the phenomenon of deflation from the point of commodity binding. For example you borrowed from your friend 10 dollars and pawned an apple for it (note that apple in this sense is commodity equivalent of 10 dollars that's it). After deflation price of apple become 8 dollars. Then you have to return only 8 dollars, to take away your pawn (for example your friend refused to take 8 dollars and expect to receive 10 dollars, then you can refuse to return the debt and let your pawn be sold. But note that pawn will be sold for market price, that is 8 dollars. So your friend will be in loss. The same situation will be with banks and US economy.

Another important and evident economic consequence - in case of INFLATION it is wise to invest in commodities (gold, silver, realty). In case of DEFLATION it is wise to invest in money.
 
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Martinghoul

Senior member
2,690 276
Deflation doesn't really increase debt repayments, it just increases the "value" of interest and principal that one has to repay.
 
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