Debt-deflation dynamic

The debt-deflation dynamic describes a self-reinforcing cycle in which falling prices increase the real burden of outstanding debt. As prices and nominal incomes decline, the fixed nominal value of debt and interest payments becomes harder to service. This strain leads to defaults and deleveraging, reducing aggregate demand and pushing prices down further. The resulting credit contraction and bankruptcies amplify the process, creating a deflationary spiral that can destabilize the entire financial system.

Related Intelligence

This term is explored in depth in SBI-004.