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After decades of fighting aggressively to keep prices from rising rapidly, the Fed has become worried that the long economic slump could cause prices to begin declining, raising the effective cost of debts as each dollar became more valuable and causing consumers to cut spending in anticipation of future bargains.
Deflation also elevates the cost of debts and debt service since both remain fixed in nominal terms but the revenues and incomes used to repay them tend to fall with overall prices.
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The deflation in turn increases the real cost of debt.
The cost of debt falls too, since creditors have a bigger buffer beneath them.
But that reflects the fact its cost of debt is close to zero.
In America and Britain, policy is geared to avoiding deflation, which raises the real cost of debt.
That in turn would raise the cost of debt service and reduce economic growth.
The news raised the cost of debt protection against default of neighbouring countries, such as Bahrain.
Other borrowers, such as banks and corporations, pay a premium over their domestic government's cost of debt.
And I think states are going to have to accept that cost of debt is going to be higher".
But in the short term, something has to give: the cost of debt, the price of assets, or investor returns.
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Justyna Jupowicz-Kozak
CEO of Professional Science Editing for Scientists @ prosciediting.com