Reply To: During depressions, are wage cuts…


Thank you so much for that very thorough explanation. Two quick follow-ups to it:

1.) So if costs of production (including real wages) fall relatively proportionately to prices, then how exactly are the Average Joes (who manage to remain on the payroll without their hours being cut) hurt by the bust? If they’re making less due to the bust, but at the same time, everything costs less, are they really that worse off than before? On the other side of the coin, how are the business owners (those that did not face insolvency) hurt? Though they were forced to lower their prices, won’t they also be purchasing lower priced items for both production and consumption? So doesn’t this balance it out?

2.) Can you please explain why the increased demand to hold money during the bust causes purchasing power to decline? I don’t understand why people would be so willing to hold on to their money when the bust causes prices to fall!, I also don’t get how holding money reduces purchasing power…does the lack of market activity not permit prices to adjust back to normal?