Irving Fisher's debt-deflation theory: its relevance to current conditions

Abstract

The essence of Irving Fisher's debt-deflation theory was an interactive process whereby falling commodity prices increased the debt burden of borrowers. Despite the absence of falling prices today, this paper argues that a modified debt-deflation process is still possible. As the 1987 stock market crash demonstrates, the modern debt-deflation process encompasses falling asset prices, debt repayment difficulties, a reluctance to lend, a financial crisis, the impact on the banks, and the interdependency of the financial system. Recent debt-deflations have been aborted by lender-of-last-resort intervention and government support of the financial system. (c) 1996 Academic Press Limited Copyright 1996 by Oxford University Press.