It's a deflationary force, if not handled right.

First, there was no automatic deflationary pressure following from some alleged peculiarity of the adjustment mechanism. The question of overall deflationary or inflationary impact depended (and still depends) on the total quantity of money.

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

One major concern relates to the destabilizing and deflationary feedbacks among trade, debt and finance.

But, rather than recognize the likely drivers of these developments namely, a seemingly chronic shortfall of global aggregate demand amid a supply glut and a deflationary profusion of technological innovations and new supply chains the Fed continues to minimize the deflationary impact of global forces. It would rather attribute low inflation to successful inflation targeting, and the Great Moderation that it presumably spawned.

Fiscal consolidation means less public spending. And less spending means less upward pressure on prices which is the last thing Europe needs in a deflationary environment.

Experts pointed out that both inflationary and deflationary pressures have eased at this time. This was undoubtedly good news for the financial and economic structural transformation stage.

But monetary policy typically focuses on domestic recovery. And, though unconventional measures have reduced financial instability, their effectiveness in countering widespread deflationary pressures or restoring growth remains dubious.

The indirect effect, which might be substantial, is that cost competitive light manufacturing in emerging markets increases. That would reinforce the deflationary pressure from globalization for years to come.

Simply put, we live in a world in which there is too much supply and too little demand. The result is persistent disinflationary, if not deflationary, pressure, despite aggressive monetary easing.

Abe is right about one thing Japan needs to get out of its no growth and deflationary trap. But the policies that he favors are not the way to do it.

For example, ordinary citizens could be allowed zero interest transactions balances (up to a limit). Presumably, nominal interest rates would move into negative territory only in response to a deep deflationary crisis.

As a result, annual growth in the 18 country eurozone slipped to just 0.4 in the first half of 2014. This poor performance can only exacerbate the European Central Bank s deflationary concerns.

Japan is still stagnating. Not inflation, but a Japanese type period of deflationary pressure with ever increasing public debt is the real risk that the world will be facing for years to come.

The most widely cited example of a deflationary economy is Japan. But Japan has experienced a low rate of inflation and some sustained short periods of deflation without ever producing a downward price spiral.

Fifth, weak profitability, owing to high debts and default risk, low economic and thus revenue growth, and persistent deflationary pressure on companies margins, will continue to constrain firms willingness to produce, hire workers, and invest.

Recent inflation in many countries has been the result of higher commodity prices, especially fuel and food prices. In these circumstances, domestic deflationary policies will only further slow growth and are helpless to stem imported inflation.

To be sure, after 15 years of deflationary recession, revitalization of the Japanese economy remains far from complete. Nonetheless, the effects of Abe s reforms are becoming visible in areas such as equity prices and exchange rates.

As a result of these factors, eurozone growth has resumed, and eurozone equities have recently outperformed US equities. The weakening of the euro and the ECB s aggressive measures may even stop the deflationary pressure later this year.

Specifically, an appreciating dollar improves the price competitiveness of European and Japanese companies in the US and other markets, while moderating some of the structural deflationary pressure in the lagging economies by causing import prices to rise.

Third, the corporate sector faces a glut of capacity, and a weak recovery of profitability is likely if growth is anemic and deflationary pressures still persist. As a result, businesses are not likely to increase capital spending.

Deflationary expectations can be transformed into inflationary expectations thereby encouraging more spending only by policies that induce shock and awe. Dramatic measures are needed to convince households and firms that the future will be different from the past.

The only available monetary policy tool is to change collectively the euro s value relative to outside currencies. But use of this tool is constrained by the wide discrepancies among individual countries appetite for inflationary or deflationary price levels.

In response to deflationary pressure, Fisher s plan would have enabled banks to draw down their reserves and thus, supposedly, increase their lending (or create deposits). The extra spending would cause prices to rise, which would stimulate business activity.

By pumping in whatever liquidity the financial sector needs to alleviate the credit crunch, the ECB is effectively maintaining a deflationary bias for the financial sector, whereas it has announced an inflationary bias for the rest of the economy.

Declining economic growth strengthens the temptation to loosen monetary policy. But in today s deflationary environment, typical monetary expansion alone can do little to help the real economy, because the money either remains idle or fuels asset bubbles and capital outflows.

