Why do falling prices hurt debtors?
$begingroup$
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
edited 10 hours ago
Brian Romanchuk
3,8291316
asked 11 hours ago
KastrupKastrup
111
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Kastrup is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
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$endgroup$
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
edited 10 hours ago
Brian Romanchuk
3,8291316
asked 11 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
edited 10 hours ago
Brian Romanchuk
3,8291316
asked 11 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.
$endgroup$
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
deflation
edited 10 hours ago
Brian Romanchuk
3,8291316
asked 11 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 10 hours ago
Brian Romanchuk
3,8291316
asked 11 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 10 hours ago
Brian Romanchuk
3,8291316
edited 10 hours ago
Brian Romanchuk
3,8291316
edited 10 hours ago
Brian Romanchuk
3,8291316
3,8291316
asked 11 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 11 hours ago
KastrupKastrup
111
asked 11 hours ago
KastrupKastrup
111
111
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Kastrup is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
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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.
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Check out our Code of Conduct.
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add a comment |
3 Answers
3
active
oldest
votes
$begingroup$
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.
answered 10 hours ago
Brian RomanchukBrian Romanchuk
3,8291316
$endgroup$
$begingroup$
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
8 hours ago
$begingroup$
@Kastrup Krugman is not universally acclaimed for his consistent reasoning.
$endgroup$
– chrylis
7 hours ago
$begingroup$
Krugman is not making both these arguments, so not sure why he should be accused of being inconsistent. He's only inconsistent if he agrees with the argument by Brian. And either way, I still don't understand the argument. Even if wages do fall, since prices are falling as well, my real wage may have increased (which would be especially true if my wage shows greater rigidity than the prices, as one might expect), so how could that possibly increase my debt burden?
$endgroup$
– Kastrup
6 hours ago
$begingroup$
The burden increase is the rise in the ratio of debt to income. Also, I don’t think Krugman’s argument is what you think. The rigidity means that there is a need for mass unemployment to get a fall in wages, as opposed to less effort needed for inflation. That is, wages do fall, and you need a lot of unemployment to get there. He’s not particularly clear on that front.
$endgroup$
– Brian Romanchuk
5 hours ago
$begingroup$
@Kastrup: Krugman does say that there is downward nominal wage ridigity. This means that it's difficult for nominal wages to fall, but not that it's impossible. Here is his exact quote: in a deflationary economy, wages as well as prices often have to fall – and it’s a fact of life that it’s very hard to cut nominal wages — there’s downward nominal wage rigidity. What this means is that in general economies don’t manage to have falling wages unless they also have mass unemployment, so that workers are desperate enough to accept those wage declines.
$endgroup$
– Kenny LJ
3 hours ago
|
show 1 more comment
$begingroup$
In economics, the "cost" of A is ultimately the value of what you could have had if you hadn't gotten A. If you take out a loan of $1000 in 2018 and owe $1100 in 2019, then the cost of the loan is whatever $1100 buys in 2019. If it buys more in 2019, then the cost has gone up.
answered 5 hours ago
AcccumulationAcccumulation
28215
$endgroup$
add a comment |
$begingroup$
On 1st Jan 2020, D borrows $1000 from C for one year. (So, D must repay C $1000 on 1st Jan 2021.)
Suppose that apples are the only good that is produced and consumed, and that on 1st Jan 2020, the price of each apple is $1. Then D has borrowed the equivalent of 1000 apples from C.
Suppose there is 50% deflation over the course of 2020, so that on 1st Jan 2021, the price of each apple is $0.50. Then D, who must still repay $1000, must repay the equivalent of $1000 ÷ $0.50 = 2000 apples. The cost of D's debt has gone up.
