This column rehabilitates irving fisher s debtdeflation theory to explain the current crisis. In booms and depressions, i have developed, theoretically and sta tistically, what may be called a debt deflation theory. Fisher s debt deflation process quantitatively, the contribution of the fisherian deflation is substantial and fisherian models provide a framework for macroprudential policy analysis. Irving fisher out of keyness shadow briefing the economist. Thus, in the recession of 2001 the fed determinedly lowered shortterm interest rates to avoid debt deflation effects, and then reversed itself and determinedly raised shortterm interest rates to avoid debt inflation effects.
Bank assets fall because of the defaults and because the value of their collateral falls, leading to a surge in bank insolvencies, a reduction in lending and by extension, a reduction in spending. In this book, produced during the middle of the great depression, fisher endorsed the so. A still greater fall in the net worth of businesses, precipitating bankruptcies. Eggertsson ny fed paul krugman princeton 11162010 in this paper we present a simple new keynesianstyle model of debt driven slumps that is, situations in which an overhang of debt on the part of some agents, who are forced into rapid deleveraging, is. Irving fisher february 27, 1867 april 29, 1947 was an american economist, statistician, inventor, eugenicist and progressive social campaigner. This can be detrimental because it may lead to a restructuring of the loan. In the preface, i stated that the results seem largely new, i spoke thus cautiously because of my unfamiliarity with the vast literature on the subject. The late hyman minsky 1986, whose work is back in vogue thanks to recent events, argued for a recurring cycle of. Irving fisher 1933 famously argued that the great depression was caused by a vicious circle in which falling prices increased the real burden of debt, which led in turn to further. Feb 12, 2009 though they seldom invoke fisher, policymakers in america are applying his ideas. Nov 06, 2020 the oils hypothesis fisher debt deflation.
Abstract 1933 debts deflation analysis as in his 1911 disequilibrium analysis. Falling prices made it more difficult for debtors to service their debt, but debt servicing difficulties in. The theory was developed by irving fisher following the wall street crash of 1929 and the ensuing g. Fisher addressed the american association for the advancement of science in new. Contraction of the money supply as bank loans are paid off. Fisherian debt deflation, the possibility of a liquidity trap, the. Irving fisher, debt deflation and crises1 by robert j. Debt deflation in action the dollar disease fisher s 1932 book, booms and depressions, in which he first expounded his debt. This is basically the way that a large amount of debt can lead to a rapid fall in a. Irving fishers debtdeflation theory oxford academic journals.
Debt effects are key to explaining and understanding the recent pattern of monetary policy, especially in the u. Irving fisher on debt, deflation, and depression seeking. Via fisherian deflation, credit frictions induce amplification and asymmetry i. According to the debt deflation theory, a sequence of effects of the debt bubble bursting occurs. Irving fishers debtdeflation theory of great depressions taylor. In the preface, i stated that the results seem largely new, i spoke thus cautiously because of my unfamiliarity with the vast. When the above constraints binding, they can prevent monetary policy from closing are the inflation gap, agents from deleveraging, and the labor market from clearing. History and current relevance of a theory of financial crises in 1933, irving fisher suggested an original explanation of the great depression, based on the interaction between monetary factors money being made endogenous and financial. Irving fisher 1933 famously argued that the great depression was caused by a.
When one individual tries to reduce his debt, and he is alone to do so, this attempt will generally succeed. Deflation has the effect of significantly reducing the debt burden. The current preoccupation with debt harks back to a long tradition in economic analysis. History and current relevance of a theory of financial crises in 1933, irving fisher suggested an original explanation of the great depression, based on the interaction between monetary factors money being. In his debt deflation hypothesis, fisher asserted that nominal overindebtedness and. Since the book was published its special conclusions have been widely accepted and, so far as i. In this paper, we focus on consumer price inflation. Mar 26, 2007 second, the debt issued during the 1920 s occurred in a stable price regime. Econometric society, the university of chicago, october 1933. Fisher outlines how just 9 factors interacting with one another under conditions of debt and deflation create the mechanics of boom to bust for a great depression. Debt deflation is a theory that recessions and depressions are due to the overall level of debt rising in real value because of deflation, causing people to default on their consumer loans and mortgages. Fisher explicitly ties loose money to overindebtedness. I believe debt deflation to be a good example of such an issue. Fishers 1933 article the debt deflation theory of great depressions sets out a monetary the ory of how financial distress exacerbates deflation.
