Main stream media on deflation

http://www.bloomberg.com/apps/news?pid=20601068&sid=ame31IjWda6w

Here is a concept that is commonly misunderstood. From the article:

A sustained price drop might set off a chain reaction in which lower profits force employers to pare wages and payrolls. That would erode consumer demand, exacerbating wage cuts and firings.

A sustained price drop only reduces nominal revenue. Consequently, wages will have to be pared back.

Good.

But why would lower prices engender lower consumption? If prices and wages drop simultaneously, on a relative basis there would be no change to consumption.

The problem is debt.

Deflation reduces the nominal value of commercial revenues and wages. However, debt and debt service amounts remain at the same value as when they were first generated.

Government finances suffer the same fate. Deflation brings about reduced tax collection and  the bankruptcy of government.

So unless someone somewhere does not find a way to restart the credit markets and inflation at rates approximating anything like the period 2000/2007 Western governments are bankrupt with no possibility to postpone the day of reckoning.

War it is then.

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