Debt and deflation

Date posted: October 12, 2011

Some say there’s nothing new in the world — everything is simply recycled. If you accept this idea, are there any predecessors to the kind of economic rocky road we’ve had in the recent years? N.C. State University economist Mike Walden responds.

“I think there are … .  Eighty years ago there was an economist — very famous economist … — named Erving Fisher.  And he published a little book — it’s only about 30 pages — that really, if you read it, you could say, ‘Gosh this is happening exactly now,’ because he really outlined an economy like we have now. And he outlined the problems that economy can get into.

“What he said is that you can have your worst recessions and deep depressions when you have an asset boom — that is, some asset in the economy, some investment, has gone way up in value and then for some reason it collapses.  The asset market collapses.  And you get those asset prices and values going down.

“And then you follow that, however, with deflation. That is, because the asset has been so important, it puts downward pressure not only on its prices but on other prices.  And he said that can really cause problems across the board in your economy.

“Now he was right in a time when the asset that had boomed and then busted was the stock market. I think we can apply Fisher’s comments really to today by substituting the housing market. We had a big boom, as most people know, in housing prices and values in the mid-part of the last decade.  Then we’ve had a bust.

“Housing prices on average and values have gone down about 30 percent.  That’s really put downward pressure on all aspects of the economy, because the housing market is so big.

“And we actually did … go through a period of deflation across the board where prices were going down in 2009.

“So I think … the adage that, yes, there’s nothing new in the world it’s just all recycled, is a very apt adage, and I think you can look at history and see similar circumstances economically in the past to what we see today.”

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