Deflation has frequently accompanied financial crashes. Many theorists argue that deflation leads to crashes. We will examine this argument.
Historically price deflation seems to occur in the same time periods as economic declines and recessions. Based on these occurrences many economists have leaped to the conclusion that price deflation leads to economic decline. They give this rationale as yet another reason for the perpetual growth of the money supply – i.e. to prevent price deflation.
In this section we'll examine the pros and cons of price deflation and its causes and the pitfalls of using monetary expansion in order to avoid price deflation.