As the prices that U.S. firms can obtain in an era of deflation begin to fall, they will find it increasingly difficult to meet their obligations. Deflation also discourages investment, research and development, and technological advance because firms cannot be reasonably sure that their expenditures can ever be recovered in an environment in which prices are falling. Many pundits try to extrapolate from rapid technological change and falling computer industry prices to conclude that deflation is beneficial. This confuses cause and effect. This is quite different, however, from a situation in which prices are falling because of depressed demand conditions, which, rather than encouraging innovation, simply discourage investment.
Deflation also discourages home ownership.
For most Americans, equity in the home is the main form of saving, outside retirement savings. This will have wide-reaching deleterious impacts. For example, it will be more difficult and expensive to obtain home equity loans for making home improvements or paying college tuition for children. While it is true that rapidly rising housing prices can generate speculation with subsequent problems, this does not mean that falling prices cannot have deleterious effects. No one can doubt that neighborhoods with falling real estate prices experience significant problems quite apart from problems that might have caused the falling prices.