# Deflation spiral

- Canonical URL: https://www.gerhardmerk.de/deflation-spiral
- Post ID: 590948
- Modified: 2023-07-25T20:59:13+00:00
- Language: en

## Definition

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: info@ekrah.com https://de.wikipedia.org/wiki/Gerhard_Ernst_Merk https://www.jung-stilling-gesellschaft.de/merk/ https://www.gerhardmerk.de/

## Machine-readable

- Generator: Merk Knowledge 1.1.1