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Deflation is a sustained decline in consumer price levels that is associated with the erosion of economic activity, a decrease in investment spending, and high levels of unemployment that usually last several months or longer. Deflation can also be brought on by the lack of personal spending in the general economy, a reduction in government spending, or a reduction in the overall money supply.

  • Deflation can be seen as the opposite of inflation.

Although mild deflation can be good for the economy, it has to be kept in under control by a system of checks and balances. A severe bout of deflation can be devestating, sending shock waves through the economy causing consumers to worry about their jobs, their investments, their retirement incomes, and how they are going to live day to day and survive if things get worse than what they already are.

  • Deflation can start as a mild event and then cause a severe turndown in the housing markets, money markets, stock markets, the automobile markets, and trickle down to have a negative effect on just about all segments of the economy. It can cause the banking industry to take big losses and bring lending to businesses to a virtual halt, which in turn causes layoffs, business closures, and bankruptcy filings.

In 2008, there was a deflation in real estate markets across the country. Stocks went on a downward spiral and other segments of the economy, including the airline and automobile industries, took a devestating blow. Several banks and other lending institutions were taken over by the The Federal Deposit Insurance Corporation (FDIC), causing many consumers to panic and withdraw their money. Many businesses either went filed for bankruptcy or closed their doors permanently while unemployment figures rose at an alarming rate.

With the refusal of major banks to loosen lending requirement, all segments of the econony start feeling the strains of deflation. It usually begins in one segment of the economy, and if not brought under control, it can lead to more severe problems that are felt around the country and around the world.

When banks stop lending, a ripple effect permeates the whole economy. Without short term loans, many business can't survive. During times of recession and deflation, if you look around, you will see many vacant commercial buildings along with going out of business signs on store fronts.

Some economist think that the eonomy should be left alone to run it's course and then start to rebuild on it's on. They feel that little or no government intervention should be taken. Others feel that the government should try to maintain a codicum of control so it can munipulate forces in the economy as it deems necessary to keep deflation at a minimum.

Government spending and tax polices can be used to contol deflation by adjusting supply and demand. Other elements used in the regulation of deflation include long term technological development and capital investments geared towards putting people to work in rebuilding the country's infrastructure.

The national money supply has to be adjusted to finance a desired level of economic growth while maintaining control over interest rate equlibrium which might discourage consumer spending and investment. Government intervention may become necessary if the economy is to level off and start to grow again.

During periods of economic challenges, many people feel the loss of personal wealth thereby curtailing their spending habits and looking more to the government to take the lead in rebuilding consumer confidence, doing what is necessary to turn the economy around, and to gain control of deflation before it turns into a global depression.

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