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Strategies & Market Trends : Booms, Busts, and Recoveries
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To: Ilaine who wrote (13845)1/23/2002 9:32:28 PM
From: Don Lloyd  Read Replies (1) of 74559
 
CB -

If deflation causes depressions, how does it work?

Not necessarily endorsing that view, consider the following mechanism -

1. Production takes place over time.

2. Production factors are bought first, then transformed into consumer products for sale.

3. If prices are falling, revenues also fall and reduce profits as costs have been incurred when prices were higher.

4. Labor costs stay high, and can typically only be reduced by layoffs.

5. Debt repayment obligations remain high.

6. Unemployed workers cannot pay even the reduced prices.

7. Businesses fail as they can neither earn a profit nor repay their loans.

8. Even when the economy hits bottom, the government will typically impede any chance of recovery by wage level maintenance programs and farm price supports.

Regards, Don
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