The decline in output is accompanied by widespread bankruptcies and by a steep increase in unemployment. The real value of debt increases. Coupled with declining prices of assets, it leads to bank failures as a result of debts gone sour. This is the phase of reflation. The market failure, at this stage, is so pervasive that all the self-balancing and allocation mechanisms are rendered dysfunctional.
State intervention is needed in order to restart the economy.
An injection of money through a fiscal stimulus, a monetary expansion, a lowering of interest rates, firm support of the financial system, tax and other incentives to consume and to import. Unfortunately, all these goals are best achieved by engaging in warfare. But with or without war people sense the demise of an old cycle and the imminent birth of a new one, fraught with uncertainty and ignorance. They rush to buy things. Because the economy is just recovering from deflation there aren t usually many things to buy.