Page 92 - Accelerating out of the Great Recession

THE NEW REALITIES

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was “a sizable sum even for an economist”). Later, reflect-
ing on the tragedy of the Great Depression, Fisher came up
with his famous debt-deflation theory.
Prefacing the theory, Fisher analyzed the nature of instabil-
ity and equilibrium. He distinguished between two sorts of
cyclic tendencies: “forced” cycles (such as seasons) and “free”
cycles (not forced from outside but self-generating, like waves).
Fisher concluded that “exact equilibrium […] is seldom
reached and never maintained for long. New disturbances are
[…] sure to occur.” 13
It was in this context that Fisher considered the features of
business, economics, and investment: overproduction, under-
consumption, overcapacity, price dislocation, maladjustment
between agricultural and industrial prices, overconfidence,
overinvestment, oversaving, overspending, and the discrepancy
between saving and investment. These are all factors that help
to explain business cycles.
But Fisher singled out two other factors—indebtedness
and deflation—as the biggest reasons for booms and busts.
And the two factors could be linked by a chain of events. As
he put it:

Assuming, accordingly, that, at some point of time, a
state of overindebtedness exists, this will tend to lead to
liquidation, through the alarm either of debtors or cred-
itors or both. Then we may deduce the following chain of
consequences in nine links: (1) Debt liquidation leads to
distress selling and to (2) contraction of deposit cur-
rency, as bank loans are paid off, and to a slowing down
of velocity of circulation. This contraction of deposits
and of their velocity, precipitated by distress selling,

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