debt-deflation theory

Debt-deflation theory explains how falling prices can worsen economic downturns. When prices decline, the real value of debt increases, making it harder for borrowers to repay their loans. This leads to reduced spending and investment, causing businesses to earn less and potentially cut costs or go bankrupt. As companies and consumers pay down debts, the economy contracts further, leading to more deflation. This cycle can trap an economy in stagnation or recession, as rising debt burdens after deflation hurt economic activity and delay recovery.