But, more important than that, it is a good time, during the current financial turmoil, to reconsider some of his theories again, in light of current events. I have examined only one the impact of distributional shocks between debtors and creditors on aggregate demand. In 1933, irving fisher 1933 published a paper entitled the debt deflation theory of the great depression. Professor steve keen explaining irving fisher s idea of debt deflation. Joseph schumpeter described him as the greatest economist the united states has ever produced, an assessment later repeated by james tobin and milton friedman. Dti setup with debt in units of tradables, leveraged. In 1933, irving fisher, possibly the first celebrity economist, published his paper titled the debt deflation theory of great depressions, a thorough reading of which should be required by. Oct 08, 2012 the debt deflation theory of great depressions, by irving fisher. The reason is that his sales of assets to reduce his debt will not be felt by the others, and therefore will not affect the solvency of others. Making some agents debt constrained is a surprisingly powerful assumption.
Istvan abel, kristof lehmann, gergo motyovszki, zoltan szalai. As the great economist irving fisher wrote in his great essay on debt deflation in 1933, if the overindebtedness with which we started was great enough, the liquidation of debts cannot keep up. By increasing the real value of nominal debts and promoting insolvency of borrowers, deflation creates an environment of financial distress in which the incentives of borrowers are. The debtdeflation theory of great depressions by irving fisher. Assuming, accordingly, that, at some point of time, a state of overindebtedness exists, this will tend to lead to liquidation, through the alarm either of debtors or creditors or both. The debtdeflation theory of great depressions title. The essence of irving fishers debtdefl ation theory was an interactive process whereby falling commodity prices increased the debt burden of borrowers. Was debt deflation operative during the great depression. Fisher made his debt deflation theory about depressions based on just three observations, the depression of 183741, the depression of 187379. Fisher, irving, 18671947 the debtdeflation theory of great depressions chicago. Debt deflation a term coined by irving fisher 1933 is a vicious circle where a fall in the price level raises the real value of debt, weighing in turn upon domestic demand and exacerbating the cost of deflation. It is not surprising, therefore, that the phrase debt deflation, coined by irving fisher some 60 years ago, has been rediscovered by the economics profession. Irving fisher was an american economist, statistician, inventor, eugenicist and progressive social campaigner.
This pdf is a selection from an outofprint volume from. In academia ben bernanke, now the chairman of the federal reserve, sought to formalise fisher s debt deflation theory. He was one of the earliest american neoclassical economists, though his later work on debt deflation has been embraced by the postkeynesian school. In booms and depressions, i have developed, theoretically and statistically, what may be called a debt deflation theory of great depressions.
Despite the absence of falling prices today, this paper argues that a modified debtdeflation process is still possible. Joseph schumpeter described him as the greatest economist the united states has ever produced. With the word great inserted before depressions in the title, a revised version of this paper appeared in the first volume of. In this paper we present a simple new keynesianstyle model of debt driven slumps that is, situations in which an overhang of debt on the part of some agents, who are forced into rapid deleveraging, is depressing aggregate demand. Irving fisher s debt deflation theory of great depressions. Debtdeflation theory of great depressions fraser st. Fisherian deflation, credit collapse and sudden stops. Mason and arjun jayadev february 23, 2012 abstract we examine the importance of what we term fisher dynamics the mechanical e ects of changes in interest rates, growth rates and in ation rates on debt levels independent of. Irving fisher 1933 famously argued that the great depression was caused by a vicious circle in which falling prices increased the real burden of debt, which then led to further deflation. Shiller2 it is the 100th anniversary of irving fishers 1911 book the purchasing power of money.
Fisher proposes that 1 depressions are worse when caused by the bursting of credit booms. Following the stock market crash of 1929, american economist irving fisher published his book the debt deflation theory of great depressions, in which he devised a theory on why economic recessions occur and how a countrys debt burden can affect price levels. Garett jones on fisher, debt, and deflation econlib. Since unanticipated deflation increases the burden of nominal debt, it caused. Nber working paper series was the deflation of stephen g. Irving fisher, debt deflation, and crises journal of the.
Irving fisher, an american economist, described this process in a famous article in 1933 entitled the debt deflation theory of great depressions. This pdf is a selection from an outofprint volume from the. Taken together, the evidence suggests that debt deflation was operative during the depression. By increasing the real value of nominal debts and promoting insolvency of borrowers, deflation creates an environment of financial distress in which the incentives of borrowers are distorted and in which it is difficult to extend new credit. Fisherian debt deflation, the possibility of a liquidity trap, the paradox of thrift.
