As I understand it, decreased prices means overproduction relative to demand. Overproduction leads to reducing production to maintain profit margins. Reducing production leads to layoffs. Layoffs lead to underemployment and unemployment. Unemployment leads to reduced purchasing power. Reduced purchasing power leads to depressed demand. Depressed demand leads to even lower prices and businesses folding. Return to top.
This is a spiral until the Gummint steps in (see farm crisis of the 1920s).
362
u/nebileyim_ben 9h ago
its deflation, prices keep falling over time.
japan experienced long periods of deflation which is hurt spending and as a result affected economic growth.
its super hard to fix that bcs of liquidity trap.