(Conversely, suppose there is 100% inflation over the course of 2020 so that on 1st Jan 2021, the price of each apple is $2. Then D, who must still repay $1000, must repay the equivalent of $1000 ÷ $2 = 500 apples. The cost of D's debt has gone down.)
answered 2 hours ago
Kenny LJKenny LJ
6,18021946
$endgroup$
add a comment |
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3 Answers
3
active
oldest
votes
3 Answers
3
active
oldest
votes
active
oldest
votes
active
oldest
votes
$begingroup$
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.
answered 10 hours ago
Brian RomanchukBrian Romanchuk
3,8291316
$endgroup$
$begingroup$
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
8 hours ago
$begingroup$
@Kastrup Krugman is not universally acclaimed for his consistent reasoning.
$endgroup$
– chrylis
7 hours ago
$begingroup$
Krugman is not making both these arguments, so not sure why he should be accused of being inconsistent. He's only inconsistent if he agrees with the argument by Brian. And either way, I still don't understand the argument. Even if wages do fall, since prices are falling as well, my real wage may have increased (which would be especially true if my wage shows greater rigidity than the prices, as one might expect), so how could that possibly increase my debt burden?
$endgroup$
– Kastrup
6 hours ago
$begingroup$
The burden increase is the rise in the ratio of debt to income. Also, I don’t think Krugman’s argument is what you think. The rigidity means that there is a need for mass unemployment to get a fall in wages, as opposed to less effort needed for inflation. That is, wages do fall, and you need a lot of unemployment to get there. He’s not particularly clear on that front.
$endgroup$
– Brian Romanchuk
5 hours ago
$begingroup$
@Kastrup: Krugman does say that there is downward nominal wage ridigity. This means that it's difficult for nominal wages to fall, but not that it's impossible. Here is his exact quote: in a deflationary economy, wages as well as prices often have to fall – and it’s a fact of life that it’s very hard to cut nominal wages — there’s downward nominal wage rigidity. What this means is that in general economies don’t manage to have falling wages unless they also have mass unemployment, so that workers are desperate enough to accept those wage declines.
$endgroup$
– Kenny LJ
3 hours ago
|
show 1 more 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.
answered 10 hours ago
Brian RomanchukBrian Romanchuk
3,8291316
$endgroup$
$begingroup$
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
8 hours ago
$begingroup$
@Kastrup Krugman is not universally acclaimed for his consistent reasoning.
$endgroup$
– chrylis
7 hours ago
$begingroup$
Krugman is not making both these arguments, so not sure why he should be accused of being inconsistent. He's only inconsistent if he agrees with the argument by Brian. And either way, I still don't understand the argument. Even if wages do fall, since prices are falling as well, my real wage may have increased (which would be especially true if my wage shows greater rigidity than the prices, as one might expect), so how could that possibly increase my debt burden?
$endgroup$
– Kastrup
6 hours ago
$begingroup$
The burden increase is the rise in the ratio of debt to income. Also, I don’t think Krugman’s argument is what you think. The rigidity means that there is a need for mass unemployment to get a fall in wages, as opposed to less effort needed for inflation. That is, wages do fall, and you need a lot of unemployment to get there. He’s not particularly clear on that front.
$endgroup$
– Brian Romanchuk
5 hours ago
$begingroup$
@Kastrup: Krugman does say that there is downward nominal wage ridigity. This means that it's difficult for nominal wages to fall, but not that it's impossible. Here is his exact quote: in a deflationary economy, wages as well as prices often have to fall – and it’s a fact of life that it’s very hard to cut nominal wages — there’s downward nominal wage rigidity. What this means is that in general economies don’t manage to have falling wages unless they also have mass unemployment, so that workers are desperate enough to accept those wage declines.
$endgroup$
– Kenny LJ
3 hours ago
|
show 1 more 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.
answered 10 hours ago
Brian RomanchukBrian Romanchuk
3,8291316
$endgroup$
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.
answered 10 hours ago
Brian RomanchukBrian Romanchuk
3,8291316
answered 10 hours ago
Brian RomanchukBrian Romanchuk
3,8291316
answered 10 hours ago
Brian RomanchukBrian Romanchuk
3,8291316
answered 10 hours ago
Brian RomanchukBrian Romanchuk
3,8291316
3,8291316
$begingroup$
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
8 hours ago
$begingroup$
@Kastrup Krugman is not universally acclaimed for his consistent reasoning.
