Debt-Deflation Spiral Simulator

Debt-Deflation Spiral

● Stable

Shock size 20%

Collateral sensitivity 1.0×

Leverage (fire-sale strength) 3×

Capital buffer (Basel-style) 8%

Asset price P

–

Credit C

–

Output Y

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Peak drawdown

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How it works

Three linked indices — asset Price P, Credit availability C, Output Y — all start at 1.0 (normal). A shock knocks P down. Credit then tracks collateral value: C → 1 + sensitivity·(P−1) − buffer·0.5, so a bigger capital/countercyclical buffer keeps C from falling as far. Output drifts toward whatever credit allows: dY ∝ (C−1). When credit is scarce, leveraged holders must dump assets to deleverage — a fire-sale force ∝ leverage·max(0, 1−C) — which pushes P down further, alongside weaker demand from falling Y. That closes the loop: P↓ → C↓ → Y↓ & fire-sales → P↓↓.

C(t) → 1 + s·(P−1) − 0.5·buffer
Y(t) += [0.3·(C−1) − 0.05·(Y−1)]·dt
P(t) += [0.4·(Y−1) − leverage·max(0,1−C)·0.1]·dt

Shock size — the initial one-off price drop that starts the loop.
Collateral sensitivity — how tightly banks tie lending to current collateral value; higher means credit contracts faster after a price fall.
Leverage — how forcefully over-leveraged holders must sell assets to deleverage as credit dries up; higher amplifies the spiral.
Capital buffer — a Basel III-style countercyclical cushion; a high buffer keeps credit from collapsing even as collateral falls, breaking the loop before it runs away.

The trailing ribbon plots the live (P, C, Y) trajectory through phase space — a tight loop around the origin means the shock was absorbed; a trajectory that spirals outward and down means the economy fell into a self-reinforcing debt-deflation crisis, as in 1929–33, 2008, or the 1997 Asian crisis.

Price P Credit C Output Y

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