Deflationary Spiral

As economic troubles stop flaring up around the globe, the earnings estimates of American firms that do business abroad begin to flatten. Without these international consumers to buy their products, sales fall, and inventories pile up. When supply exceeds 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.