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until it has capsized. Ultimately, of course, but only after almost universal bankruptcy, the indebtedness must cease to grow greater and begin to grow less. Then comes recovery and a tendency for a new boom-depression sequence. This is the so-called "natural" way out of a depression, via needless and cruel bankruptcy, unemployment, and starvation. On the other hand, if the foregoing analysis is correct, it is always economically possible to stop or prevent such a depression simply by reflating the price level up to the average level at which outstanding debts were contracted by existing debtors and assumed by existing creditors, and then maintaining that level unchanged.
511:
313:, developed in the 1980s, complements Fisher's theory in providing an explanation of how credit bubbles form: the financial instability hypothesis explains how bubbles form, while debt deflation explains how they burst and the resulting economic effects. Mathematical models of debt deflation have recently been developed by post-Keynesian economist
329:– returning the price level to the level it was prior to deflation – followed by price stability, which would break the "vicious spiral" of debt deflation. In the absence of reflation, he predicted an end only after "needless and cruel bankruptcy, unemployment, and starvation", followed by "a new boom-depression sequence":
517:
Several studies prove that the empirical support for the validity of the debt deflation hypothesis as laid down by Fisher and
Bernanke is substantial, especially against the background of the Great Depression. Empirical support for the Bernanke transmission mechanism in the post–World War II economic
333:
Unless some counteracting cause comes along to prevent the fall in the price level, such a depression as that of 1929-33 (namely when the more the debtors pay the more they owe) tends to continue, going deeper, in a vicious spiral, for many years. There is then no tendency of the boat to stop tipping
267:
Fisher's idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was
501:
Given the perceived political difficulties in debt relief and the suggested inefficacy of alternative courses of action, proponents of debt deflation are either pessimistic about solutions, expecting extended, possibly decades-long depressions, or believe that private debt relief (and related public
30:
are due to the overall level of debt rising in real value because of deflation, causing people to default on their consumer loans and mortgages. Bank assets fall because of the defaults and because the value of their collateral falls, leading to a surge in bank insolvencies, a reduction in lending
541:
in her speech acknowledged Minsky's contribution to understanding how credit bubbles emerge, burst and lead to deflationary asset sales. She described how a process of balance sheet deleveraging ensued while consumers cut back on their spending to be able to service their debt. Similarly invoking
280:
as well as the debt deflation hypothesis of Irving Fisher, Bernanke developed an alternative way in which the financial crisis affected output. He builds on Fisher's argument that dramatic declines in the price level and nominal incomes lead to increasing real debt burdens, which in turn leads to
285:
and further decline in the price level, which develops into a debt deflation spiral. According to
Bernanke a small decline in the price level simply reallocates wealth from debtors to creditors without doing damage to the economy. But when the deflation is severe, falling asset prices along with
532:
In 2008, Deepak Lal wrote, "Bernanke has made sure that the second leg of a
Fisherian debt deflation will not occur. But, past and present U.S. authorities have failed to adequately restore the balance sheets of over-leveraged banks, firms, and households." After the
204:
In the context of this quote and the development of his theory and the central role it places on debt, it is of note that Fisher was personally ruined due to his having assumed debt due to his over-confidence prior to the crash, by buying stocks on margin.
90:
Assuming, accordingly, that, at some point in time, a state of over-indebtedness exists, this will tend to lead to liquidation, through the alarm either of debtors or creditors or both. Then we may deduce the following chain of consequences in nine links:
361:
Widespread debt relief either requires government action or individual negotiations between every debtor and creditor, and is thus politically contentious or requires much labor. A categorical method of debt relief is inflation, which reduces the
489:
debt – "swap private debt for government debt", or more evocatively, a government credit bubble replacing the private credit bubble. Indeed, some argue that this is the mechanism by which
Keynesian economics actually works in a depression –
357:
asset prices, rather than stable asset prices: the so-called "Ponzi units". Such debts cannot be repaid in a stable price environment, much less a deflationary environment, and instead must either be defaulted on, forgiven, or restructured.
171:
It is as absurd to assume that, for any long period of time, the variables in the economic organization, or any part of them, will "stay put," in perfect equilibrium, as to assume that the
Atlantic Ocean can ever be without a
246:
Debt-deflation theory has been studied since the 1930s but was largely ignored by neoclassical economists, and has only recently begun to gain popular interest, although it remains somewhat at the fringe in U.S. media.
470:. Inflation results in a wealth transfer from creditors to debtors, since creditors are not repaid as much in real terms as was expected, and on this basis this solution is criticized and politically contentious.
