Debt Deflation
A self-reinforcing economic spiral in which falling prices increase the real burden of debt, causing further spending cuts and deeper deflation.
What is Debt Deflation?
Debt deflation is an economic theory, first articulated by economist Irving Fisher in 1933, describing a destructive feedback loop between falling prices and rising real debt burdens. When a period of over-indebtedness is followed by declining asset prices, borrowers begin selling assets to repay loans. This mass liquidation drives prices further down, which paradoxically increases the real value of outstanding debts — making borrowers' positions even worse despite their repayment efforts. The resulting contraction in spending reduces incomes and prices further, deepening the deflationary spiral. Fisher cited debt deflation as a key mechanism in the severity of the Great Depression.
Example
During the Great Depression (1929–1933), falling commodity and asset prices increased the real burden of farm mortgages even as farmers sold assets to make payments. The more they sold, the lower prices fell, and the heavier the debt became in real terms — a classic debt deflation spiral that wiped out millions of farms and businesses.
Source: Irving Fisher — The Debt-Deflation Theory of Great Depressions (1933)