If the rate of inflation is high when the bubble bursts, the cash flows from assets will soon increase to a level where they cover the costs of debt repayment (which do not rise with inflation), despite the fact that investment and growth have decreased. Because of this bankruptcies are limited, although liquidity Is decreased. While a depression is avoided, little else is changed, and this, combined with the absence of a ‘real.' crisis sets the stage for a repeat performance. No government intervention, low inflation: If after the bubble bursts the rate of inflation is low, the cash flows from investments will not increase quickly enough to a level which allows investors to repay their debts. In this situation the bursting of the bubble can lead to a mass selling off of assets, resulting in a debt deflation process of the type described by Irving Fisher. In Fisher's (1933) formulation, the process is as follows: "(1) Debt liquidation leads to distress selling and to (2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation ... causefing] (3) A fall in the level of prices ... fas a result] there must be (4) A still greater fall in the net worths of business, precipitating bankruptcies and (5) A like fall in profits,
which in a "capitalistic," that is, a private-profit society, leads the concerns which are running at a loss to make (6) A reduction in output, in trade and in employment of labor ... leadfing] to (7) Pessimism and loss of confidence, which in turn lead to (8) Hoarding and slowing down still more the velocity of circulation. The above eight changes cause (9) Complicated disturbances in the rates of interest." (p. 342) Thus the actions of the market participants serves to exacerbate the initial fall in asset prices, and the economy enters a downward spiral from which it is difficult to escape. Debt deflations are likely to be particularly painful for smaller firms. Minsky (1986), shows that in the event of a modest decline in demand
162