98:
Contraction of the money supply, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of the money supply and its velocity, precipitated by distress selling, causes
148:. In order to apply this to financial markets, which involve transactions across time in the form of debt – receiving money now in exchange for something in future – he made two further assumptions:
290:
that does serious harm to the economy. A credit crunch lowers investment and consumption, which leads to declining aggregate demand, which additionally contributes to the deflationary spiral.
101:
A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be
542:
Minsky, in 2011 Charles J. Whalen wrote, "the global economy has recently experienced a classic Minsky crisis - one with intertwined cyclical and institutional (structural) dimensions."
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which is supposed to be automatically established. A certain kind of equilibrium, it is true, is reestablished in the long run, but it is after a frightful amount of suffering.",
416:
286:
debtor bankruptcies lead to a decline in the nominal value of assets on bank balance sheets. Banks will react by tightening their credit conditions. That in turn leads to a
494:" simply meaning growth in government debt, hence boosting aggregate demand. Given the level of government debt growth required, some proponents of debt deflation such as
552:'s works published since 2009 have addressed the causes of financial collapses both in recent modern times and throughout history, with a particular focus on the idea of
853:
124:
Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.
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denominated: if wages and prices double, but debts remain the same, the debt level drops in half. The effect of inflation is more pronounced the higher the
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640:
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Following Hyman Minsky, some argue that the debts assumed at the height of the bubble simply cannot be repaid – that they are based on the assumption of
208:
Other debt deflation theories do not assume that debts must be paid, noting the role that default, bankruptcy, and foreclosure play in modern economies.
521:
There was a renewal of interest in debt deflation in academia in the 1980s and 1990s, and a further renewal of interest in debt deflation due to the
107:
A like fall in profits, which in a "capitalistic," that is, a private-profit society, leads the concerns which are running at a loss to make
186:
He further rejected the notion that over-confidence alone, rather than the resulting debt, was a significant factor in the
Depression:
624:
1019:
Charles
Roxburgh; Susan Lund; Tony Wimmer; Eric Amar; Charles Atkins; Ju-Hon Kwek; Richard Dobbs; James Manyika (January 2010),
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In view of the
Depression, he rejected equilibrium, and noted that in fact debts might not be paid, but instead defaulted on:
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Prior to his theory of debt deflation, Fisher had subscribed to the then-prevailing, and still mainstream, theory of
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I fancy that over-confidence seldom does any great harm except when, as, and if, it beguiles its victims into debt.
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Later commentators do not in general believe that reflation is sufficient, and primarily propose two solutions:
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A reduction in output, in trade and in employment of labor. These losses, bankruptcies and unemployment, lead to
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The following decades saw occasional mention of deflationary spirals due to debt in the mainstream, notably in
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prior to Fisher's discussion of it, but he found it lacking in comparison to what would become his theory of
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421:
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611:
Steve Keen (1995). "Finance and economic breakdown: modelling Minsky’s
Financial Instability Hypothesis",
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debt relief – de facto sovereign debt repudiation) will result from an extended period of inflation.
39:
868:"Rethinking Economics for a New Era of Financial Regulation: The Political Economy of Hyman Minsky,"
299:
63:
972:
The Theory of
Interest as Determined by Impatience to Spend Income and Opportunity to Invest it
510:
233:
has occasionally been cited as a leading cause of economic cycles in the post-WWII era, as in (
226:
27:
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Fisher, I. (1933) "The Debt-Deflation Theory of Great Depressions," Econometrica 1 (4): 337-57
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to 45%, while at a 300% ratio, one year of 10% inflation reduces the ratio by approximately
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The lack of influence of Fisher's debt-deflation in academic economics is thus described by
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467:
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51:
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Grant, J. (2007) "Learn From the Fall of Rome, U.S. Warned," Financial Times (14 August)
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54:. The theory, however, has enjoyed a resurgence of interest since the 1980s, both in
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A still greater fall in the net worths of business, precipitating bankruptcies and
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is: at a 50% ratio, one year of 10% inflation reduces the ratio by approximately
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suggested, pure redistributions should have no significant macroeconomic effects.
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Debt and deleveraging: The global credit bubble and its economic consequences
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Initially Fisher's work was largely ignored, in favor of the work of Keynes.
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917:
902:"The Macroeconomics of the Great Depression: A Comparative Approach"
641:"Debt-Reset is Inevitable « Liberty, Love, and Justice for All"
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cited Fisher as instrumental in his theory of economic instability.
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Keynes' Liquidity Preference Trumps Debt Deflation in 1931 and 2008
505:
116:
Hoarding and slowing down still more the velocity of circulation.
