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Copyright © Cambridge Political Economy Society

research-article

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

Martin H. Wolfson*

*University of Notre Dame

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 inter-dependency of the financial system. Recent debt-deflations have been aborted by lender-of-last-resort intervention and government support of the financial system.

Manuscript received October 8, 1993; final version received June 14, 1994.


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