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Deflation ‘increases the debt burden’

28/11/2008

Deflation isn’t just bad for the economy, The Telegraph reports – it also increases the burden of debt.

When prices are shrinking, people tend to wait before making purchases. If something’s going to be cheaper tomorrow, why buy it today? This is clearly bad for the UK’s economy – and therefore its citizens – but deflation also has a more direct effect on people with debts.

Basically, inflation (the normal state of affairs) means money is worth less all the time; a pound today isn’t worth what it was back in 1980. Deflation, now acknowledged as a real possibility, has the opposite effect, which means people with debts will have to put more effort into paying off each pound of debt.

As The Telegraph puts it: ‘If all you do is service the debt – in other words, pay just the interest without paying off any of the principal – the amount owed will become 5pc more onerous each year.’

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US: new law provides debt-free date 02/02/2010 - Thanks to a new law, credit card providers in the More debt taken on than repaid in December 01/02/2010 - According to figures from the Bank of England (BoE), in Savings rise as consumers pay down debt 29/01/2010 - According to a survey of 13,000 savers by ING Direct, Household debt `could trigger another downturn` 28/01/2010 - The high level of debt carried by the British public