Debt deflation is an especially big risk in Germany, where corporate debts are dangerously large.
ECONOMIST: The deadly cocktail of high borrowing and falling prices
And the longer an economy stays addicted to inflation, the harder the eventual debt deflation will become.
Irving Fisher, an economist who worked in the first half of the 20th century, called this the debt deflation trap.
But Fisher took both theories to task, arguing that during periods of debt deflation, the forces of deleveraging outweigh the effects of monetary and fiscal stimulus.
Currency devaluation largely avoids dealing with the short-term negative consequences of debt deflation in favor of prolonging the period time that the bad debts remain embedded in the system.
The potential of a long debt-deflation period resembles Japan, but with a crucial difference.
This caused a debt-deflation spiral in America that infected the rest of the world.
Therefore most of the political forces in the U.S. will be pushing for inflation if the current debt-deflation scare scenario goes on too much longer.
But there is a growing sense that Japan's problems - debt, deflation and demographics - must be confronted by policymakers and voters and not ignored for too much longer.
The new chief cabinet secretary, Yoshito Sengoku, the prime minister's gatekeeper on government policy, will want to deal seriously with both Japan's national debt and its deflation.
If we have deflation, debt grows in value, so we must reduce debt.
FORBES: Taxpayers Save $160 Billion By Letting Government Employee Unions Rot
Anyway, what with entrenched deflation, high debt and disappointing economic growth, the Japanese have had other things to worry about in the past two decades.
The biggest bears of the financial markets are concerned about different things: inflation, deflation, government debt, tax hikes, insufficient government stimulus, government intervention or lack of regulation.
Companies, meanwhile, have been focused on paying down debt, as well as coping with deflation in the domestic economy and competition from cut-price imports.
ECONOMIST: Twenty years on Japan is still paying its bubble-era bills
Recession and, worse, deflation, would exacerbate the debt ratio.
One possibility is that, with inflation and deflation both plausible consequences of a debt crisis, investors are spreading their bets, buying gold as a hedge against the former and bonds as a hedge against the latter.
Deflation pushes up the real burden of debt, while the value of assets linked to that debt, such as house prices, may have to fall even more sharply in nominal terms to return to a fair level.
And without the ECB as a ready buyer of European sovereign debt when the markets revolt once more, Euro monetary deflation is virtually guaranteed.
Deflation erodes profitability and increases the real burden of debt, and so makes defaults more likely.
That risks a demand deflation spiral, which is sure to increase the debt burden and sharply slow down growth, not to mention stress the financial system.
Greece will soon be there, once they have to meet market rates for their debt, or force their labor markets to endure a very serious deflation to make themselves more competitive.
He argues that the market is still bound to turn much lower eventually because of the dangers of deflation, huge government deficits, and massive consumer and corporate debt.
If deflation took hold, the gap in demand left by those fleeing debt would not be filled by cash-rich consumers, who tend to be less free-spending.
However, it would yield a chronic deflation that would produce high unemployment and would likely make long-term debt financing too risky (for both lender and borrower) to be undertaken.
However, because the Fed and ECB have both proclaimed that they are on hold from debt monetization and currency debasement, the same monetary environment that led to the pronounced deflation that occurred during fall of 2008 has arrived once again.
应用推荐