What is debt deflation?
Debt-Deflation Thus governments strained their muscles to balance their budgets–thus further depressing demand–and to reduce wages and prices–in order to restore “competitiveness” and balance to their economies. In Germany the Chancellor–the Prime Minister–Heinrich Bruening decreed a ten percent cut in prices, and a ten to fifteen percent cut in wages. But every step taken in pursuit of financial orthodoxy made matters worse. For once the declines in wages and prices in the Great Depression had passed some critical value, they knocked the economy out of its normal business-cycle pattern. Severe deflation had consequences that were much more than an amplification of the modest five to ten percent falls in prices that had been seen in past depressions. When banks make loans, they allow beforehand for some measure of fluctuation in the value of the assets pledged as security for their loans: even some diminuation of the value of their collateral will not cause banks to panic, because
