Imagine that nearly everyone is put to work for a month by businesses that build high-priced houses induced by government stimulus. While that is happening, fewer people are employed baking bread. At the end of the month, people try to buy bread and find that there is not enough. Meanwhile, they do not want to buy the high-priced houses. There are too many of those. Home prices fall. Bread prices rise. Consumer goods prices rose 0.3 percent in January. The workers in homebuilding are laid off. Home prices decline. Lenders find their home loans going bad. The economy goes into an adjustment that is a recession in order to correct the imbalance. The economy needs more bread factories and bread makers. Left to its own devices, the adjustment will occur. The possibility of making profits by making bread will see to that. The losses in homebuilding will see to it that fewer homes are built.

But suppose that the government steps in with a stimulus bill and hires labor to pave roads. The adjustment toward bread making is delayed. At first overall production seems to improve, counting the money spent on roads. But eventually there is a surplus of paved roads and not enough bread. The bread makers try to hire labor. They compete with the road pavers. Wages rise. The economy sees price inflation. It still does not have the bread it wants.

There is much more to it, of course. But this is the idea. Deflation in prices is not a problem. It is part of the solution

via There’s No Conspiracy Here by Michael S. Rozeff.