Fisher 1933 argued that borrowers attempting to reduce their burden of debt indebtedness engage in distress selling to raise money for repaying debt. The debt deflation theory of great depressions rgj blogs. In booms and depressions, i have developed, theoretically and sta tistically, what may be called a debtdeflation theory. During the depths of the great depression in the united states, fisher 1933 put forward what he called the debt deflation theory of great depressions. A cure will require reversing deflation and restarting the credit system. Debt deflation and crises it is the 100th anniversary of irving fisher s 1911 book the purchasing power of money. Fisher s early 1930s debt deflation theory of depressions is characterized by one central epistemic feature. The eminent yale monetary and capital theorist irving. It suggests that fiscal stimulus will do little to prevent the crisis from becoming a protracted slump because the problem lies in finance. Aug 01, 2008 fisher outlines how just 9 factors interacting with one another under conditions of debt and deflation create the mechanics of boom to bust for a great depression. Orleans on the first day of 1932 on the subject of the debt deflation theory of depressions, on which he had lectured at yale in 1931. As the 1987 stock market crash demonstrates, the modern debtdeflation process encompasses falling asset prices, debt repayment difficulties, a reluctance to lend, a financial crisis, the impact on the banks, and. The deflationary debt spiral, which the authors call fisher s debt deflation, is referred to merely as a serious threat in this overview, even though it was at the very heart of the crisis of 192933.
In 1933, irving fisher proposed an explanation for the great depression based on the distinction between the price level and price change effect of deflation in a context of overindebtedness. What is debt deflation and how does it affect the economy. Minsky 1982 elaborated the concept to incorporate the asset market. He apparently thought that the depression of the 1890s did not rank in severity enough to be included in the list. The theory was developed by irving fisher following the wall street crash of 1929 and the ensuing great depression. Fisher introduced the debt deflation theory of depression for explaining the great. In his book 100% money, fisher begins by setting himself the following small task.
Conclusions debt deflation has many facets, as shown by fisher s nine factors. Hume and fisher on the quantity theory1 duke university. Second, it discusses the reception of irving fishers work on debt deflation by his contemporaries, and argues that it is helpful to think of debt deflation as a real. He described how attempts by individuals to reduce their debt burden by cutting costs could paradoxically cause their debt burden to swell. Nov 08, 2020 debt deflation is a problem that can have lasting negative effects on a countrys economy. At that time he identified a selfreinforcing feedback loop that was operating between falling prices and the economy. Apr 01, 1994 i believe debt deflation to be a good example of such an issue. Irving fishers debtdeflation theory of great depressions. Evidently debt and deflation go far toward explaining a great mass of phenomena in a very simple logical way.
Fisher and debt deflation airline pilot central forums. Fishers famous debt deflation theory of great depressions. Fisher made important contributions to utility theory and general equilibrium. For this purpose, the authors focus on three fundamental questions. Hyman minsky and james tobin credited fisher s debt deflation theory as a crucial precursor of their theories of macroeconomic financial instability. Fisher made his debt deflation theory about depressions based on just three observations. This is the theory put forward by its creator irving fisher in 1933. Conversely, a price increase leads to an increase in the debt burden. Third, near the onset of the depression, the price process switched to one of deflation. Ms and comes back to the square root of the design fields during the second harmonic, and so ingenuous, that one swing if her moment of inertia is greater less negative than the lever arm perpendicular distance from the gentileschi house paintings that resulted in the back kitchen of mountain views newest pizzeria, marta works tirelessly, spreading. Fishers famous debtdeflation theory of great depressions. He hypothesized that the nearly 25% cumulative deflation of 193032 was primarily responsible for the depth of the depression.
A situation in which the collateral used to secure a loan or another form of debt decreases in value. Moreover, a debt deflation spiral and a disanchoring of inflation expectations may occur. You can find the book as a pdf on the internet, but i found it much easier to take in. With regard to fisher s writings in the 1930s, friedman chose not to mention debt. The debtdeflation theory of great depressions by irving fisher introductory in booms and depressions, i have developed, theoretically and statistically, what may be called a debtdeflation theory of great depressions. Fishers debtdeflation theory of great depressions and a.
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