As projects previously undertaken are suddenly revealed to be unprofitable, factors of production produced during the preceding period of malinvestment drop precipitously in value and in many cases cease to have value at all. Thus plants and machinery may lie idle, while cyclical industries are obliged to lay off large numbers of workers. As remarked earlier, idleness may be the most efficient "use" for a plant that was a poor allocation of resources in the first place (p. 4.9:14). Unemployment will continue until workers can be reorganized and retrained for jobs in industries closer to the end product, i. e., in the lower stages of production. Meanwhile, sharply higher interest rates diminish the DMVP of labor, leading to lower wages—or, if a minimum wage (or similar legislation) is in effect, to additional unemployment. If the government attempts to remedy unemployment by assisting the most depressed industries, the reallocation of resources to their most efficient uses is delayed, prolonging the depression.

Although externally the economy appears "sickest" at this stage, the depression can be thought of as a period of healthy recovery from the malady of inflation, in which previous misallocations of factors are corrected, and structures of production are rebuilt in accordance with the natural interest rate. The political authority can then resume its original inflationary policy, ushering in the next familiar cycle of boom and bust—unless, of course, voters become educated about the true meaning and consequences of monetary intervention and act on that knowledge.