$endgroup$
– chrylis
7 hours ago
$begingroup$
Krugman is not making both these arguments, so not sure why he should be accused of being inconsistent. He's only inconsistent if he agrees with the argument by Brian. And either way, I still don't understand the argument. Even if wages do fall, since prices are falling as well, my real wage may have increased (which would be especially true if my wage shows greater rigidity than the prices, as one might expect), so how could that possibly increase my debt burden?
$endgroup$
– Kastrup
6 hours ago
$begingroup$
The burden increase is the rise in the ratio of debt to income. Also, I don’t think Krugman’s argument is what you think. The rigidity means that there is a need for mass unemployment to get a fall in wages, as opposed to less effort needed for inflation. That is, wages do fall, and you need a lot of unemployment to get there. He’s not particularly clear on that front.
$endgroup$
– Brian Romanchuk
5 hours ago
$begingroup$
@Kastrup: Krugman does say that there is downward nominal wage ridigity. This means that it's difficult for nominal wages to fall, but not that it's impossible. Here is his exact quote: in a deflationary economy, wages as well as prices often have to fall – and it’s a fact of life that it’s very hard to cut nominal wages — there’s downward nominal wage rigidity. What this means is that in general economies don’t manage to have falling wages unless they also have mass unemployment, so that workers are desperate enough to accept those wage declines.
$endgroup$
– Kenny LJ
3 hours ago
|
show 1 more comment
$begingroup$
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
8 hours ago
$begingroup$
@Kastrup Krugman is not universally acclaimed for his consistent reasoning.
$endgroup$
– chrylis
7 hours ago
$begingroup$
Krugman is not making both these arguments, so not sure why he should be accused of being inconsistent. He's only inconsistent if he agrees with the argument by Brian. And either way, I still don't understand the argument. Even if wages do fall, since prices are falling as well, my real wage may have increased (which would be especially true if my wage shows greater rigidity than the prices, as one might expect), so how could that possibly increase my debt burden?
$endgroup$
– Kastrup
6 hours ago
$begingroup$
The burden increase is the rise in the ratio of debt to income. Also, I don’t think Krugman’s argument is what you think. The rigidity means that there is a need for mass unemployment to get a fall in wages, as opposed to less effort needed for inflation. That is, wages do fall, and you need a lot of unemployment to get there. He’s not particularly clear on that front.
$endgroup$
– Brian Romanchuk
5 hours ago
$begingroup$
@Kastrup: Krugman does say that there is downward nominal wage ridigity. This means that it's difficult for nominal wages to fall, but not that it's impossible. Here is his exact quote: in a deflationary economy, wages as well as prices often have to fall – and it’s a fact of life that it’s very hard to cut nominal wages — there’s downward nominal wage rigidity. What this means is that in general economies don’t manage to have falling wages unless they also have mass unemployment, so that workers are desperate enough to accept those wage declines.
$endgroup$
– Kenny LJ
3 hours ago
$begingroup$
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
8 hours ago
$begingroup$
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
8 hours ago
$begingroup$
@Kastrup Krugman is not universally acclaimed for his consistent reasoning.
$endgroup$
– chrylis
7 hours ago
$begingroup$
@Kastrup Krugman is not universally acclaimed for his consistent reasoning.
$endgroup$
– chrylis
7 hours ago
$begingroup$
Krugman is not making both these arguments, so not sure why he should be accused of being inconsistent. He's only inconsistent if he agrees with the argument by Brian. And either way, I still don't understand the argument. Even if wages do fall, since prices are falling as well, my real wage may have increased (which would be especially true if my wage shows greater rigidity than the prices, as one might expect), so how could that possibly increase my debt burden?
