Reply To: Deflationary Spirals


Dr. Huelsmann answers this point in the articles above.

Here are a few comments. First, there is some amount of consumption that must be done and people will not wait for prices to fall tomorrow before they buy food, clothing, fuel, etc. So price spirals, if they exist, have a termination point. Second, speculation cuts the spiral short. If entrepreneurs realize the extent to which prices will fall in the future, they will lower prices today. Third, lower prices for outputs reduce revenue for entrepreneurs who must, then, lower their demands for inputs which reduces prices for inputs. There is no need for production to be curtailed if input and output prices fall proportionately. The problem of the bust is not falling aggregate demand, but a mismatch of productive capacity built up during the boom with preferences that emerge in the bust. Layoffs occur during the bust in areas of malinvestment that occurred during the boom. The solution, then, is liquidation of the malinvestments and reallocation of resources into lines that satisfy consumer preferences as they will be in the near future.