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Debt Deflation

Financial glossary · plain-language definition · Bonds Credit Macro

A doom loop in which falling prices make existing debts heavier in real terms, forcing borrowers to sell assets and cut spending, which pushes prices down further. Because debts are fixed in dollar amounts, deflation (a general fall in prices) means each dollar owed is harder to earn, so the real burden of debt rises even though the number stays the same. Economist Irving Fisher described this cycle as a central mechanism of the Great Depression: distress selling drives prices lower, which deepens distress.

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