$endgroup$
– Kastrup
6 hours ago
$begingroup$
Krugman is not making both these arguments, so not sure why he should be accused of being inconsistent. He's only inconsistent if he agrees with the argument by Brian. And either way, I still don't understand the argument. Even if wages do fall, since prices are falling as well, my real wage may have increased (which would be especially true if my wage shows greater rigidity than the prices, as one might expect), so how could that possibly increase my debt burden?
$endgroup$
– Kastrup
6 hours ago
$begingroup$
The burden increase is the rise in the ratio of debt to income. Also, I don’t think Krugman’s argument is what you think. The rigidity means that there is a need for mass unemployment to get a fall in wages, as opposed to less effort needed for inflation. That is, wages do fall, and you need a lot of unemployment to get there. He’s not particularly clear on that front.
$endgroup$
– Brian Romanchuk
5 hours ago
$begingroup$
The burden increase is the rise in the ratio of debt to income. Also, I don’t think Krugman’s argument is what you think. The rigidity means that there is a need for mass unemployment to get a fall in wages, as opposed to less effort needed for inflation. That is, wages do fall, and you need a lot of unemployment to get there. He’s not particularly clear on that front.
$endgroup$
– Brian Romanchuk
5 hours ago
$begingroup$
@Kastrup: Krugman does say that there is downward nominal wage ridigity. This means that it's difficult for nominal wages to fall, but not that it's impossible. Here is his exact quote: in a deflationary economy, wages as well as prices often have to fall – and it’s a fact of life that it’s very hard to cut nominal wages — there’s downward nominal wage rigidity. What this means is that in general economies don’t manage to have falling wages unless they also have mass unemployment, so that workers are desperate enough to accept those wage declines.
$endgroup$
– Kenny LJ
3 hours ago
$begingroup$
@Kastrup: Krugman does say that there is downward nominal wage ridigity. This means that it's difficult for nominal wages to fall, but not that it's impossible. Here is his exact quote: in a deflationary economy, wages as well as prices often have to fall – and it’s a fact of life that it’s very hard to cut nominal wages — there’s downward nominal wage rigidity. What this means is that in general economies don’t manage to have falling wages unless they also have mass unemployment, so that workers are desperate enough to accept those wage declines.
$endgroup$
– Kenny LJ
3 hours ago
|
show 1 more comment
$begingroup$
In economics, the "cost" of A is ultimately the value of what you could have had if you hadn't gotten A. If you take out a loan of $1000 in 2018 and owe $1100 in 2019, then the cost of the loan is whatever $1100 buys in 2019. If it buys more in 2019, then the cost has gone up.
answered 5 hours ago
AcccumulationAcccumulation
28215
$endgroup$
add a comment |
$begingroup$
In economics, the "cost" of A is ultimately the value of what you could have had if you hadn't gotten A. If you take out a loan of $1000 in 2018 and owe $1100 in 2019, then the cost of the loan is whatever $1100 buys in 2019. If it buys more in 2019, then the cost has gone up.
answered 5 hours ago
AcccumulationAcccumulation
28215
$endgroup$
add a comment |
$begingroup$
In economics, the "cost" of A is ultimately the value of what you could have had if you hadn't gotten A. If you take out a loan of $1000 in 2018 and owe $1100 in 2019, then the cost of the loan is whatever $1100 buys in 2019. If it buys more in 2019, then the cost has gone up.
answered 5 hours ago
AcccumulationAcccumulation
28215
$endgroup$
In economics, the "cost" of A is ultimately the value of what you could have had if you hadn't gotten A. If you take out a loan of $1000 in 2018 and owe $1100 in 2019, then the cost of the loan is whatever $1100 buys in 2019. If it buys more in 2019, then the cost has gone up.
answered 5 hours ago
AcccumulationAcccumulation
28215
answered 5 hours ago
AcccumulationAcccumulation
28215
answered 5 hours ago
AcccumulationAcccumulation
28215
answered 5 hours ago
AcccumulationAcccumulation
28215
28215
add a comment |
add a comment |
$begingroup$
On 1st Jan 2020, D borrows $1000 from C for one year. (So, D must repay C $1000 on 1st Jan 2021.)
