Why the Right Will Oppose Getting Us Out of Recession
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In a post about Depression Economics, Paul Krugman discusses deflation, or dropping price levels. I'm seeing deflation in the local real estate market, as buyers are holding back because they think prices will keep dropping. One theory is that deflation raises the value of money, which is true. If one dollar buys more real estate tomorrow than today, the value of money goes up. Presumably, this is expansionary since it is increasing the total monetary base in the economy, and has what's known as a 'real balance effect'.
But here's the rub.
Then add in the debt deflation issue: deflation redistributes wealth from debtors to creditors. If the debtors have a higher marginal propensity to spend out of wealth than the creditors, which is what Irving Fisher thought, then this could easily swamp the tiny real balance effect.
Deflation transfers wealth from debtors to creditors, which is another way of saying from people who have cash (the risk-averse rich) to people who don't (the poor, the middle class, entrepreneurs, risk-takers). Unfortunately, the risk-averse rich don't spend very much of their wealth relative to everyone else, which is why they are risk-averse. There also aren't that many of them, and they have probably become more risk-averse in this environment because of expected deflation and financial losses from substantial asset value declines.