The whole system seems to feed off itself, producing its own internal dynamic which is only loosely connected to reality. The inevitable result is swings of positive feedback at various degrees of trend, so to speak. There are those who see in this the application of fractals to market behaviour. Robert Prechter is the one I am most familiar with, but I also remember an article to that effect by Mandelbrot (I'll try to find the link). Its an intriguing concept which I follow out of interest, but am not intellectually wedded to. The psychological argument seems more compelling to me than the potential mathematical applications, but then my approach to life is generally more qualitative than quantitative.

Here's an excerpt from the interview Sunlight links to:

"Question 6:  Also in the book you note that "over-investment causes excess capacity and excess capacity causes deflation."  Could you explain to our readers exactly what deflation is, why it is to be feared and why you believe the threat of global deflation is real?

Answer:   Inflation comes about when there is too much demand relative to supply.  Deflation is caused when there is too much supply relative to demand--or, more precisely, purchasing power.  When credit is abundant, companies borrow and expand industrial capacity and aggregate supply increases.  However, the purchasing power of the public does not necessarily expand in line with supply.  During periods of very rapid credit expansion as in the 1970s and `80s in Japan, in the Asia Crisis countries during the 1990s and in China during the last 15 years, supply grows much faster than the personal income of the public.  When supply exceeds purchasing power, prices fall.  That is why Japan and China are suffering from deflation now.  The Asia Crisis countries avoided deflation by devaluing their currencies and exporting deflation abroad.  For example, the devaluation of the South Korean Won after the Asia Crisis contributed to the downward pressure on global semiconductor and steel prices.

The US current account deficit is flooding the global economy with dollar liquidity.  When the dollar earnings of the surplus nations are deposited into their domestic banking systems, those dollars, being exogenous to those banking system, act as high powered money and spark off an explosion of credit creation.  Excessive credit creation permits over-investment, which, in turn, causes excess capacity and deflation.  So long as the huge US current account deficits continue to flood the world with dollars, global deflationary pressures are very likely to continue to build, as reckless credit creation results in more industrial capacity than can be absorbed at the prevailing price level.

The reason that deflation is harmful is because it undermines corporate profitability and, thereby, leads to rising unemployment and falling purchasing power."