I find this comment very interesting, but I’m generally confused by economics and have a few points of confusion here.
It’s also why so many instances of bank bailouts lately have created “zombie” economies in which growth remains perpetually low: the misvalued debts were never cleared, but deflationary pressures have set in, so the real economies are being drained of larger amounts of real productivity than the debts originally corresponded to.
To check my understanding, is the “underwater mortgage” pattern a concrete example of this?
This explanation can be generalized: the higher the average (mean or median) level of debt among any given population, the more difficulty markets among that population will have in clearing, because market adjustments don’t change the price-levels on time (hence debt: borrowing is buying time) that has already been bought and sold, forcing everyone to try and obtain the old prices (corresponding to prices when they took their loans) whenever they can.
I understand that deflation is bad for debtors, but I’m confused about the concrete ways in which this means the rational behavior of debtors (in contrast to psychological explanations like morale) could be the cause of downward nominal wage rigidity. Is the idea that bankruptcy is an abrupt flat line on the utility-money curve, and so an employee can credibly pre-commit to quitting in response to a nominal pay cut (of certain magnitude), because the pay cut would lead to the same outcome (bankruptcy) as getting fired? And then “no nominal wage cut” emerges as a sort of Schelling point (because the exact degree of nominal wage cut that would lead to bankruptcy is unknown to the employer)?
I find this comment very interesting, but I’m generally confused by economics and have a few points of confusion here.
To check my understanding, is the “underwater mortgage” pattern a concrete example of this?
I understand that deflation is bad for debtors, but I’m confused about the concrete ways in which this means the rational behavior of debtors (in contrast to psychological explanations like morale) could be the cause of downward nominal wage rigidity. Is the idea that bankruptcy is an abrupt flat line on the utility-money curve, and so an employee can credibly pre-commit to quitting in response to a nominal pay cut (of certain magnitude), because the pay cut would lead to the same outcome (bankruptcy) as getting fired? And then “no nominal wage cut” emerges as a sort of Schelling point (because the exact degree of nominal wage cut that would lead to bankruptcy is unknown to the employer)?