The way I would define “deflation” is as a general decline in prices, an increase in the real value of money. A recent article at Business Insider warns of the dangers posed by deflation:
The risk of outright deflation in Europe with inflation at such low levels, and the danger of similar developments in the U.S., should not be minimized as inflation has fallen in almost every previous U.S. and European economic contraction. Lower inflation is, in fact, almost as much of a hallmark of recessions as is decreasing real GDP. From peak-to-trough the rate of CPI inflation fell by an average of slightly more than 300 basis points in and around the mild U.S. recessions of 1990-91 and 2000-01. Starting from a much lower point, the CPI in Europe at those same times dropped by an average of 150 basis points. Given that inflation is already so minimal in both the U.S. and Europe, even the mildest recession could put both economies in deflation.
I think there are a number of distinct issues being conflated in the article: deflation, disinflation, a change in the velocity of the money supply, and a decline in the value of capital assets.
I don’t know what things are like in Europe but I see few signs of deflation here in the United States. Oil prices that have fallen slightly do not constitute deflation and neither does a small decrease in the Dow. Healthcare prices, housing prices, food prices, and the prices of automobiles are all rising, both in dollar terms and relative to incomes. If that’s deflation, it’s of a sort very different from what I was taught in school.
Anything, to the conventional thinkers, which deviates from the Federal Reserve’s target rate is taken as a sign of impending doom. One might be forgiven for thinking they would realize central banks do not control this variable after six years of failed efforts to engineer a controlled inflation.
In the current system (fractional reserve lending & fiat money), inflation & deflation indicates the growth of the credit supply. Deflation would indicate that the credit supply was not growing fast enough to keep up with debt rolling over and replacement. Inflation indicates how fast the expansion is occurring.
The money supply defines the upper limit of the credit supply but not the lower limit, and therefore, the Fed keeps trying to stimulate credit supply expansion with little success. Instead, they dig the hole deeper, and they attempt to build a mound with the dirt to crawl out of the ever deepening hole.
As the existing debt is paid off or written off, the hole will be filled, but this may take a while. The Fed will claim it was their policy that eventually fixed the problem.