Doug Henwood dhenwood at
Thu Sep 17 07:41:12 PDT 1998

John K. Taber wrote:

>Somebody mentioned that bond holders might benefit from deflation.
>But if corporations are collapsing due to deflation, wouldn't many
>bonds become worthless?

Not government bonds. We've already seen a widening of the risk premium - the difference between government bond rates and those paid by riskier issuers. It's highly unlikely that a major corporation would default on its bond debt; the danger is in the - and C-rated credits.

>I think that the most widely held "investment" is money market funds,
>which have taken the place of savings accounts. Wouldn't deflation
>cause the collapse of a lot of MMFs?

A few losses, maybe, but a collapse is unlikely. Money-market funds hold lots of commercial paper, short-term unsecured debts issued by big corps. But the only firms that can issue commercial paper are the blue-chip ones.

In the entire history of the U.S. national income accounts, which begin in 1929, the corporate sector as a whole has lost money in only two years - 1932 and 1933 - and the losses were under 1% of GDP. After adding in depreciation allowance, corporate cash flow was negative in only one year, 1932.


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