The credit crunch today is not destroying capital but recognising that capital was destroyed by misallocation in the years of irrational exuberance. If that is so, then we are entering a spiral of debt deflation that will play out slowly for years to come. To understand how that works, we turn to Professor Irving Fisher of Yale (1933).
The Debt-Deflation Theory of Great Depressions
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One of the most insightful books about the current financial crisis was written in 1933! Irving Fisher’s Debt-Deflation Theory was so prescient vs what occurred 75 years later. This short book written in 1933 is more insightful about the cause of the recent financial crisis than the majority of the current books written after it.The main points of his theory are that the drivers of depressions and financial crisis are over-indebtedness and ensuing deflation as borrowers eventually default and creditors have to resell their collateral at liquidation prices…
The Debt-Deflation Theory of Great Depressions “I have been both a central banker and a market regulator. I now find myself questioning whether my early career, largely devoted to liberalising and deregulating banking and financial markets, was misguided. In short, I wonder whether I contributed – along with a countless others in regulation, banking, academia and politics – to a great misallocation of capital, distortion of markets and the impairment of the real economy. We permitted the banks to betray capital into ‘hopelessly unproductive…
A Good Historical Book to COmpare Past Trends to Today Good use of Google can result in PDF copies of this book being found on the web for free. No need to buy unless you want a printed nice looking reference for future usage.