"M Holmes" wrote
Not only those with debts - according to your comments earlier, *depositors* would be in trouble too - because they can't get their money out of the banks!
In fact, the depositors would arguably be **worse** off than the debtors.
At least the debtors can go bankrupt...
Fair point.
In fact after most such incidents, legislation is enacted to preent mass bankruptcy and some sort of political settlement is reached whereby debtors must continue to try to pay off at least some of their debts.
Essentially it becomes politically and financially infeasible for a government to permit those in debt to simply renege on them because this would lead to total financial collapse.
FoFP
But the borrower does not have to sell the asset in order to continue the repayments. So why does the situation have to lead to deflation. Why can the scenario not be more - the borrow cannot afford to sell the asset for less than the outstanding loan and other borrowers are in the same situation. This leads to less of that particular asset being available for purchase, but buyers may still want to buy the now scarce asset which will tend to increase the price.
The aforementioned mechanism of people reneging on or paying down debts and consequent effects on the money supply.
It usually runs like that after normal periods of overexcitement in asset markets. Credit bubbles though have had a very strong tendency to lead to deflations.
FoFP
says the limit is 31.7K GBP per depositor.
Best Regards, Alex.
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