Let's hope we don't have to. As Jon Hilsenrath of the Wall Street Journal explains, economists don't fully understand deflation. During the Great Depression there were big declines in the price level, but that's not the way deflation always works. Take Japan for example:
But Japan's experience has looked nothing like this. Rather than being deep, destructive and concentrated in a few years, deflation has been a surprisingly mild, drawn-out affair. Consumer prices have been falling in Japan for 15 years, but never by more than 2% in any single year. Japan's deflation has been a morass, but not the destructive downward spiral many economists predicted. Why? And what does it portend for the rest of the world today?
Economists don't have good answers. "We don't know how deflation works," says Adam Posen, a member of the Bank of England's monetary policy committee who has been studying Japan since 1997. "We don't have a way of rationalizing steady, several-year flat deflation," he says.
Read the full story at the Wall Street Journal.
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