And that's basically deflation 50 percent deflation.

Deflation Doldrums?

Putting Deflation First

The Deflation Bogeyman

Deflation and Democracy

Inflation or Deflation?

Can China Beat Deflation?

Can China Avoid Deflation?

Southern Europe could enforce deflation.

Deflation in many advanced economies.

Has Global Stag Deflation Arrived?

That's a 50 percent deflation rate.

Why Deflation is Good News for Europe

In terms of price performance, that's a 40 to 50 percent deflation rate.

Deflationary pressures eased in Japan but firm evidence that deflation has ended is still awaited.

Policymakers will have to worry about a strange beast called stag deflation (a combination of economic stagnation recession and deflation) about liquidity traps (when official interest rates become so close to zero that traditional monetary policy loses effectiveness) and about debt deflation (the rise in the real value of nominal debts, increasing the risk of bankruptcy for distressed households, firms, financial institutions, and governments).

Price deflation is far more likely in the near term. But temporary deflation need not be the terror that central bankers fear, at least if the banking system is recapitalized and if interest rates in the industrial countries fall sharply.

Early in that terrible decade, deflation became a reality for nearly all countries and for all of the advanced economies. In the last two years, at least six of the advanced economies and as many as eight have been coping with deflation.

The inability of unconventional monetary policies to prevent outright deflation partly reflects the fact that such policies seek to weaken the currency, thereby improving net exports and increasing inflation. This, however, is a zero sum game that merely exports deflation and recession to other economies.

Japan provides good lessons about where the true risks are, as it has been suffering from deflation or near deflation for 14 years. Since 1991, Japan has been mired in what Harvard economist Alvin Hansen, a contemporary of Keynes, once described as secular stagnation.

A five year cumulative 30 deflation in prices and wages in Greece, for example which would mean five years of deepening and socially unacceptable depression even if feasible, this amount of deflation would exacerbate insolvency, given a 30 increase in the real value of debt.

Deflation increases the real (inflation adjusted) debt burden, as well as the real interest rate. Though there is little evidence of the importance of small changes in real interest rates, the effect of even mild deflation on real debt, year after year, can be significant.

In the summer of 2003, public debate and market sentiment in the euro area were influenced by Japan s protracted deflation and the expectation of a possibly severe disinflationary process in America. Some observers saw a risk of sustained deflation in the euro area as well.

The main lesson of the Asian financial crisis or, for that matter, of any financial crisis is that deflation is the ultimate threat to recovery. Because the 1997 crisis was confined to East Asia, China was able to escape deflation after it joined the World Trade Organization.

But now the eurozone seems incapable of escaping near deflation, with little economic growth and prices barely moving upwards.

But that is logically flawed even with deflation, real purchasing power would fall, and the real value of debts would rise (debt deflation), as the real depreciation occurs. More importantly, the exit path would restore growth right away, via nominal and real depreciation, avoiding a decade long depression.

Deflation fears were mistakenly raised in 2001 2003, when the strong response of the US housing market and consumer spending to lower interest rates should have made the debate redundant. Influenced by a misreading of the Japanese experience, this led to excessive protection against the tail risk of deflation.

If you have 50 percent deflation, people may increase their volume 30, 40 percent, but they won't keep up with it.

A public debt crisis in Japan (as the combination of recession, deflation, and high deficits drove up the debt GDP ratio).

The main reason for the new dose of transatlantic drift is that the crisis is being experienced differently. America fears deflation

nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp A five year cumulative 30 deflation in prices and wages in Greece, for example which would mean five years of deepening and socially unacceptable depression even if feasible, this amount of deflation would exacerbate insolvency, given a 30 increase in the real value of debt.

Moreover, if deflation were to become entrenched in the eurozone and other parts of the world, a negative nominal return could be associated with a positive real return. That has been the story for the last 20 years in Japan, owing to persistent deflation and near zero interest rates on many assets.

We had deflation during the Depression, but that was collapse of the money supply, collapse of consumer confidence, a completely different phenomena.

This deflationary tendency will create serious economic problems, which do not necessarily result from deflation as such, but may stem from a natural resistance to deflation. In each country, a number of prices are rigid, because sellers resist selling cheaper, as low productivity gains and wage defense by unions leave no margin for lower prices.

Why won t that continue and feed on itself as it has in Japan as consumers delay spending in anticipation of even lower prices in the future? And doesn t Japan s persistent deflation since the early 1990 s also show that, once it begins, deflation cannot be reversed by a policy of easy money or fiscal deficits?

Just as inflation helps debtors by eroding the real value of their debts, deflation hurts them by increasing the real value of what they owe. While the very modest extent of current deflation does not create a significant problem, if it continues, the price level could conceivably fall by a cumulative 10 over the next few years.

But, in any case, the deflation of this glacier since 1984 has been higher than the Eiffel Tower, higher than the Empire State Building.

Low inflation is already a serious obstacle to economic recovery and rebalancing within the eurozone. Outright deflation would be an even more dangerous threat.

The problem is that this kind of incrementalism will not work. When the problem is deflation, quantitative easing will help only by transforming expectations.

Time is a luxury that Europe does not have. With every month that the economy loses productive capacity, the likelihood of stagnation and deflation rises.

The experience of deflation is well entrenched. And, given Japan s high level of public indebtedness, the risks of collateral damage and unintended consequences are potentially higher.

Deflation discourages optimism about the future. Shifting the entire adjustment burden onto peripheral countries with current account deficits, while core countries continue to run surpluses, obstructs adjustment.

According to Bernanke s debt deflation theory, the collapse in consumer prices was one of the causes of the Great Depression, since deflation raised the real value of debts, making it difficult to repay loans. As Bernanke pointed out, 45 of US farms were behind on mortgage payments in 1933, and in 1934, default rates on home mortgages exceeded 38 in half of US cities.

In 2003, an IMF study raised the specter of Japan like problems around the world, and listed thirteen countries, including, China, Germany, Singapore, and Poland, with a moderate to high risk of deflation. Yet, in the face of overwhelming evidence of the importance of inflation or deflation risk, most people even in countries that have been warned generally still have not taken steps to protect themselves.

CAMBRIDGE The European Central Bank is moving, hesitantly but ineluctably, toward quantitative easing. The threat of deflation and the ineffectiveness of its previous measures leaves it no choice.