As long as falling prices encourage people to keep buying in greater volumes, the overall economy can continue to hum along. When people stop buying, because they start losing their jobs or want to put off their purchases, deflation can spiral into depression. Such potentially demand-destroying events are unfolding in countries like Indonesia. For now, the country is experiencing high inflation, because it devalued its currency, the rupiah. High rates of inflation like those in Indonesia, a result of higher prices for imports, can foreshadow deflation as countries sink into depression.
Japan also continues to wrestle with deflation.
Wholesale prices have been flat or have fallen there for more than a year as the government has struggled to re-ignite the economy. The United States last saw devastating deflation during the Depression, when unemployment soared and many people lucky enough to have jobs saw their wages fall faster than prices. But only the most alarmist thinkers paint a picture in which 1930s-style deflation would be unleashed on America today, when stocks and real estate are not nearly as overvalued as they were in the 1920s, the banking system is healthier and the Federal Reserve is likely to act more decisively. One has to hope so. In a vicious deflation, assets like real estate and stocks go into free fall.