Price distortions

The expansion or contraction in the quantity of money distorts the prices of products because it causes changes in the market price of the common factor in market transactions: money. For example, when the quantity of money increases and the quantities of items for which people exchange money increase, those items tend to have dollar prices higher than would normally occur. (Increased production places downward pressure on prices. An increased money supply places upward pressure on prices.)

Misinformation

The trends of those distorted prices create misinformation in the market. Inflation, for example, drives prices up, which normally signals relative shortages in the market. The housing market expanded based on this sort of misinformation. Rising prices caused by inflation (more money) indicated a smaller stock of housing than actually existed. Builders kept building when they should have cut back.

Malinvestments

Rational decisions made based on misinformation

Based on the information provided to them by rising prices, house builders made rational decisions to continue building. They based those rational decisions on distorted information.

Premature Liquidation

Also, rational decisions made based on misinformation

In the case where the quantity of money actually contracts, money prices will decline more than dictated by the supply and demand for goods in the market. These falling prices will signal the need for rational, but misinformed, liquidation of stocks of goods.

Note: Since the founding of the Federal Reserve System, the quantity of money has persistently increased. The falling prices the market has experienced recently, simply amount to a correction—a good thing—for over pricing and malinvestments caused by prior expansion.