it is the debt built up in bubbles that makes them so destructive, not the fluctuations of asset prices in themselves. This factor might be part of the explanation why the macroeconomic effects of the housing bubble were so much more severe than those of the dot-com bubble of ten years earlier, even though the loss of wealth at the end of the two bubbles was very similar: The fall in the value of corporate equity owned by households over 2000-2002 equalled 61 percent of GDP, compared with 62 percent of GDP for the fall in housing wealth from 2006 to the present
In other words, households were paying down debt after 1980, but the combination of high nominal interest rates and falling inflation meant that the stock of debt rose faster than households were able to pay it down. In a sense, the ten or 20 years after the Volcker rate increase looks like a slow motion Fisher debt-deflation, or a debt-disinflation. Only starting in the late 1990s did the household sector begin to run large primary deficits; and even during the period of greatest new borrowing, from 2000 to 2005, over one third of the increase in leverage is attributable to the difference between real interest and growth rates.
But negative growth, deflation, and interest each raised leverage by 2.5 percentage points annually, resulting in an overall increase (de la deuda en la depresión del 29). In Fisher's view, this was the key to the severity of the Depression. Attempts to reduce leverage by reducing spending resulted in falling prices and incomes and rising real interest rates (despite falling nominal rates), leading to higher leverage and intensified efforts to reduce spending. If units are forced to reduce their debt-income ratios, they will have to reduce spending; but if unfavorable debt dynamics mean that spending reductions do not actually lower debt burdens, then the effort to reduce spending may continue indefinitely. Similarly, in 2009, the household sector had a primary surplus of 9.5 percent, the highest in the entire series. But the combinations of low and falling inflation, relatively high and stable effective nominal interest rates, and a sharp fall in output (2.4 percent, increasing the debt-income ratio by 3.1 percent) meant that this primary surplus reduced household leverage by less than one point.
in an environment where real interest rates significantly exceed real growth rates, deleveraging is almost impossible simply via reduced expenditure relative to income