Suppose that apples are the only good that is produced and consumed, and that on 1st Jan 2020, the price of each apple is $1. Then D has borrowed the equivalent of 1000 apples from C.
Suppose there is 50% deflation over the course of 2020, so that on 1st Jan 2021, the price of each apple is $0.50. Then D, who must still repay $1000, must repay the equivalent of $1000 ÷ $0.50 = 2000 apples. The cost of D's debt has gone up.
(Conversely, suppose there is 100% inflation over the course of 2020 so that on 1st Jan 2021, the price of each apple is $2. Then D, who must still repay $1000, must repay the equivalent of $1000 ÷ $2 = 500 apples. The cost of D's debt has gone down.)
answered 2 hours ago
Kenny LJKenny LJ
6,18021946
$endgroup$
add a comment |
$begingroup$
On 1st Jan 2020, D borrows $1000 from C for one year. (So, D must repay C $1000 on 1st Jan 2021.)
Suppose that apples are the only good that is produced and consumed, and that on 1st Jan 2020, the price of each apple is $1. Then D has borrowed the equivalent of 1000 apples from C.
Suppose there is 50% deflation over the course of 2020, so that on 1st Jan 2021, the price of each apple is $0.50. Then D, who must still repay $1000, must repay the equivalent of $1000 ÷ $0.50 = 2000 apples. The cost of D's debt has gone up.
(Conversely, suppose there is 100% inflation over the course of 2020 so that on 1st Jan 2021, the price of each apple is $2. Then D, who must still repay $1000, must repay the equivalent of $1000 ÷ $2 = 500 apples. The cost of D's debt has gone down.)
answered 2 hours ago
Kenny LJKenny LJ
6,18021946
$endgroup$
add a comment |
$begingroup$
On 1st Jan 2020, D borrows $1000 from C for one year. (So, D must repay C $1000 on 1st Jan 2021.)
Suppose that apples are the only good that is produced and consumed, and that on 1st Jan 2020, the price of each apple is $1. Then D has borrowed the equivalent of 1000 apples from C.
Suppose there is 50% deflation over the course of 2020, so that on 1st Jan 2021, the price of each apple is $0.50. Then D, who must still repay $1000, must repay the equivalent of $1000 ÷ $0.50 = 2000 apples. The cost of D's debt has gone up.
(Conversely, suppose there is 100% inflation over the course of 2020 so that on 1st Jan 2021, the price of each apple is $2. Then D, who must still repay $1000, must repay the equivalent of $1000 ÷ $2 = 500 apples. The cost of D's debt has gone down.)
answered 2 hours ago
Kenny LJKenny LJ
6,18021946
$endgroup$
On 1st Jan 2020, D borrows $1000 from C for one year. (So, D must repay C $1000 on 1st Jan 2021.)
Suppose that apples are the only good that is produced and consumed, and that on 1st Jan 2020, the price of each apple is $1. Then D has borrowed the equivalent of 1000 apples from C.
Suppose there is 50% deflation over the course of 2020, so that on 1st Jan 2021, the price of each apple is $0.50. Then D, who must still repay $1000, must repay the equivalent of $1000 ÷ $0.50 = 2000 apples. The cost of D's debt has gone up.
(Conversely, suppose there is 100% inflation over the course of 2020 so that on 1st Jan 2021, the price of each apple is $2. Then D, who must still repay $1000, must repay the equivalent of $1000 ÷ $2 = 500 apples. The cost of D's debt has gone down.)
answered 2 hours ago
Kenny LJKenny LJ
6,18021946
answered 2 hours ago
Kenny LJKenny LJ
6,18021946
answered 2 hours ago
Kenny LJKenny LJ
6,18021946
answered 2 hours ago
Kenny LJKenny LJ
6,18021946
6,18021946
add a comment |
add a comment |
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