What is the risk of a debt deflation spiral?
The risk of debt deflation spiral is significant, particularly in the US and UK where house prices are already falling sharply banks and other financial institutions have sustained big losses (with several in the US going bust) bank lending standards have become very tight (and may become even tighter as banks capital bases continue to come under pressure) and the slump in house prices is starting to affect consumer spending. Very poor affordability raises the prospect of something similar in Australia. The intransigence of the European Central Bank, which has been raising interest rates despite the subprime related credit crunch, is also adding to the global risks. However, most economic downturns and bear markets go through a period of heightened uncertainty and concern that the central bank is powerless and effectively just pushing on a string because banks dont want to or cant lend and no one wants to borrow. This is a common refrain at some point in most economic downturns and bea
