Graham and Doddsville -- Value Investing In The New Era Message Board

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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era

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To: porcupine --''''> who wrote (1512)	4/4/1999 12:57:00 PM
From: Freedom Fighter	Read Replies (1) of 1722

Porc, Just one thought on deflation, repaying debts, collateral values etc... from "intuition". I believe that nominal interest rates would adjust to a deflationary environment. If productivity is so high that nominal wages are falling (even though real wages are still rising), my guess is that the system would produce negative nominal interest rates. So not only would you not be paying interest on the loan, the principal amount would be falling without you paying a thing. It would just be falling at a rate that is lower than the actual deflation rate and thus providing the lender with a positive real rate of return. The asset holders real wealth would also remain the same even though the nominal price of the asset would be falling too. (excluding normal depreciation) Cash balances might also be falling but would still be producing a positive real return. Wayne

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