Deflationary Spiral

As economic troubles flare up around the globe, the earnings estimates of American firms that do business abroad are beginning to flatten. Without these international consumers to buy their products, there are fewer sales, which means that inventories pile up. When there is more supply than demand, prices go down. Lower prices would normally cause demand to pick up, but in an uncertain economy people tend to postpone purchases. We see this tendency in the American economy with computer products, where consumers believe that the prices will go down if they wait another six months, so they decide to hold off. This tendency causes further gluts in the market, which eventually leads manufacturers to slow production. They lay off workers, causing domestic consumption to fall further since there is less money to buy goods. These effects ripple throughout the economy and create a deflationary spiral that can lead to a recession or even a depression.