European economies, including Germany, are suffering, as the sanctions depressive impact aggravates the recessionary and deflationary forces that are already at work. By contrast, helping Ukraine to defend itself against Russian aggression would have a stimulative effect on Ukraine and Europe.

Second, the profits and earnings of corporations and financial institutions will not rebound as fast as the consensus predicts, as weak economic growth, deflationary pressures, and surging defaults on corporate bonds will limit firms pricing power and keep profit margins low.

The ECB s monetary policy is too tight and Germany is front loading fiscal austerity. Thus, the periphery is destined to a destructive deflationary and recessionary adjustment that will exacerbate the risks of recession, insolvency, eventual defaults and, possibly, exit from the euro.

In addition, net foreign capital inflows are likely to dwindle for several quarters at least, affecting domestic monetary conditions while aggregate demand is weak. As such, the PBoC will need to maintain counter cyclical policies in order to avoid a deflationary spiral.

The analogy popularized by the great monetarist economist Milton Friedman was that the central bank could always deal with deflationary problems by dropping money from a helicopter. But, in the real world, not everyone is underneath the helicopter when it makes the drop.

Literally. In Golden Fetters The Gold Standard and the Great Depression, published in 1992, I argued that the deflationary engine that was the gold standard was a key cause of the 1930 s depression, and that abandoning it opened the door to recovery.

Nonetheless, China eventually managed to rid itself of deflation and return to rapid economic growth. For starters, a decline in investment during the deflationary period together with firm closures, mergers, and acquisitions reduced overcapacity, clearing the way for investment to rebound strongly in 2002.

The third group, led by Europe, will struggle, as continued economic stagnation fuels social and political disenchantment in some countries and complicates regional policy decisions. Anemic growth, deflationary forces, and pockets of excessive indebtedness will hamper investment, tilting the balance of risk to the downside.

Debtor countries pay substantial risk premiums to finance their debt, which is reflected in their high economy wide borrowing costs. This has pushed them into a deflationary tailspin and put them at a substantial and potentially permanent competitive disadvantage vis à vis creditor countries.

Even if the Fed ignores deflationary pressure and hikes interest rates more quickly, medium and long term rates are still likely to be anchored, given how little yield is available elsewhere in the world. Yields on German Bunds are now negative out to eight years.

Contrary to the current discourse, the long term solution must provide a stimulus to get Europe out of a deflationary vicious circle structural reform alone will not do it. The stimulus must come from the EU, because individual countries will be under strict fiscal discipline.

Abenomics, with its potentially powerful combination of monetary and fiscal stimulus, coupled with a wide array of structural reforms, was supposed to end Japan s lost decades. All three arrows of the strategy were to be aimed at freeing the economy from a 15 year deflationary quagmire.

When deflationary expectations are entrenched, as they are in Europe today, consumers and investors delay spending on the ground that prices and costs will be lower tomorrow. Those expectations become self fulfilling, because less spending means even less inflation and, in the worst case, falling prices.

It has suggested that central banks may want to consider higher inflation targets in order to avoid hitting the zero bound in the event of deflationary shocks. For this, it drew a stern reproach from Germany s Bundesbank a clear sign that it is doing something right.

In recent days, Abe has raised serious questions about proceeding with the second phase of a previously legislated consumer tax hike that has long been viewed as the linchpin of Japan s debt consolidation strategy. Abe has flinched because the economy remains weak, posing renewed risks of a deflationary relapse.

The expansion of the ECB s balance sheet and the targeted depreciation of the euro should help to bring the eurozone s short term inflation rate close to 2 and thus reduce deflationary risks. For the first time in its history, the ECB appears to be pursuing an exchange rate target.

The reason why central banks have increasingly embraced unconventional monetary policies is that the post 2008 recovery has been extremely anemic. Such policies have been needed to counter the deflationary pressures caused by the need for painful deleveraging in the wake of large buildups of public and private debt.

But if they maintain large budget deficits and continue to monetize them, at some point after the current deflationary forces become more subdued bond markets will revolt. At this point, inflationary expectations will increase, long term government bond yields will rise, and the recovery will be crowded out.

If the US tips from mild recession into deep recession, the global deflationary implications will cancel out some of the inflationary pressures the world is facing. Global commodity prices will collapse, and prices for many goods and services will stop rising so quickly as unemployment and excess capacity grow.