<P> The liquidation of debt could not keep up with the fall of prices it caused . The mass effect of the stampede to liquidate increased the value of each dollar owed, relative to the value of declining asset holdings . The very effort of individuals to lessen their burden of debt effectively increased it . Paradoxically, the more the debtors paid, the more they owed . This self - aggravating process turned a 1930 recession into a 1933 great depression . </P> <P> Fisher's debt - deflation theory initially lacked mainstream influence because of the counter-argument that debt - deflation represented no more than a redistribution from one group (debtors) to another (creditors). Pure re-distributions should have no significant macroeconomic effects . </P> <P> Building on both the monetary hypothesis of Milton Friedman and Anna Schwartz as well as the debt deflation hypothesis of Irving Fisher, Ben Bernanke developed an alternative way in which the financial crisis affected output . He builds on Fisher's argument that dramatic declines in the price level and nominal incomes lead to increasing real debt burdens which in turn leads to debtor insolvency and consequently leads to lowered aggregate demand, a further decline in the price level then results in a debt deflationary spiral . According to Bernanke, a small decline in the price level simply reallocates wealth from debtors to creditors without doing damage to the economy . But when the deflation is severe falling asset prices along with debtor bankruptcies lead to a decline in the nominal value of assets on bank balance sheets . Banks will react by tightening their credit conditions, that in turn leads to a credit crunch which does serious harm to the economy . A credit crunch lowers investment and consumption and results in declining aggregate demand which additionally contributes to the deflationary spiral . </P> <P> Economist Steve Keen revived the debt - reset theory after he accurately predicted the 2008 recession based on his analysis of the Great Depression, and recently advised Congress to engage in debt - forgiveness or direct payments to citizens in order to avoid future financial events . Some people support the debt - reset theory . </P>

During the great depression aggregate demand decreased. this would have been caused by
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