Personally I don’t think deflation is something to panic about. In Japan if they spent money on childcare centres instead of funding bowling alleys on U.S bases the they would probably see the population creep up again and consumer demand as well.

Regarding deflation and the Great Depression I would say I do not tend to see that being all that relevant to the situation now. Way back then when you lost your job you were really in deep, deep trouble. There was no social security as exists today and the chances were the money you had in a savings account also vanished when the bank went under. A few million penniless people would really send prices tumbling!

What we also need to remember is that the Great Depression came not long after WW1 and the Spanish Flu so the preceding decades weren’t exactly great times for people to be building up vast savings. The rough sequence of events were: WW1, Spanish Flu, a bit of doing the Charleston and then whack…hello Great Depression. (then followed soon after by WW2) Not exactly a great run of decades in that little part of the 20th century!

I guess one thing to be careful of when looking at deflation in an economy that is doing OK is if the broader global economy does not have deflation. I’m thinking specifically of Japan. And just wondering to what extent (if any?) inflation in the global economy (and the ability to invest outside the county through things like the carry trade [plus general trade]?) might have dampened any negative effects of deflation in Japan itself.

I’m no fan of inflation as you know. But must admit it was a rude shock to see deflation as “low” as 26.7% in US prices over 4 years sitting side by side the years 1930 through 1933. It gave me cause to ponder. As in if there was a cause and effect relationship, those numbers could be seen to argue against my previous assumption that equal(ish) amounts of inflation and deflation would balance each other out over time – The original thought being that I’d find it hard to imagine about 26.7% inflation over 4 years “tied in with”(?) global unhappiness like the world saw in the 1930s. And on looking a bit deeper, I can’t even bring myself to put it down to the fact that mathematically a 26.7% decrease requires an increase of about 36.5% to unwind it – Even that only equates to about 8.1% pa over 4 years – Very painful for many individuals, but other things being equal (which they probably weren’t – Smile), I wouldn’t think it would be catastrophic globally?

Of course the bulk of the deflation in the 1930s occurred in less than 4 years – So it could have been some sort of economic “shock” effect? But given the unknowns, it did make me back off singing the possible praises of deflation until I reckoned I just might know a bit more. And the thought came to me that a better understanding of how it worked could be tied to the money multiplier – Because basically the problems seem to come back to debt and I got the feeling the money multiplier ties in with that?

One could end up chasing red herrings in this! But either way, I am questioning an assumption I made.

On a related note, I hear the delightful Ms Bligh just put Qld car regos up by 20% – Definitely no chance of price deflation surfacing here anytime soon.

So what we do know is that deflation was present when an economy was struggling..sometimes. But was it a symptom or a cause of the problems? How about cases where deflation was present and an economy was doing okay? I will dig into this.

But either way, it seems drops in US prices of 4.5% in 1930, 12.0% in 1931, 11.5% in 1932 and 1.3% in 1933 (a drop of 26.7% overall from 1929) were tied in with the world economy becoming very unwell.

Stats were worked out from figures in the following:
http://www.friesian.com/money.htm
(Don’t know if it is a good article or not – Didn’t have time to read it in full.)

Agree deflation is not necessarily a bad thing. As you point out it rewards the prudent; people who responsibly saved during the good years do not lose 2-3% or more during deflationary periods.

I think the world economy needs currently needs some deflation in the same way the human body needs sleep after a big night out. But the apparatchiks in the government and central banks just want to keep the loud music playing via their fiscal and monetary stimulus.