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debt can be compensated for, at least temporarily, by growth in
995:"1. The Mechanisms of the Business Cycle in the Postwar Period"
602:
Minsky, Hyman (1992). "The Financial Instability Hypothesis".
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Debt deflation has been studied and developed largely in the
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466:, particularly of sovereign debt, inflation corresponds to
113:
pessimism and loss of confidence, which in turn lead to
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380:
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Compare: "Let us beware of this dangerous theory of
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Debtwatch No. 42: The economic case against Bernanke
156:—and cleared with respect to every interval of time.
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838:"The Great Crash of 2008: Causes and Consequences,"
498:are pessimistic about these Keynesian suggestions.
1001:The American Business Cycle: Continuity and Change
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454:
410:
778:, Brian Griffin, November 05, 2008, Seeking Alpha
95:Debt liquidation leads to distress selling and to
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937:"The Debt-Deflation Theory of Great Depressions"
854:"A Minsky Meltdown: Lessons for Central Bankers"
776:Irving Fisher on Debt, Deflation, and Depression
506:Empirical support and modern mainstream interest
325:Fisher viewed the solution to debt deflation as
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566:Causes of the Great Depression: Debt deflation
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70:and by the neo-classical mainstream economist
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272:Building on both the monetary hypothesis of
46:. The debt deflation theory was familiar to
281:debtor insolvency, thus leading to lowered
31:and by extension, a reduction in spending.
717:"Why You Should Love Government Deficits"
589:Pilkington, Philip (February 24, 2014). "
477:tradition, some suggest that the fall in
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884:"Academic Papers | Kenneth Rogoff"
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455:{\displaystyle 300\%\times 10\%=30\%,}
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906:Journal of Money, Credit, and Banking
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764:New Principles of Political Economy,
703:"UK's debts 'biggest in the world',"
411:{\displaystyle 50\%\times 10\%=5\%,}
366:debt burden, as debts are generally
804:Reflections on the Great Depression
788:Can the USA debt-spend its way out?
735:Reflections on the Great Depression
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613:Journal of Post Keynesian Economics
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806:, Edward Elgar Publishing, 2003,
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140:Rejection of previous assumptions
307:financial instability hypothesis
82:In Fisher's formulation of debt
1005:, University of Chicago Press,
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535:financial crisis of 2007-2008
523:financial crisis of 2007–2010
294:Post-Keynesian interpretation
159:(B) The debts must be paid. (
119:The above eight changes cause
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34:The theory was developed by
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212:Initial mainstream interest
78:Fisher's formulation (1933)
10:
1078:
843:, 30(2) (2010), p.271-72.
766:vol. 1 (1819), pp. 20–21.
235:Eckstein & Sinai 1990
40:Wall Street Crash of 1929
64:post-Keynesian economics
1057:Business cycle theories
993:; Sinai, Allen (1990),
969:Fisher, Irving (1930).
873:, 15(1) (2011), p. 163.
790:, November 29th, 2008,
705:BBC (21 November 2011).
668:Out of Keynes's shadow
627:, January 24th, 2010,
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222:The Great Crash, 1929
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518:activity is weaker.
468:currency devaluation
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56:mainstream economics
52:liquidity preference
866:Charles J. Whalen,
802:Randall E. Parker,
760:Simonde de Sismondi
733:Randall E. Parker,
342:– particularly via
251:Ben Bernanke (1995)
146:general equilibrium
48:John Maynard Keynes
1062:Monetary economics
871:Chapman Law Review
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481:caused by falling
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1012:978-0-226-30453-3
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340:debt relief
241:James Tobin
197:Fisher 1933
179:Fisher 1933
161:Fisher 1930
132:Fisher 1933
58:and in the
28:depressions
1051:Categories
1042:Steve Keen
792:Steve Keen
745:, p. 14-15
651:2012-12-13
629:Steve Keen
577:References
496:Steve Keen
315:Steve Keen
263:, p. 17):
62:school of
24:recessions
475:Keynesian
447:%
438:%
432:×
429:%
403:%
394:%
388:×
385:%
368:nominally
344:inflation
327:reflation
321:Solutions
199:, p. 339)
181:, p. 339)
84:deflation
60:heterodox
935:(1933),
900:(1995),
827:, p. 17)
560:See also
193:—
175:—
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152:(A) The
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963:1907327
926:2077848
814:, p. 15
483:private
473:In the
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721:Forbes
487:public
355:rising
346:– and
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172:wave.
1007:ISBN
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808:ISBN
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548:and
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