When people believe that prices are falling, they postpone planned purchases because they expect to be able to buy everything even cheaper soon. – This causes manufacturers’ warehouses to overflow. – They are forced to cut-back production and – release workers. The result is that – due to the now less paid wages and salaries further purchasing power is lost, consequently – production has to be cut back further and even more people lose their jobs. In addition – companies will hold back on purchasing in view of this situation; because stockholding easily becomes a source of loss if selling prices fall steadily and even fall below purchasing prices and production costs. – To prevent this vicious cycle from getting underway in the first place, it is important to keep consumer and company expectations about the future rate of price increases stable. – If prices fall, the real burden of debt on companies increases, because they receive less money for their goods but still have to service the same nominal (in money terms) debt. – Companies with a high proportion of borrowed capital can thus quickly run into payment difficulties. – If many companies are affected in this way, the banks suddenly find themselves sitting on high proportions of bad debts. Bank insolvencies then threaten to worsen the crisis. – On the other hand, private households and the state will postpone purchases in this situation because they expect prices to fall further. – Companies will also hold back on purchasing. This is because stockholding easily becomes a source of losses if selling prices fall steadily and even fall below purchasing prices and production costs. – See apple harvest close, deflation, bad, deflation, ugly.
Attention: The financial encyclopedia is protected by copyright and may only be used for private purposes without express consent!
University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
E-mail address: email@example.com