There are four basic lines of reasoning according to which deflation is harmful.
Second, deflation increases the real interest rate.
The result of the monetary deflation will be slack sales, unemployment, and bankruptcies.
Monetary Deflation, Intertemporal Discoordination, and the Capital Structure
Deflation, on the other hand, increases debt, and feels like being smothered by a lead blanket.
The political response to deflation is to call for a stronger state.
This article reviews the conventional view of deflation, which assumes that deflation is always harmful, and contrasts it with a more nuanced view of deflation, which makes a distinction between deflationary pressures originating from the aggregate demand and the aggregate supply sides of the economy.
Deflation returned as a pressing issue as Japan struggled with its weak economy and falling price level and inflation in many of world's advanced economies declined significantly Between 1995 and 2004, Japan's economy grew an anemic 1.15 percent per year while its price level declined by 0.04 percent per year.
Both the sticky-wage and debt-deflation stories relied on movements in the price level that were unanticipated when contracts were signed, while the interest-rate story is based on expected deflations
. This implies that simply summing the three effects will overestimate the net effect.
Periods of deflation
typically are associated with down-turns in the economy.
These low inflation rates raise the risk that the US and the euro zone could be entering their own deflation
trap with lost decades of low growth and deflation
ahead, like in Japan.
If G7 central banks fail to deliver a revival, bonds denominated in local currencies in emerging markets will also become good value as recession and deflation
will take on more global characteristics.