>In a classic paper, Irving Fisher (1933) argued that financial
>involvement made all the difference between routine downturns (not
>yet called recessions) and big-time collapses like 1873 and 1929.
>Typically, such a collapse followed upon a credit-powered boom,
>which left businesses excessively debt-burdened, unable to cope with
>an economic slowdown. The process, which he labeled a debt
>deflation, was fairly simple, and makes great intuitive sense, but
>it was an argument largely forgotten by mainstream economics in the
>years after World War II. A mild slowdown, caused perhaps by some
>shock to confidence, leaves debtors unable to meet their obligations
>out of current cash flows. To satisfy their creditors, they
>liquidate assets, which depresses the prices of real goods. The
>general deflation in prices makes their current production
>unprofitable, since cost structures were predicated on older, higher
>sales prices, at the same time it increases the real value of their
>debt burden. So firms cut back on production, employment falls and
>demand falls with it, profits turn into losses, the debt burdens
>further increase, net worths sink into negative territory - and so
>on into perdition. Fisher argued that there was nothing on the
>horizon to stop the process from continuing in 1933 - until
>Roosevelt took office and declared a bank holiday on March 4. This
>state intervention broke the destructive pattern; otherwise, claimed
>Fisher, the collapse would have taken out whole new realms of the
>economy, leading inevitably to the bankruptcy of the U.S.
>government. The implication, then, is that such deflations are
>impossible today, because governments will intervene at a far
>earlier stage (Minsky 1982b).