debt deflation

Discussion in 'Economics' started by Wallace, Nov 26, 2008.

  1. tueday night's PBS 'NewsHour' economic segment was interesting
    'Government Widens Support for Home Loans, Credit'
    read - not verbatim:
    interviewees: James Galbraith, Kenneth Rogoff, John Cassidy

    i liked the bit about 'debt deflation' by James Galbraith: ". . . the problem here is that
    the whole financial system has seized up. The result is a collapse in asset values,
    what economists call a debt deflation."
    def: "A situation in which the collateral used to secure a loan (or another form of debt)
    decreases in value. This can be detrimental because it may lead to a restructuring of
    the loan agreement or the loan itself. Also known as "worst deflation" and "collateral
    "A mortgage, which is a form of secured debt, presents a good example. [appropriate]
    Let's say you purchased a home by taking out a mortgage. That same home would be
    secured as collateral for the loan, meaning that if you defaulted on payments to the
    bank, the home would be repossessed by the bank. If the potential selling price of the
    home decreased in value while you were still making payments to the bank, you would
    be in the middle of a debt deflation scenario." investopedia