1 deposits 2 Luxemburg1.850.87France1.962.96Finland2.021.4The Netherlands2.182.47Germany3.141.3Italy4.722.74 1 loans to non-financial corporations up to 1 year
2 from households up to 2 years
, liquidity trap is caused with the reduction of value of assets of firms in comparison with their debt liabilities that leads to deleveraging of firms and close-to-zero interest rate. There is the only way to prevent decoupling of firm debts from their assets that is participation in assets, and participation in assets preventing decoupling of firm debts from their assets will allow avoiding deleveraging of borrowers that leads to close-to-zero interest rates and liquidity trap.decoupling of firms debt from asset is also causes the debt deflation . The term debt-deflation was coined by Irving Fisher in 1933. Debt deflation theory was later developed by Minsky and Bernanke and refers to the way attempts to repay debts leads to deflation.are several channels debt crisis leads to deflation:
According to Fisher if over-indebtedness exists, this leads to debt liquidation. But debt liquidation leads to contraction of deposit that slowing down velocity of circulation causes deflation: (1) Debt liquidation leads to distress selling and to (2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes (3) A fall in the level of price (Fisher I +1933, p. 341-342).
Minsky argues that if as a result of decline in income borrowers are faced difficulties in repay debts they are forced to sell assets. This leads to fall in asset prices, and losses from decline in asset values ??in comparison with debts reduce consumption and investment through a wealth effect that leads to deflation. If payment commitments can not be met from the normal sources, then a unit is forced either to borrow or to sell assets. Both borrowing on unfavorable terms and the forced sale of assets usually result in a capital loss for the affected unit. However, for any unit, capital losses and gains are not symmetrical: there is a ceiling to the capital losses a unit can take and still fulfill its commitments. Any loss beyond this limit is passed on to its creditors by way of default or refinancing of the contracts. Such induced capital losses result in a further contraction of consumption and investment beyond that due to the initiating decline in income. This can result in a recursive debt-deflation process. Raquo; [Minsky 1 963, p. 6-7]
Bernanke says that debt deflation is caused by credit squeeze that decreases aggregate demand (Bernanke 1983, p. 257) .the debt deflation is caused by decoupling of firms debts from their assets that make borrowers are disable to pay debts. There are the following ways to equal firms debts and their assets and so, solve a debt deflation:
) reflating the price level up to the level at which outstanding debts were contracted
) Expansionary fiscal policy that provides increase in profits and enable business to meet debt liabilities.
) Participation in asset, or coupling of debt with asset at which when volume of assets of firms decrease their debts fall too.to Fisher the solution to debt deflation is reflating the price level up to the level at which outstanding debts were contracted by existing debtors. However, as we can see in Japan and US, increase of inflation in case of reduction in lending and aggregate demand is an elusive goal. So, in Japan and the United States, where despite the massive infusion of money into the banking system the threat of deflation remains.to escape debt deflation suggests stabilize profits that will enable business to meet financial commitments. For this goal Minsky suggests expansionary budget policy. Minsky wrote: A cumulative debt deflation process that depends on a fall of profits for its realization is quickly halted when government is so big that the deficit explodes when income falls (Minsky 1982, p. 11); Expansion can take place only as expected profits are sufficient to induce increasing expenditures on investments, and current profits provide the cash flows that enable business to meet financial commitments (Minsky 1982, p. 11) .effective solution to debt deflation is participation in assets: under the conditions of participation in assets, when volume of assets of firms decrease they debt liabilities fall too and so firms don t face difficulties in repayment of debts that allows avoiding debt deflation.
3. Conclusion
Debt deflation, liquidity trap, the theory of debt deflation, ...
